<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1996
REGISTRATION NUMBER 333-04593
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
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 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
------------------------------------------- -------------------------------------------
<S> <C> <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 JUNE 28, 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
$ .
(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
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 rental 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 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 these 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. The Company also believes that this direct
interaction with the end-user assists it in identifying demand for new and
improved products and better enables it to design and develop such products in a
timely manner.
The Company 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, without the prior written consent of the
Representatives, offer for sale, sell or otherwise dispose of any shares of
Common Stock (other than pursuant to existing employee benefit plans or
outstanding options) or securities convertible into or exchangeable for Common
Stock or grant options, rights or warrants with respect to any shares of Common
Stock (other than the grant of options pursuant to option plans existing on the
date hereof), for a period of 180 days after the date of this Prospectus.
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".
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".
12
<PAGE> 15
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
rental 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, Dailey was a wholly-owned subsidiary of Lawrence
Industries, Inc. On June 6, 1996, Lawrence reorganized its ownership of Dailey
into a holding company structure pursuant to a forward triangular merger of
Dailey Petroleum Services Corp. into a newly-formed, indirect wholly-owned
subsidiary, which took the name Dailey Petroleum Services Corp., (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. 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".
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
13
<PAGE> 16
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.
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.
14
<PAGE> 17
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".
15
<PAGE> 18
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
---------- ---------- ---------- ---------- -----------
<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....................... -- -- -- -- $ .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>
<S> <C> <C> <C> <C> <C>
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".
16
<PAGE> 19
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 inventory valuation reserves, the Company's policy is to
specifically identify at risk receivables and reserve for any balances which, in
the opinion of management, are not expected to be collected. Similarly, the
Company identifies inventory which is not expected to be utilized in the future
to
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<PAGE> 20
generate revenues. These 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.
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
18
<PAGE> 21
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 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,
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<PAGE> 22
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.
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
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<PAGE> 23
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 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
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<PAGE> 24
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. In fiscal 1997, the Company will no longer be included in the
federal tax return of Lawrence. Accordingly, the Company has recognized an
allocation of Lawrence's net operating loss carryforwards in the amount of $4.6
million, which will expire in 2004 through 2010. 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.
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<PAGE> 25
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 rental 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. These technologically-advanced drilling techniques include
directional and horizontal drilling, extended-reach drilling and short-radius
drilling. The Company offers drilling services for directional and horizontal
applications and offers its downhole tools for all advanced drilling techniques.
The Company believes these 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. The Company also believes that this direct
interaction with the end-user assists it in identifying demand for new and
improved products and better enables it to design and develop such products in a
timely manner.
The Company 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
23
<PAGE> 26
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 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
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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.
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 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.
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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 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; Corpus Christi, Texas; Houma, 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 32 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 11 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 agent 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 is directional drilling services 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 46 trademarks and
servicemarks registered in the United States. The trademarks also are registered
in other countries. 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
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pending. Many of the Company's competitors also have obtained or applied for
patent 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
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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.
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<PAGE> 36
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.
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<PAGE> 37
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 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".
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.
35
<PAGE> 38
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 June 7, 1996, 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
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 -- Business
Development
</TABLE>
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Executive Committee of the Board of Directors.
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".
36
<PAGE> 39
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.
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 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.
37
<PAGE> 40
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. 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.
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
38
<PAGE> 41
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".
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(1) COMPENSATION(2)
- ------------------------------------ -------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
J. D. Lawrence...................... $296,532(3) $ 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 -- 901
Senior Vice President-Finance,
Chief Financial Officer and
Treasurer
</TABLE>
- ---------------
(1) 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.
(2) Represents payments for premiums for group term life insurance on behalf of
such individual.
(3) 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.
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
39
<PAGE> 42
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.
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, 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
40
<PAGE> 43
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 17,999 shares of Class A Common Stock pursuant to the
1996 Plan, 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.
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 360,138 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
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<PAGE> 44
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 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 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
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<PAGE> 45
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 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.
Upon completion of the Offering, Messrs. Farr, Sutton and Tighe, each of whom is
a director and officer of the Company, will resign all positions currently held
by them as officers of Lawrence or as officers and 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 management training
program. 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.
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<PAGE> 46
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 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
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<PAGE> 47
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 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> 48
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
NAME AND ADDRESS OF COMMON COMMON COMMON COMMON
BENEFICIAL OWNER STOCK STOCK PERCENT(2) STOCK STOCK PERCENT(2)(3)
------------------- --------- --------- ---------- ------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence(4)........................ * 5,000,000 100% * 5,000,000 53%
J.D. Lawrence(5)................... * 5,000,000 100% * 5,000,000 53%
James F. Farr...................... * * -- 120,000(6) * 1%
Cecil W. Harvey.................... * * -- * * --
William D. Sutton.................. * * -- 120,000(6) * 1%
David T. Tighe..................... * * -- 120,000(6) * 1%
--------- --------- --- ------- --------- ---
All executive officers and
directors as a group (5
Persons)......................... * 5,000,000 100% 360,000 5,000,000 57%
</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.
(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 approximately 50% of the Common Stock then
outstanding. Furthermore, following the Offering, Lawrence will own 89% of
the voting power of the Company (88% if the Underwriters' over-allotment
option is exercised in full). 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> 49
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> 50
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> 51
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.
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<PAGE> 52
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.
50
<PAGE> 53
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 grant any option to purchase
or otherwise dispose of any shares of Common Stock (other than shares of Class A
Common Stock issued pursuant to the 1996 Plan and the 1996 Director Plan) or any
options exercisable for Common Stock (other than the grant of options pursuant
to the 1996 Plan and the 1996 Director Plan) for a period of 180 days after the
date of this Prospectus. 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
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.
51
<PAGE> 54
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 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 not to 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 for a
period of 180 days from the date of this Prospectus, without the prior written
consent of the Representatives.
52
<PAGE> 55
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.
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.
53
<PAGE> 56
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.
54
<PAGE> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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 May 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 May 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> 64
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> 65
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> 66
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
-------- --------
<S> <C> <C>
(IN THOUSANDS)
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
------ ------
<S> <C> <C>
(IN THOUSANDS)
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> 67
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
------- -------
<S> <C> <C>
(IN THOUSANDS)
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> 68
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> 69
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> 70
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> 71
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
-------- ------- -------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
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
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
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> 72
DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating income (loss) by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
Domestic................................................ $ 2,781 $ 3,639 $ 8,025
Europe.................................................. 2,368 2,512 2,424
West Africa............................................. 419 286 860
Latin America........................................... 2,758 812 1,434
Middle East............................................. 236 (15) 413
Southeast Asia.......................................... 2,078 1,645 916
Corporate (A)........................................... (7,154) (6,972) (8,890)
------- ------- -------
Total......................................... $ 3,486 $ 1,907 $ 5,182
======= ======= =======
</TABLE>
(A) Corporate operating losses include general and administrative costs
including accounting, systems, data processing, legal and other costs
which support all operations of the Company.
Identifiable assets by geographic area are as follows:
<TABLE>
<CAPTION>
APRIL 30,
------------------
1995 1996
------- -------
<S> <C> <C>
(IN THOUSANDS)
Domestic.......................................................... $31,955 $30,931
Europe............................................................ 7,328 7,617
West Africa....................................................... 1,418 1,631
Latin America..................................................... 5,091 7,972
Middle East....................................................... 342 242
Southeast Asia.................................................... 4,098 3,620
Corporate......................................................... 4,176 3,865
------- -------
Total................................................... $54,408 $55,878
======= =======
</TABLE>
F-16
<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....................... 17
Business and Properties............... 23
Management............................ 36
Certain Relationships and Related
Transactions........................ 42
Security Ownership of Management and
Principal Stockholder............... 46
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 51
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Available Information................. 54
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......................................... *
Legal Fees and Expenses.................................................... *
Accounting Fees and Expenses............................................... *
Blue Sky Fees and Expenses (including legal fees).......................... *
Printing Expenses.......................................................... *
Transfer Agent and Registrar Fees.......................................... *
Miscellaneous.............................................................. *
-------
TOTAL............................................................ $ *
=======
</TABLE>
- ---------------
* to be filed by amendment
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 Amended Bylaws (the "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 Registrant
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 Registrant 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 Registrant'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.
+ To be filed by amendment.
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 June 27, 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 June 27, 1996
- ---------------------------------------------
J. D. Lawrence
/s/ JAMES F. FARR President and Chief Executive June 27, 1996
- --------------------------------------------- Officer and Director
James F. Farr (Principal Executive
Officer)
/s/ WILLIAM D. SUTTON Senior Vice President, General June 27, 1996
- --------------------------------------------- Counsel, Secretary and
William D. Sutton Director
*/s/ DAVID T. TIGHE Senior Vice President, June 27, 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> 82
<TABLE>
<S> <C>
+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.
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 3.2
RESTATED BYLAWS
OF
DAILEY PETROLEUM SERVICES CORP.
(a Delaware Corporation)
ADOPTED JUNE 27, 1996
OFFICES
1. The Corporation shall at all times maintain a registered
office in the State of Delaware.
2. The Corporation may also have offices at such other places
within or outside of the State of Delaware as the Board of Directors shall from
time to time appoint or the business of the Corporation require.
CAPITAL STOCK
3. The Board of Directors may authorize the issuance of the
capital stock of the Corporation at such times, for such consideration, and on
such terms and conditions as the Board may deem advisable, subject to any
restrictions and provisions of law, the Certificate of Incorporation, as
amended and restated from time to time (the "Certificate of Incorporation"), of
the Corporation or any other provisions of these Bylaws.
4. The shares of the Corporation shall be represented by
certificates, provided that the Board of Directors may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the Corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue. The certificates shall
otherwise be in such form as may be determined by the Board of Directors, shall
be issued in numerical order, shall be entered in the books of the Corporation
as they are issued and shall exhibit the holder's name and number of shares.
5. The shares of the capital stock of the Corporation are
transferable only on the books of the Corporation upon surrender, in the case
of certificated shares, of
<PAGE> 2
the certificates therefor properly endorsed for transfer, or otherwise properly
assigned, and upon the presentation of such evidences of ownership of the
shares and validity of the assignment as the Corporation may require.
6. The Corporation shall be entitled to treat the person in whose
name any share of stock is registered as the owner thereof for purposes of
dividends and other distributions in the course of business or in the course of
recapitalization, consolidation, merger, reorganization, liquidation, or
otherwise, and for the purpose of votes, approvals and consents by
stockholders, and for the purpose of notices to stockholders, and for all other
purposes whatsoever, and shall not be bound to recognize any equitable or other
claim to or interest in such share on the part of any other person, whether or
not the Corporation shall have notice thereof, save as expressly required by
the laws of the State of Delaware.
7. The Board of Directors may appoint one or more transfer agents
and registrars, and may require certificates for shares to bear the signature
of such transfer agent(s) and registrar(s).
8. Upon the presentation to the Corporation of a proper affidavit
attesting the loss, destruction or mutilation of any certificate for shares of
stock of the Corporation, the Board of Directors may direct the issuance of a
new certificate or uncertificated shares in lieu of and to replace the
certificate so alleged to be lost, destroyed or mutilated. The Board of
Directors may require as a condition precedent to the issuance of a new
certificate or uncertificated shares any or all of the following: (a)
additional evidence of the loss, destruction or mutilation claimed; (b)
advertisement of the loss in such manner as the Board of Directors may direct
or approve; (c) a bond or agreement of indemnity, in such form and amount and
with such surety (or without surety) as the Board of Directors may direct or
approve; and (d) the order or approval of a court.
STOCKHOLDERS AND MEETINGS OF STOCKHOLDERS
9. All meetings of stockholders shall be held at such place
within or outside of the State of Delaware as shall be fixed by the Board of
Directors and stated in the notice of meeting.
10. The Annual Meeting of Stockholders of the Corporation shall be
held on such date and at such time as is fixed by the Board of Directors and
stated in the notice of meeting. Directors shall be elected in accordance with
the provisions of the Certificate of Incorporation of the Corporation and these
Bylaws and such other business shall be transacted as may properly come before
the meeting.
11. The Annual Meeting of Stockholders may be adjourned by the
presiding officer of the meeting for any reason (including, if the presiding
officer determines that it would be in the best interests of the Corporation to
extend the period of time for the solicitation of proxies) from time to time
and place to place until the presiding officer shall determine that the
business to be conducted at the meeting is completed, which determination shall
be conclusive.
2
<PAGE> 3
12. At an Annual Meeting of the Stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an Annual Meeting, business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (b) otherwise properly brought before the meeting by
or at the direction of the Board of Directors or (c) otherwise properly brought
before the meeting by a stockholder of the Corporation. For business to be
properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation, not
less than 60 days nor more than 180 days prior to the anniversary date of the
immediately preceding annual meeting; provided, however, that in the event that
the date of the annual meeting is more than 60 days later than the anniversary
date of the immediately preceding annual meeting, notice by the stockholder to
be timely must be received not later than the close of business on the tenth
day following the earlier of the date on which a written statement setting
forth the date of the annual meeting was mailed to stockholders or the date on
which it is first disclosed to the public. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting (a) a brief description of the business desired to be
brought before the annual meeting, (b) the name and address, as they appear on
the Corporation's books, of the stockholder proposing such proposal, (c) the
class and number of shares of the Corporation that are beneficially owned by
the stockholder and (d) any material interest of the stockholder in such
business. In addition, if the stockholder's ownership of shares of the
Corporation, as set forth in the notice, is solely beneficial, documentary
evidence of such ownership must accompany the notice. Notwithstanding anything
in these Bylaws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 12.
The presiding officer of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that any business that was not properly
brought before the meeting is out of order and shall not be transacted at the
meeting.
13. A special meeting of stockholders may only be called by the
Chairman of the Board, the Chief Executive Officer or the Board of Directors
pursuant to a resolution adopted by two-thirds of the directors then in office.
The notice of every special meeting of stockholders shall state the purpose for
which it is called. At any special meeting of stockholders, only such business
shall be conducted as shall be provided for in the resolution or resolutions
calling the special meeting or, where no such resolution or resolutions have
been adopted, only such business shall be conducted as shall be provided in the
notice to stockholders of the special meeting. Any special meeting of
stockholders may be adjourned by the presiding officer of the meeting for any
reason (including, if the presiding officer determines that it would be in the
best interests of the Corporation to extend the period of time for the
solicitation of proxies) from time to time and from place to place until the
presiding officer shall determine that the business to be conducted at the
meeting is completed, which determination shall be conclusive.
14. Written notice of each meeting of stockholders shall be mailed
to each stockholder of record at his last address as it appears on the books of
the Corporation at least ten days prior to the date of the meeting.
3
<PAGE> 4
15. The Board of Directors shall have the power to close the stock
transfer books of the Corporation for a period not more than sixty nor less
than ten days preceding the date of any meeting of stockholders, or the date
for payment of any dividend, or the date for the allotment of rights, or the
date when any reclassification or change or conversion or exchange of capital
stock shall go into effect; provided, however, that in lieu of closing the
stock transfer books as aforesaid, the Board of Directors may fix in advance a
date not more than sixty nor less than ten days preceding the date of any
meeting of stockholders, or the date for any payment of dividends, or the date
for allotment of rights, or the date when any reclassification or change or
conversion or exchange of capital stock shall go into effect, as a record date
for the determination of the stockholders entitled to vote at any such meeting
or entitled to receive payment of any such dividend or to any such allotment of
rights, or to exercise the rights in respect of any such reclassification,
change, conversion or exchange of capital stock, and in such cases only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to vote at such meeting, or to receive payment of such dividend, or to
receive such allotment of rights, or to exercise such rights or to participate
in the effect of any such transaction, as the case may be, notwithstanding any
transfer of any stock on the books of the Corporation after any such record
date fixed as aforesaid. This Bylaw shall in no way affect the rights of a
stockholder and his transferee or transferor as between themselves.
16. The holders of a majority of the outstanding shares of stock
of the Corporation having voting power with respect to a subject matter
(excluding shares held by the Corporation for its own account) present or
represented by proxy shall constitute a quorum at the meeting of stockholders
for the transaction of business with respect to such subject matter; provided,
however, that if the subject matter is one as to which a higher vote is
required (as contemplated by Section 17 hereof), then the holders of that
number of shares equal to at least that higher number of outstanding shares of
stock of the Corporation having voting power with respect to such subject
matter (excluding shares held by the Corporation for its own account) present
or represented by proxy shall constitute a quorum at the meeting of
stockholders solely for the transaction of business with respect to such
subject matter. In the absence of a quorum with respect to a particular
subject matter, the presiding officer of the meeting shall have power to
adjourn the meeting from time to time, without notice other than an
announcement at the meeting, until a quorum is present with respect to that
subject matter. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. At such adjourned meeting, any business may be transacted
that might have been transacted at the meeting as originally notified.
17. When a quorum is present or represented at any meeting of
stockholders, the affirmative vote of the holders of a majority of the shares
present in person or represented by proxy at the meeting and entitled to vote
on the subject matter shall be the act of the stockholders in all matters,
unless the matter is one upon which, by express provision of the corporation
laws of the State of Delaware, of the Certificate of Incorporation or of these
Bylaws, a different vote is required, in which case such express provision
shall govern and control the decision of that matter. Directors shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy and entitled to vote on the election of directors.
4
<PAGE> 5
18. Every stockholder having the right to vote shall be entitled
to vote in person, or by proxy appointed by an instrument in writing subscribed
by such stockholder (which for purposes of this paragraph may include a
signature and form of proxy pursuant to a facsimile or telegraphic form of
proxy or any other instruments acceptable to the Judge of Election), bearing a
date not more than three years prior to voting, unless such instrument provides
for a longer period, and filed with the Secretary of the Corporation before, or
at the time of, the meeting. If such instrument shall designate two or more
persons to act as proxies, unless such instrument shall provide to the
contrary, a majority of such persons present at any meeting at which their
powers thereunder are to be exercised shall have and may exercise all the
powers of voting thereby conferred, or if only one be present, then such powers
may be exercised by that one; or, if an even number attend and a majority do
not agree on any particular issue, each proxy so attending shall be entitled to
exercise such powers in respect of the same portion of the shares as he is of
the proxies representing such shares.
19. Unless otherwise provided by the Certificate of Incorporation
or by the corporation laws of the State of Delaware, each stockholder of the
Corporation shall, at every meeting of stockholders, be entitled to one vote in
person or by proxy for each share of capital stock of the Corporation
registered in his name.
20. Any other corporation owning voting shares in this Corporation
may vote the same by its President or by proxy appointed by him, unless some
other person shall be appointed to vote such shares by resolution of the Board
of Directors of such stockholder corporation. A partnership holding shares of
this Corporation may vote such shares by any general partner or by proxy
appointed by any general partner.
21. Shares standing in the name of a deceased person may be voted
by the executor or administrator of such deceased person, either in person or
by proxy. Shares standing in the name of a guardian, conservator or trustee
may be voted by such fiduciary, either in person or by proxy, but no such
fiduciary shall be entitled to vote shares held in such fiduciary capacity
without a transfer of such shares into the name of such fiduciary. Shares
standing in the name of a receiver may be voted by such receiver. A
stockholder whose shares are pledged shall be entitled to vote such shares,
unless in the transfer by the pledgor on the books of the Corporation, he has
expressly empowered the pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent the stock and vote thereon.
22. The order of business and all other matters of procedure at
every meeting of the stockholders may be determined by the presiding officer of
the meeting, who shall be the Chairman of the Board or the Chief Executive
Officer, or in the absence of both of them such other officer of the
Corporation as designated by the Board. The presiding officer of the meeting
shall have all the powers and authority vested in a presiding officer by law or
practice without restriction, including, without limitation, the authority, in
order to conduct an orderly meeting, to impose reasonable limits on the amount
of time at the meeting taken up in remarks by any one stockholder and to
declare any business not properly brought before the meeting to be out of
order.
23. The Board shall appoint one or more Judges of Election to
serve at every meeting of the stockholders.
5
<PAGE> 6
DIRECTORS AND MEETINGS OF DIRECTORS
24. The business of the Corporation shall be managed by a Board of
Directors (herein the "Board of Directors" or the "Board") who shall exercise
all the powers of the Corporation not reserved to or conferred on the
stockholders by statute, the Certificate of Incorporation or the Bylaws of the
Corporation.
25. Except as otherwise fixed pursuant to the provisions of the
Certificate of Incorporation relating to the rights of the holders of any class
or series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect additional directors under specified circumstances,
the number of directors shall be as fixed from time to time by resolution of
the Board adopted by the affirmative vote of at least two-thirds of the
directors then in office, provided the number shall be not less than the
minimum or more than the maximum number permitted by the Certificate of
Incorporation, provided further that if no such minimum or maximum number is
stated in the Certificate of Incorporation the number shall not be less than
three nor more than 12. The directors, other than those who may be elected by
the holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, shall be divided into three classes
as nearly equal in number as possible, with the term of office of one class
expiring each year. The term of office of each director shall expire at the
third Annual Meeting after election of the class to which he belongs. The
initial classification of directors shall be made by resolution of the Board
adopted by the affirmative vote of at least two-thirds of the directors then in
office. During the intervals between Annual Meetings of Stockholders, any
vacancy occurring in the Board of Directors caused by resignation, removal,
death or other incapacity, and any newly-created directorships resulting from
an increase in the number of directors, shall be filled by a two-thirds vote of
the directors then in office, whether or not a quorum. Each director chosen to
fill a vacancy shall hold office for the unexpired term in respect of which
such vacancy occurs. Each director chosen to fill a newly-created directorship
shall hold office until the next election of the class for which such director
shall have been chosen.
26. Subject to the rights of holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, nominations for the election of directors may be made by the Board
of Directors or a committee appointed by the Board of Directors or by any
stockholder entitled to vote in the election of directors generally. However,
any stockholder entitled to vote in the election of directors generally may
nominate one or more persons for election as directors at a meeting only if
written notice of such stockholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation not later than 90
days prior to the anniversary date of the date of the immediately preceding
annual meeting of stockholders. Notwithstanding the foregoing if an existing
director is not standing for reelection to a directorship that is the subject
of an election at such meeting, then a stockholder may make a nomination with
respect to such directorship at anytime not later than the close of business on
the tenth day following the date on which a written statement setting forth the
fact that such directorship is to be elected and the name of the nominee
proposed by the Board of Directors is first mailed to stockholders. Each
notice of a nomination from a stockholder shall set forth: (a) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to
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be nominated; (b) a representation that the stockholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the Securities Exchange Act of
1934 and the rules and regulations thereunder (or any subsequent provisions
replacing such Act, rules or regulations); and (e) the consent of each nominee
to serve as a director of the Corporation if so elected. The presiding officer
of the meeting may refuse to acknowledge the nomination of any person not made
in compliance with the foregoing procedure.
27. Any director may be removed from office as a director at any
time, but only for cause (as set forth in the Certificate of Incorporation), by
the affirmative vote of stockholders of record holding a majority of the
outstanding shares of stock of the Corporation entitled to vote in elections of
directors at a meeting of the stockholders called for that purpose.
28. Regular meetings of the Board of Directors shall be held at
such times and at such place or places as the directors shall, from time to
time, determine at a prior meeting. Special meetings of the Board may be
called by the Chairman of the Board or President of the Corporation and shall
be called by either of said officers upon the written request of any two
directors. Special meetings shall be held at the office of the Corporation or
at such place as is stated in the notice of the meeting. No notice shall be
required for regular meetings of the Board. Notices of special meetings shall
be given by mail at least five days before the meeting or by telephone,
telecopy or telegram at least 24 hours before the meeting. Notices may be
waived. Notices need not include any statement of the purpose of the meeting.
29. When all of the directors shall be present at any meeting,
however called or notified, they may act upon any business that might lawfully
be transacted at regular meetings of the Board, or at special meetings duly
called, and action taken at such meetings shall be as valid and binding as if
legally called and notified. Members of the Board of Directors may participate
in a meeting of the Board by means of conference telephone or similar
communications equipment to the full extent and with the same effect as
authorized and permitted by Delaware law.
30. One-third of the total number of the members of the Board of
Directors (but in no event less than three directors) shall constitute a quorum
for the transaction of business, and the acts of a majority of the directors
present at any meeting at which there is a quorum present shall be the acts of
the Board; provided, however, that the directors may act in such other manner,
with or without a meeting, as may be permitted by the laws of the State of
Delaware and provided further, that if all of the directors shall consent in
writing to any action taken by the Corporation, such action shall be as valid
as though it had been authorized at a meeting of the Board.
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31. The Corporation shall not engage in any transaction or series
of related transactions within a single fiscal year involving an aggregate
amount of $10,000 or more in which any of the following persons had or will
have a direct or indirect interest: (a) any holder of 20% or more of any class
of the Corporation's capital stock, (b) any director of the Corporation, (c)
any "affiliate" or "associate" (as such terms are defined in the Rules and
Regulations promulgated under the Securities Act of 1933, as amended) of any
person described by clause (a) or clause (b), or (d) any relative, by blood or
marriage, within the third degree of consanguinity of any person described by
clause (a) or clause (b), unless such transaction (i) is approved by the
affirmative vote of a majority of the directors not having any personal direct
or indirect interest in the transaction and (ii) is proposed to a committee of
the Board of Directors consisting of all directors who are not employees of the
Corporation and (A) such committee unanimously approves, either at a meeting or
by written consent, the proposed transaction by the affirmative vote of the
members of such committee or (B) such committee fails to consider and vote upon
such proposal within ten business days of the time it is approved in accordance
with clause (i) of this paragraph.
32. Directors shall receive such compensation and reimbursement
for expenses for attendance at meetings of the Board or of committees thereof
and such other compensation as shall be fixed by a majority of the entire
Board.
COMMITTEES OF DIRECTORS
33. The Board of Directors shall establish an Audit Committee and
a Compensation Committee, and may establish an Executive Committee, a
Nominating Committee and such other committees as may be established by
resolution of a majority of the whole Board. Each of such committees shall
consist of one or more members of the Board. Members of committees of the
Board of Directors shall be elected annually by vote of a majority of the
Board. The Chief Executive Officer shall be an ex-officio nonvoting member of
each committee (except the Audit and Compensation Committees) of which he is
not elected as an official voting member. With respect to any committee
(including the Audit and Compensation Committees) of which the Chief Executive
Officer is not an official voting member, the Chief Executive Officer shall be
given notice of all committee meetings at the same time notice is given to
committee members, and the Chief Executive Officer shall be afforded the
opportunity to speak at the committee meeting. Presence of a majority of the
committee members (not counting any ex-officio nonvoting members) shall
constitute a quorum. Committees may act by majority vote of the voting members
present at a meeting. Each of such committees shall have and may exercise such
of the powers of the Board of Directors in the management of the business and
affairs of the Corporation as may be provided in these Bylaws or by resolution
of the Board of Directors. Each of such committees may authorize the seal of
the Corporation to be affixed to any document or instrument. The Board of
Directors may designate one or more directors as alternate members of any such
committee, who may replace any absent or disqualified member at any meeting of
such committee. Meetings of committees may be called by any member of a
committee by written, telegraphic or telephonic notice to all members of the
committee and the Chief Executive Officer and shall be held at such time and
place as shall be stated in the notice of meeting. Any member of a committee
may participate in any meeting by means of conference telephone or similar
communications equipment.
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In the absence or disqualification of a member of any committee the member or
members thereof present at any meeting and not disqualified from voting,
whether or not constituting a quorum may, if deemed advisable, unanimously
appoint another member of the Board to act at the meeting in the place of the
disqualified or absent member. Each committee may fix such other rules and
procedures governing conduct of meetings as it shall deem appropriate.
34. The Executive Committee of the Board of Directors, if one is
established, shall consist of not less than three directors. The Executive
Committee shall have and exercise the authority of the Board of Directors
between meetings of the Board, subject to such limitations and restrictions
required by Delaware law or as the Board may impose in a resolution duly
adopted by the Board.
35. The Audit Committee shall consist of not less than two members
of the Board of Directors. The Audit Committee shall be responsible for
recommending to the entire Board engagement and discharge of independent
auditors of the financial statements of the Corporation, shall review the
professional service provided by independent auditors, shall review the
independence of independent auditors, shall review with the auditors the plan
and results of the auditing engagement, shall consider the range of audit and
non-audit fees, shall review the adequacy of the Corporation's system of
internal accounting controls, shall review the results of procedures for
internal auditing and shall consult with the internal auditor of the
Corporation with respect to all aspects of the Corporation's internal auditing
program. In addition, the Audit Committee shall direct and supervise special
investigations as deemed necessary by the Audit Committee.
36. The Compensation Committee shall consist of not less than two
members of the Board of Directors, none of whom shall be employees of the
Corporation. The Compensation Committee shall recommend to the Board the
compensation to be paid to officers and key employees of the Corporation and
the compensation of members of the Board of Directors. Except as otherwise
provided in any specific plan adopted by the Board, the Compensation Committee
shall be responsible for administration of executive incentive compensation
plans, stock option plans and other forms of direct or indirect compensation of
officers and key employees, and each member of the Compensation Committee shall
have the power and authority to execute and bind the Company to such documents,
agreements and instruments related to such plans and compensation as are
approved by the Compensation Committee. In the alternative, the Compensation
Committee may authorize any officer of the Company to execute such documents,
agreements and instruments on behalf of the Company. In addition, the
Compensation Committee shall review levels of pension benefits and insurance
programs for officers and key employees.
37. The Nominating Committee, if one is established, shall
recommend to the Board nominees for election as directors. The Nominating
Committee shall consider performance of incumbent directors and shall recommend
to the Board whether an incumbent director whose term expires shall be
nominated for reelection.
38. Any action required or permitted to be taken at any meeting of
any committee of the Board of Directors may be taken without a meeting if a
consent in
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writing, setting forth the action so taken, is signed by all of the members of
such committee.
OFFICERS
39. The Board of Directors shall elect a President and a
Secretary, and may elect a Chairman of the Board, a Treasurer, one or more vice
presidents, including one or more Senior Vice Presidents and an Executive Vice
President and Chief Financial Officer, a General Counsel, a Controller, one or
more assistant secretaries and assistant treasurers, and such other officers as
the Board of Directors shall deem appropriate. The Chairman of the Board shall
be a director of the Corporation. Other officers need not be directors. One
individual may be elected to and hold multiple offices.
40. Officers of the Corporation shall hold office until their
successors are chosen and qualified or until their earlier resignation or
removal. Any officer, agent or employee may be removed at any time, with or
without cause, by the Board but such removal shall be without prejudice to the
contractual rights, if any, of the person so removed. Election or appointment
of an officer or agent shall not of itself create contract rights. Vacancy
occurring in any office or position at any time may be filled by the Board.
All officers, agents and employees of the Corporation shall respectively have
such authority and perform such duties in the conduct and management of the
Corporation as may be delegated by the Board of Directors or by these Bylaws.
41. Officers shall receive such compensation as may from time to
time be determined by the Board of Directors. Agents and employees shall
receive such compensation as may from time to time be determined by the Chief
Executive Officer.
42. The Chairman of the Board, if one is elected, may preside, or
may direct that the President so preside, at all meetings of the stockholders
and at all meetings of the directors. In the absence of the Chairman of the
Board, or if no Chairman of the Board is elected, the President shall so
preside.
43. Unless the Board of Directors shall have elected a Chairman of
the Board of Directors and designated such person the Chief Executive Officer
of the Corporation, the President shall be the Chief Executive Officer of the
Corporation, supervising and directing the operations of the business of the
Corporation in accordance with the policies determined by the Board of
Directors. If the Board of Directors shall have elected a person as Chairman
of the Board and designated such person as a Chief Executive Officer of the
Corporation, the President shall be the Chief Operating Officer of the
Corporation and shall be responsible for the general supervision and control of
the business and the affairs of the Corporation subject to the directions of
the Chairman of the Board and the Board of Directors. If the Board of
Directors shall have elected a person Chairman of the Board and shall designate
such person the Chief Executive Officer of the Corporation, the President, in
the absence or incapacity of such Chairman of the Board, shall perform the
duties of that office.
44. A Vice President, if one is elected, in the absence or
incapacity of the President, shall perform the duties of the President. If
there are multiple Vice Presidents, the Board of Directors shall designate the
Vice President who is to perform
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the duties of the President in the event of his absence or incapacity. Each
Vice President shall have such other duties and authority as shall be assigned
by the Chief Executive Officer or may be delegated by the Board of Directors.
The Executive Vice President and Chief Financial Officer, if one is elected,
shall be responsible for and direct, either directly or indirectly through any
Treasurer, Controller or Director of Data Processing of the Corporation, all
treasury, accounting, cost and budgeting, and data collection functions. He
will report directly to the President with a report and policy relationship to
the Chairman of the Board and the Board of Directors.
45. The Secretary shall attend all meetings of the Board of
Directors and all meetings of stockholders and shall record all votes and
minutes from all proceedings in a book to be kept for that purpose. He shall
keep in safe custody the seal of the Corporation and affix the same to any
instrument requiring it, and when so affixed, it shall be attested by his
signature or by the signature of the Treasurer or an Assistant Secretary;
provided, however, that the affixing of the seal of the Corporation to any
document or instrument specifically shall not be required in order for such
document or instrument to be binding on or the official act of the Corporation,
and the signature of any authorized officer, without the seal of the
Corporation, shall be sufficient for such purposes. The Secretary shall
perform such other duties and have such other authorities as are delegated to
him by the Board of Directors.
46. The Treasurer, if one is elected, shall be responsible for the
care and custody of all funds and other financial assets, taxes, corporate
debt, order entry and sales invoicing including credit memos, credit and
collection of accounts receivable, cash receipts, and the banking and insurance
functions of the Corporation. He shall report directly to and perform such
other duties as shall be assigned by the Executive Vice President and Chief
Financial Officer, if one is elected, or otherwise the President.
47. The Controller, if one is elected, shall be responsible for
the installation and supervision of all general accounting records of the
Corporation, preparation of financial statements and the annual and operating
budgets and profit plans, continuous audit of accounts and records of the
Corporation, preparation and interpretation of statistical records and reports,
taking and costing of all physical inventories and administering the inventory
levels, supervision of accounts payable and cash disbursements function and
hourly and salary payrolls. He shall report directly to and perform such other
functions as shall be assigned him by the Executive Vice President and Chief
Financial Officer, if one is elected, or otherwise the President.
48. The Board of Directors of the Corporation may require any
officer, agent or employee to give bond for the faithful discharge of his duty
and for the protection of the Corporation, in such sum and with such surety as
the Board deems advisable.
BANKING, CHECKS AND OTHER INSTRUMENTS
49. The Board of Directors shall by resolution designate the bank
or banks in which the funds of the Corporation shall be deposited, and such
funds shall be deposited in the name of the Corporation and shall be subject to
checks drawn as authorized by resolution of the Board of Directors.
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50. The Board of Directors may in any instance designate the
officers and agents who shall have authority to execute any contract,
conveyance, or other instrument on behalf of the Corporation; or may ratify or
confirm any execution. When the execution of any instrument has been
authorized without specification of the executing officer or agents, the
Chairman of the Board, if designated as the Chief Executive Officer of the
Corporation, President or any Vice President, and the Secretary or Assistant
Secretary or Treasurer or Assistant Treasurer may execute the same in the name
and on behalf of the Corporation and may affix the corporate seal thereto;
provided, however, that the affixing of the seal of the Corporation to any
document or instrument specifically shall not be required in order for such
document or instrument to be binding on or the official act of the Corporation,
and the signature of any authorized officer, without the seal of the
Corporation, shall be sufficient for such purposes.
FISCAL YEAR
51. The fiscal year of the Corporation shall begin on the first
day of May and end on the thirtieth day of April.
BOOKS AND RECORDS
52. The proper officers and agents of the Corporation shall keep
and maintain such books, records and accounts of the Corporation's business and
affairs and such stock ledgers and lists of stockholders as the Board of
Directors shall deem advisable and as shall be required by the laws of the
State of Delaware or other states or jurisdictions empowered to impose such
requirements.
INDEMNIFICATION
53. Each director or officer of the Corporation or a subsidiary of
the Corporation who was or is made a party or is threatened to be made a party
to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or a subsidiary of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended (the "GCLD"), (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said law permitted the Corporation
to provide prior to such amendment), against all expenses, (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors
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and administrators. The right to indemnification conferred in this Section
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance
of its final disposition; provided, however, that, if the GCLD requires, the
payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under the applicable
provisions of the GCLD. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
or a subsidiary of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
54. The indemnification and advancement of expenses provided in
paragraph 52 of these Bylaws shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any agreement, vote of stockholders, vote of disinterested
directors, insurance arrangement or otherwise, both as to action in his or her
official capacity and as to action in another capacity.
AMENDMENTS
55. Except as otherwise provided in the Certificate of
Incorporation, these Bylaws may be altered, amended or repealed and new Bylaws
may be adopted at any regular meeting of the stockholders or Board of
Directors; or at any special meeting of the stockholders or Board of Directors;
provided that notice of such proposed making, alteration or repeal be included
in the notice of such special meeting. The Board of Directors may take such
action by the vote of two-thirds of those Directors present and voting at a
meeting where a quorum is present. Subject to applicable provisions of the
Certificate of Incorporation, the stockholders may make new Bylaws, or adopt,
alter, amend, or repeal Bylaws adopted by either the stockholders or the Board
of Directors by the affirmative vote of the holders of not less than two-thirds
(66 2/3%) of the voting power of all of the then outstanding shares of capital
stock of the Corporation then entitled to vote generally in the election of
directors.
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EXHIBIT 4.10
DEMAND PROMISSORY NOTE
$10,000,000 Houston, Texas June 27, 1996
FOR VALUE RECEIVED AND ON DEMAND, the undersigned, Dailey Petroleum
Services Corp., a Delaware corporation ("Maker"), promises to pay to the order
of Dailey Holdings Inc. a Delaware corporation, at First Bank of Conroe, N.A.,
Conroe, Montgomery County, Texas or at such other place as the holder of this
Note may hereafter designate in writing, in lawful money of the United States
of America and in immediately available funds, the principal amount of ten
million dollars ($10,000,000), together with interest on the unpaid balance of
said principal amount from time to time remaining outstanding, from the date
hereof until demand for repayment is made by Payee in accordance with the terms
and conditions hereunder, in like money, in immediately available funds, at a
rate per annum equal to the lesser of (i) the Base Rate (as hereinafter
defined) and (ii) the Maximum Rate (as hereinafter defined) and, without
duplication as to amounts upon which interest under this Note is otherwise
accruing, interest on all past due amounts from time to time remaining
outstanding (howsoever such past due amounts shall arise), both principal and,
to the extent permitted by law, accrued interest, at a rate per annum equal to
the lesser of (y) the Past-Due Rate (as hereinafter defined) and (z) the
Maximum Rate. Any increase or decrease in the interest rate resulting from a
change in the Base Rate or the Maximum Rate shall be effective immediately,
without notice to Maker, when such change becomes effective. Interest on this
Note shall be calculated at a rate per annum based upon the actual number of
days elapsed over a year of 360 days, unless the Maximum Rate would thereby be
exceeded, in which event, to the extent necessary to avoid exceeding the
Maximum Rate, interest on this Note shall be calculated at a rate per annum
based upon the actual number of days elapsed in the applicable calendar year in
which it accrued.
Notwithstanding the foregoing, if during any period the Base Rate or
the Past-Due Rate, as applicable, exceeds the Maximum Rate for the period of
time in which the Base Rate or the Past-Due Rate, as applicable, would
otherwise be in effect, the rate of interest in effect on this Note shall be
limited to the Maximum Rate during each such period, but at all times
thereafter the rate of interest in effect on this Note shall be the Maximum
Rate until the total amount of interest accrued on this Note equals the total
amount of interest which would have accrued on this Note if the Base Rate or
the Past-Due Rate, as applicable, had at all times been in effect for such
applicable period.
The outstanding principal amount of the Note, together with any
accrued and unpaid interest thereon, are due and payable, in whole or in part,
upon demand by Payee, provided that Payee has given Maker three Business Days'
(as hereinafter defined) prior written notice of the amount of such demand.
Maker shall have the right to prepay, in whole or part, the unpaid principal
balance of this Note without premium or penalty, provided that (i) Maker has
given Payee three Business Days prior written notice of the amount of such
prepayment and (ii) together with Maker's prepayment of such principal amount,
Maker shall pay all interest accrued and unpaid on the amount of such principal
prepayment.
All payments of principal and interest on this Note shall be made to
and received by Payee not later than 12:00 noon Conroe, Texas time on the date
on which such payments shall become due (each such payment made after such time
on such due date to be deemed to have been made on the next succeeding Business
Day). If the due date of any payment under this Note would otherwise fall on a
day that is not a Business Day, such date shall be extended to the next
succeeding Business Day, and interest shall be payable for any principal so
extended for the period of such extension. All payments and prepayments on
this Note shall be applied first to accrued interest, the balance to principal;
but no such payment or prepayment shall defer or delay any payment then or
thereafter due on this Note.
For purposes of this Note, the following terms shall have the
respective meanings as follows:
"Applicable Law" means the law in effect, from time to time,
applicable to the transaction evidenced by this Note which lawfully
permits the receipt, contracting for, charging and collection of the
highest permissible lawful, non-usurious rate of interest on this Note
and
PAGE 1 OF 4 PAGES
<PAGE> 2
the transactions evidenced hereby, and arising in connection herewith,
including laws of the State of Texas and, to the extent controlling,
the federal laws of the United States of America. To the extent that
Applicable Law is determined by reference to Article 1.04, Title 79,
Revised Civil Statutes of Texas, 1925, as amended, the interest
ceiling applicable hereto and in connection herewith shall be the
"indicated" (weekly) rate ceiling as defined in said Article 1.04;
provided however, it is agreed that the terms hereof, including the
rate, or index, formula or provision of law used to compute the rate
in connection herewith, will be subject to the revisions as to current
and future balances, from time to time, pursuant to Applicable Law.
It is further agreed that in no event shall Chapter 15 of subtitle 3,
Title 79, revised Civil Statutes of Texas, 1925, as amended, apply to
this Note or the transactions evidenced thereby, and arising in
connection therewith.
"Base Rate" means the variable per annum rate of interest
designated as the "prime rate" announced from time to time by Wells
Fargo Bank (Texas), National Association (the "Bank") as such rate,
which rate (i) may be one of several rates utilized by the Bank and
may not represent the lowest or best rate actually charged by the Bank
to any of its customers and (ii) shall change automatically from time
to time as and in the amount by which such rate shall fluctuate, with
each such change to be effective as of the date of each change in such
rate.
"Business Day" means any day on which commercial banks are not
required or authorized to close in Houston, Texas.
"Maximum Rate" means, on any day, the maximum lawful
non-usurious rate of interest (if any) which, under Applicable Law,
Payee is permitted or authorized to contract for, charge, collect,
receive, reserve or take from or of Maker on the indebtedness
evidenced by this Note from time to time in effect, including changes
in such Maximum Rate attributable to changes under Applicable Law
which permit a greater rate of interest to be contracted for, charged,
collected, received, reserved or taken as of the effective dates of
the respective changes.
"Past-Due Rate" means the variable per annum rate of interest
equal to the sum of (i) the Base Rate plus(ii) 3%.
Terms otherwise defined herein, whether expressly, by reference or otherwise,
and used herein are so used as so defined.
Upon the occurrence of the following events or occurrences, and in
addition to all other rights and remedies of Payee, and not in diminution of
any of them, Payee shall have the respective rights set forth hereinbelow with
respect to the acceleration of the maturity of this Note prior to any other
date or dates specified herein:
Maker shall generally not pay its debts as such debts become due, or
shall admit in writing its inability to pay its debts generally, or
shall make a general assignment for the benefit of creditors, or any
proceeding shall be instituted by or against Maker seeking to
adjudicate it a bankrupt or insolvent, or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protection, relief, or
composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee
or other similar official for it or for any substantial part of its
property, and in the case of any such proceedings instituted against
Maker (but not instituted by it), either such proceedings shall remain
undismissed or unstayed for a period of 30 days or any of the actions
sought in such proceedings shall occur; or the Maker shall take any
action to authorize any of the actions set forth above in this clause;
then, upon the occurrence of any of the events or occurrences specified in the
foregoing clause, the entire outstanding and unpaid principal balance of this
Note, all interest accrued and unpaid thereon, and all such other earned
amounts payable under this Note, shall automatically become and be immediately
due and payable, without presentment, demand, protest, or any notice of any
kind (INCLUDING, WITHOUT
PAGE 2 OF 4 PAGES
<PAGE> 3
LIMITATION, NOTICE OF DEFAULT, NOTICE OF INTENT TO ACCELERATE MATURITY AND
NOTICE OF ACCELERATION OF MATURITY), all of which are hereby expressly waived
by the Maker.
If this Note is collected by suit or through the bankruptcy court or
probate court, or any judicial proceeding, or if this Note is not paid at
maturity, howsoever such maturity may occur, and it is placed in the hands of
an attorney for collection (whether or not suit or other legal proceedings are
commenced by such attorney), then Maker agrees to pay, in addition to all other
amounts owing hereunder, the collection costs and reasonable attorneys' fees of
Payee.
It is the intent of Payee and Maker in the execution and performance
of this Note to remain in strict compliance with Applicable Law from time to
time in effect. In furtherance thereof, Payee and Maker stipulate and agree
that none of the terms and provisions contained in this Note or any documents
now or hereafter relating to this Note (collectively, the "Subject Documents")
shall ever be construed to create a contract to pay for the use, forbearance or
detention of money with interest at a rate or in an amount in excess of the
Maximum Rate or maximum amount of interest permitted or allowed to be
contracted for, charged, received, taken or reserved under Applicable Law. For
purposes of this Note and each of the other Subject Documents, "interest" shall
include the aggregate of all amounts which constitute or are deemed to
constitute interest under Applicable Law which are contracted for, taken,
charged, reserved, received or paid under this Note or any of the other Subject
Documents. Maker shall never be required to pay unearned interest and shall
never be required to pay interest at a rate or in an amount in excess of the
Maximum Rate or maximum amount of interest that may be lawfully contracted for,
charged, received, taken or reserved under Applicable Law, and the provisions
of this paragraph shall control over all other provisions of this Note and each
of the other Subject Documents, which may be in actual or apparent conflict
herewith. If the maturity of this Note is accelerated for any reason, or if
under any other contingency the interest effective rate or amount of interest
which would otherwise be payable under this Note or any of the other Subject
Documents would exceed the Maximum Rate or maximum amount of interest Payee is
permitted or allowed by Applicable Law to charge, contract for, take, reserve
or receive, or in the event Payee shall charge, contract for, take, reserve or
receive monies that are deemed to constitute interest which would, in the
absence of this provision, increase the effective interest rate or amount of
interest payable under this Note or any of the other Subject Documents to a
rate or amount in excess of that permitted or allowed to be charged, contracted
for, taken, reserved or received under Applicable Law then in effect, then the
principal amount of this Note or the amount of interest which would otherwise
be payable under this Note, or both, shall be reduced to the amount allowed
under Applicable Law as now or hereinafter construed by the courts having
jurisdiction, and all such monies so charged, contracted for, taken, reserved
or received that are deemed to constitute interest in excess of the Maximum
Rate or maximum amount of interest permitted by Applicable Law shall
immediately be returned to or credited to the account of Maker upon such
determination. Payee and Maker further stipulate and agree that, without
limitation of the foregoing, all calculations of the rate or amount of interest
contracted for, charged, taken, reserved or received under this Note or any of
the other Subject Documents which are made for the purpose of determining
whether such rate or amount exceeds the Maximum Rate, shall be made to the
extent not prohibited by Applicable Law, by amortizing, prorating, allocating
and spreading during the period of the full stated term of this Note, all
interest hereon at any time contracted for, charged, taken, reserved or
received from Maker or otherwise by Payee.
To the extent that the Maker makes a payment or payments to the Payee
or the Payee enforces any claim, and such payment or payments or the proceeds
of such enforcement, or any part thereof, are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or other person or entity under any law or
equitable cause, then, to the extent of such recovery, the obligation or part
thereof originally intended to be satisfied, and all rights, remedies and liens
therefor, shall be revived and shall continue in full force and effect as if
such payment had not been made or such enforcement had not occurred.
Maker and all sureties, endorsers and guarantors of this Note
severally waive grace, notice of non-payment, presentment, demand, presentment
for payment, protest, notice of protest, notice of dishonor or default, notice
of intent to accelerate maturity, notice of acceleration of maturity and all
other such notices, filing of suit and diligence in collecting and bringing
suit on this Note or enforcing any of
PAGE 3 OF 4 PAGES
<PAGE> 4
the security herefor, and agree to any substitution, exchange or release of any
such security, the release of any party primarily or secondarily liable hereon
and further agree that it will not be necessary for Payee, in order to enforce
payment of this Note, to first institute suit or exhaust its remedies against
any security herefor, and consent to any one or more extensions, renewals,
rearrangements, partial payments, or postponements of time of payment of this
Note on any terms or any other indulgences with respect hereto, without notice
thereof to any of them. The nonexercise or delay by Payee of any of its
rights, remedies or powers hereunder or with respect hereto in any particular
instance shall not constitute a waiver thereof in that or any subsequent
instance. Neither a single or partial exercise of any such right, remedy or
power by the Payee, nor any abandonment or discontinuance of steps to enforce
such right, remedy or power, shall preclude any other or further exercise
thereof or the exercise of any other right, remedy or power. No course of
dealing between the Payee and the Maker shall operate as a waiver of any right,
remedy or power of the Payee.
The Maker warrants and represents to the Payee that advances evidenced
by this Note are solely for, and shall be used solely for, business,
commercial, investment or other similar purpose and not primarily or otherwise
for personal, family, household or agricultural use or purposes, as such terms
are used in Chapter One of the Texas Credit Code, Tex Rev. Civ. Stats. arts.
5069-1.01 et. seq.
Further, the Maker warrants and represents to the Payee that no
amounts advanced or borrowed hereunder shall be used for the purchase or
carrying, directly or indirectly, of any "margin stock" within the meaning of
Regulations G, T, U or X of the Board of Governors of the Federal Reserve
System. Further, Maker covenants that it will not take or permit any action
that would involve the Payee in a violation of any of the foregoing Regulations
or a violation of the Securities Exchange Act of 1934, in each case as now or
hereafter in effect.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Texas and, to the extent controlling, applicable
federal laws of the United States of America. The Maker and the Payee
expressly agree, pursuant to Article 15.10(b) of Chapter 15 ("Chapter 15") of
the Texas Credit Code that Chapter 15 shall not apply to this Note, and that
this Note shall not be governed by, or subject to, the provisions of Chapter 15
in any manner whatsoever.
THIS NOTE IS SUBJECT TO THE TERMS AND PROVISIONS OF THAT CERTAIN
SUBORDINATION AGREEMENT DATED AS OF EVEN DATE HEREWITH BY AND AMONG DAILEY
HOLDINGS, INC., A DELAWARE CORPORATION, WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION, AND DAILEY PETROLEUM SERVICES CORP., A DELAWARE CORPORATION.
DAILEY PETROLEUM SERVICES CORP.
By /s/ William D. Sutton
------------------------------------
Name: William D. Sutton
Title: Senior Vice President
PAGE 4 OF 4 PAGES
<PAGE> 1
EXHIBIT 10.1
FORM OF RELATIONSHIP AGREEMENT
THIS RELATIONSHIP AGREEMENT (this "Agreement") dated as of
___________, 1996 by and between Dailey Petroleum Services Corp., a Delaware
corporation (the "Company"), and Lawrence Industries, Inc., a Delaware
corporation ("Lawrence").
W I T N E S S E T H:
WHEREAS, Lawrence currently owns 5,000,000 shares of common stock,
$.01 par value (the "Common Stock") of the Company, constituting all of the
issued and outstanding capital stock of the Company;
WHEREAS, the Company proposes to sell to the public through
underwriters and managers an aggregate of 4,000,000 shares of Class A Common
Stock (the "Offering") and to grant to the underwriters and managers an over
allotment option to purchase up to an aggregate of 600,000 shares of Class A
Common Stock owned by the Company;
WHEREAS, certain managerial and administrative personnel employed by
the Company have historically provided management and administrative services
to Lawrence and its Affiliates (as defined below);
WHEREAS, Lawrence desires to obtain from the Company and the Company
desires to provide to Lawrence certain management and administrative services
of the general character previously provided to Lawrence and its Affiliates (as
defined under Rule 405 of the Securities Act of 1933, as amended and in effect
on even date herewith) by persons who are and will be employed by the Company;
and
WHEREAS, Company desires to obtain and Lawrence desires to provide
certain technical and advisory services which will be provided by persons
employed by Lawrence and its Affiliates.
NOW, THEREFORE, in consideration of the premises, the mutual and
dependent agreements contained herein and the mutual benefits to be obtained
from this Agreement, the Company and Lawrence agree as follows:
ARTICLE 1
USE OF PROCEEDS
Within 48 hours following closing of the Offering (the "Closing
Date"), the Company will pay or have previously paid in immediately available
funds to Lawrence (i) the aggregate net amount of indebtedness of the Company
owed to Lawrence and its Affiliates outstanding on the Closing Date.
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ARTICLE 2
MANAGERIAL AND ADMINISTRATIVE SERVICES
2.1 AGREEMENT TO PERFORM SERVICES. Subject to and on the terms and
conditions of this Agreement, the Company undertakes to perform, on an as
available basis, such of the Services (as defined below) for Lawrence and its
Affiliates, as may, from time to time, be requested by Lawrence. The Company
shall be entitled to defer the performance of Services (defined below)
requested of it hereunder if the performance of such Services within the time
period requested by Lawrence would, in the reasonable opinion of the Company,
jeopardize the ability of the Company's personnel to complete in a timely
manner tasks for the benefit of the Company within the time period reasonably
required for the completion of such tasks. In the event the Company is required
to delay the Services, it shall so notify Lawrence and provide an estimate of
the time by which it expects the requested Services can be performed. The
Company shall have no obligation to hire additional personnel or otherwise
acquire additional resources to accommodate requests for the Services.
2.2 INITIAL SERVICES. The Company shall provide management and
administrative services, including consultation, relating to the following
functions (the "Services"): accounting and financial reporting; cash
management, payroll; data processing; taxation compliance and planning;
benefits administration; legal; risk management and insurance; file and record
storage; training of personnel as provided in Section 2.3 below; receptionist
and switchboard operator ("Receptionist/Operator") functions at the principal
offices of the Company and Lawrence in Conroe, Texas; and such other functions
as may be added by mutual agreement of the parties. The transition and
personnel training and other assistance provided pursuant to this Section 2.3
shall be included in the definition of the "Services."
2.3 TRANSITION AND PERSONNEL TRAINING. In addition to the specific
Services provided by the Company hereunder, and if so requested by Lawrence,
the Company shall assist Lawrence or its Affiliates in assuming any or all of
the Services provided pursuant to this Agreement. Such assistance shall
include, without limitation, on-the-job training and temporary supervision of
personnel of Lawrence or its Affiliates who have been assigned to assume
responsibility for a Service, and communication of all data and files necessary
to enable Lawrence personnel to properly perform the Services assumed by them.
2.4 MODIFICATION OF SERVICES. By mutual agreement, additional
Services may be added to this Agreement or Services may be removed from this
Agreement at any time or from time to time. Lawrence may remove a Service from
this Agreement at any time upon 30 days written notice to the Company. Upon
removal of a Service from this Agreement, this Agreement shall continue in
effect for all Services that remain under this Agreement, but shall no longer
cover the eliminated Service.
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<PAGE> 3
ARTICLE 3
COMPENSATION AND REIMBURSEMENT
3.1 COMPENSATION. As compensation for performing Services
("Compensation"), the Company shall charge Lawrence and Lawrence shall pay the
Company an amount equal to the total number of hours spent by the Company's
personnel in the performance of Services, multiplied by the total Hourly Rate
(as defined below) of such personnel. The Hourly Rate of each employee or
independent contractor (excluding the Company's Receptionist/Operator) of the
Company performing Services shall be equal to the quotient of (A) the
annualized gross salary to be paid by the Company to such person during the
then current fiscal year, multiplied by 1.50, divided by (B) the Company's
reasonable estimate of the annualized number of hours that the employee will
work during the then current fiscal year. The Company shall charge its
employees' time to Lawrence based upon the number of whole hours spent by its
employees in the performance of Services. The services of the Company's
Receptionist/Operator shall be charged to Lawrence on a flat rate equal to two
hundred dollars per month.
3.2 EXPENSES. Lawrence shall reimburse the Company for any
direct, out-of-pocket expenses reasonably incurred by the Company in the
performance of the Services, such expenses being referred to herein as "Costs."
Upon the Company's written request and presentment of an invoice and accounting
complying with Section 3.3 below, Lawrence shall advance to the Company the
amount of Costs specified in such request.
3.3 BILLINGS AND PAYMENT. The Company shall bill Lawrence
quarterly for Compensation and Costs accrued during the preceding quarter. With
respect to each monthly invoice, the Company shall present to Lawrence an
itemized accounting of each Service covered by the invoice describing in
reasonable detail the nature of the Service performed, including the name and
Hourly Rate of, and time spent by, each person performing the Service, as well
as an itemized accounting of each Cost covered by the invoice (including
original receipts where required by federal or state income tax regulations)
setting forth in appropriate detail (including date, place, amount and names as
applicable) the individual Costs for which reimbursement is sought. Lawrence
shall pay each invoice within thirty days after receipt. Invoices not paid
when due, including disputed invoices that are later determined or agreed to be
payable, shall bear interest from the due date until paid at a per annum rate
equal to the lesser of (i) the highest per annum rate charged under any bank
loan to which the Company or any of its subsidiaries is a party, or (ii) the
maximum lawful interest rate which may be charged to corporate borrowers in
Texas. For that portion of any period during which an invoice is past due and
neither the Company nor any of its subsidiaries is a party to any bank loans,
the per annum interest rate charged by the Company thereon shall be equal to
the lesser of (i) the prime rate published from time to time by the Wall Street
in its "Money Rates" column, plus one percent (1%) per annum, or (ii) the
maximum lawful interest rate which may be charged to corporate borrowers in
Texas. Interest on past due accounts shall be compounded at the end of each
fiscal year. Lawrence's failure to pay the entire amount of an invoice within
ninety (90) days after receipt shall constitute a material breach of this
Agreement to which the termination provisions of Section 9.1 shall apply.
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<PAGE> 4
3.4 DISPUTES; AUDITS. If Lawrence disputes any amount invoiced,
Lawrence shall pay the amount of the invoice not disputed and shall give the
Company a reasonably detailed explanation of any factual and legal basis on
which the balance is disputed. In any dispute concerning computation of the
Hourly Rate, Lawrence shall have the burden of proving that any allocations or
estimates made in the calculation thereof were unreasonable when such
allocations or estimates were made. Lawrence shall be entitled to audit the
Company's books and records relating to Compensation and Costs five business
days after the Company has received from Lawrence written notice of Lawrence's
intention to conduct such an audit. No invoice may be disputed or audited
after eighteen (18) months from the date it was received by Lawrence.
ARTICLE 4
AIRCRAFT SERVICES AND EQUIPMENT RENTAL
4.1 AIRCRAFT PROVIDED. Lawrence, through one of its Affiliates,
may, from time to time, own and operate, one or more aircraft. Lawrence, or
one of its Affiliates, may from time to time acquire other or replacement
aircraft (each of the Astra, the Astar and such other or replacement aircraft
collectively the "Aircraft"). Nothing in this Agreement shall be construed as
restricting Lawrence or its Affiliates from selling, scrapping or in any other
manner disposing of any Aircraft or as requiring or obligating Lawrence or its
Affiliates to acquire or lease any replacement Aircraft upon any sale,
scrapping or other disposal of any then existing Aircraft.
4.2 AVAILABILITY AND USE. The Company shall be entitled to charter
the Aircraft from the owner of such aircraft (the "Owner") (either Lawrence or
its applicable Affiliate as the case may be) on an as available basis. The
Owner shall use reasonable efforts to schedule Aircraft use to accommodate the
Company's charter requests, but shall not be obligated to make such Aircraft
available. Any use of an Aircraft by the Company shall be in accordance with
all laws and regulations governing the ownership, operation, and use of such
Aircraft, including Federal Aviation Regulations, if applicable, insurance
requirements, manufacturers' guidelines, and rules and standards prescribed by
the Owner. The Aircraft shall be operated by pilots of the Owner, or other
persons (a) currently qualified in the particular Aircraft, (b) holding a
current commercial United States pilots license with a current instrument
rating, and (c) listed as pilots on insurance covering the specific Aircraft.
4.3 CHARGES FOR USE OF AIRCRAFT. The Owner shall charge the
Company for use of Aircraft at charter rates not in excess of those generally
available for charter of substantially similar aircraft in the Houston, Texas
metropolitan area. Charter of Aircraft may be made pursuant to such other and
further charter agreements and contracts (as to matters other than the maximum
allowable charges for use of the Aircraft) as the Company and Lawrence may from
time to time mutually agree.
4.4 EQUIPMENT RENTAL. The Company and its subsidiaries own certain
equipment and vehicles that Lawrence and its Affiliates may desire to use in
their respective businesses. Lawrence
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<PAGE> 5
shall be entitled to utilize such equipment and vehicles from time to time on
an as available basis. The Company shall use reasonable efforts to accommodate
Lawrence's requests for such equipment and vehicles, but shall not be obligated
to make such equipment and vehicles available if the requested equipment or
vehicles are committed to Company use during the time period in which Lawrence
has requested use. The use of such equipment and vehicles shall be charged to
Lawrence at fair market value daily rental rates, and on such other terms and
conditions as may be mutually agreed by the Company and Lawrence.
ARTICLE 5
INSURANCE
5.1 CURRENT INSURANCE COVERAGE. The parties recognize that there
exists insurance policies currently entered into by Lawrence with coverage for
the Company as well as policies currently entered into by the Company with
coverage for Lawrence or its other Affiliates (the "Policies"). Each of
Lawrence, with respect to Policies entered into by it, and the Company, with
respect to Policies entered into by it, hereinafter shall be referred to as the
"Policy Holder". Each of Lawrence and its Affiliates and the Company
hereinafter shall be referred to as the Insured with respect to Policies for
which it is not the Policy Holder. To the knowledge of the Policy Holder, each
of its Policies are in full force and effect with respect to the insurable
risks for the Insured set forth in the Policies.
5.2 DUTIES.
(a) The Policy Holder. The Policy Holder agrees to use its
reasonable efforts to maintain the Policies and to continue the
coverage of the Insured under the Policies or substitutes for the
Policies, if reasonably possible, as may be entered into after the
Closing Date as though the Insured was a subsidiary of the Policy
Holder until April 30, 1997 (substitutes for the Policies shall also
be referred to herein as the "Policies"). The Policy Holder shall not
be responsible to the Insured for loss of coverage or in any other
respect if any of the Policies are canceled by the insurance carrier
or underwriter regardless of cause or if the Policy Holder is unable
to secure substitute or replacement coverage for the same coverage as
the canceled or expired Policies. If the Policy Holder should decide
to change the terms and provisions of any of the Policies for its own
coverage, it may do so in its sole discretion with respect to the
Policy Holder without the written consent or agreement of the Insured
so long as such change does not have a material adverse effect on the
coverage of the Insured, or result in a significant increase in cost
to the Insured. If the Policy Holder should determine in its sole
discretion that it should not continue certain coverages, it may
cancel such coverages with respect to the Policy Holder without
consent or agreement of the Insured so long as such cancellation does
not have a material adverse effect on the coverage of the Insured. If
the Policy Holder elects to change the terms and provisions or cancel
any of the Policies as they affect the Policy Holder and the Insured,
the Policy Holder will give the Insured 30 days' prior written notice
of its intent to make such election if such changes or
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<PAGE> 6
Policies are substantial.
(b) The Insured. The Insured shall pay all out-of-pocket costs and
expenses of every kind (including, without limitation, charges for
premiums, all handling fees, attorneys fees, expenses, losses
generated by the Insured under any deductible, self-insured or
retrospective rating plan, letter of credit or banking fees and other
charges) related to its coverage under any of the Policies pursuant to
which it is covered consistent with past practices. The Insured also
agrees to cooperate with any insurance carrier, representatives or
agents in the investigation of any claim of insurance and to provide
any information which any such carrier shall reasonably request for
the purpose of investigating a claim. The Insured agrees to indemnify
and hold harmless the Policy Holder and its directors, officers,
agents, employees and affiliates providing any assistance pursuant to
this Article 5 against any and all damages, claims, obligations,
liabilities, lawsuits, penalties, administrative proceedings,
judgments, costs or expenses, including attorneys' fees, resulting
from or arising out of or in connection with any function of the
Policy Holder under this Article 5 or in connection with any claim
made by or against the Insured relating to any of the Policies or
matters purportedly covered by the Policies unless any such damage or
claim was the result of gross negligence or willful misconduct of the
Policy Holder, its employees or agents.
5.3 THE POLICY HOLDER NOT AN INSURER. The Insured agrees and
acknowledges that the Policy Holder is not an insurance carrier or an insurer
of any claims made by or against the Insured for any matters covered by any of
the Policies or otherwise. The Insured agrees not to sue the Policy Holder for
(i) any claims or events occurring for which an insurance carrier may deny
coverage or dispute any aspect of coverage (including, but not limited to,
coverage amounts, defense obligations, settlement obligations), (ii) changes in
any of the Policies which apply to the Policy Holder generally or (iii) any
other action taken or omitted pursuant hereto, unless such action constitutes
gross negligence or willful misconduct on the part of the Policy Holder. The
Insured specifically agrees that it will not sue the Policy Holder for, or be
entitled to recover from the Policy Holder with respect to, actions taken or
omitted by the Policy Holder as a result of the Policy Holder's negligence.
Further, the Insured acknowledges and agrees that the Policy Holder is and
shall be under no obligation to advance funds to any insurance carrier for
premiums, costs or expenses of any kind on behalf of the Insured. The Policy
Holder agrees to provide access to books, records, and personnel at reasonable
times to cooperate with the Insured in any dispute regarding the Policies or
any claim. The Insured will reimburse the Policy Holder for out-of-pocket costs
and other costs associated with extraordinary commitments of personnel for such
cooperation.
5.4 CLAIMS ADMINISTRATION. The obligations of any insurance
carrier with respect to claims administration shall be the same (and no
greater) for the Insured as for the Policy Holder, and the Insured agrees to be
responsible for all claims administration matters and associated expenses
relating to the Insured that the Policy Holder currently manages.
5.5 NON-INSURABLE MATTERS. Except as otherwise provided in this
Article 5, the Policy Holder shall not have any responsibility for claims
(whether by or against the Insured) not covered
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by the Policies nor shall the Policy Holder have any obligation to acquire
insurance for the Insured in any such uncovered area. In particular, but
without limitation, the Policy Holder shall not be required to maintain
directors and officers indemnification or liability insurance for the directors
and officers of the Insured.
5.6 LENDING ARRANGEMENTS. The Insured agrees to pay when due all
premiums, and administrative expenses, attorneys' fees. settlement amounts and
other costs and expenses incurred with respect to the coverage of the Insured
under the Policies which are not funded by any insurance coverage. Further, the
Insured agrees to pay directly to any insurance carrier when requested pursuant
to the terms of any insurance policy such funds for settlements of claims or
dexpenses or to provide other forms of security including letters of credit
which are required by the Policies (insofar as they relate to the coverage of
the Insured thereunder) directly to such carrier. If any amounts of such funds
are expanded by the Policy Holder on the Insured's request or as an
administrative convenience, the Insured shall reimburse the Policy Holder such
amounts within 30 days of invoice. If any invoiced amount is not paid within
such 30-day period, such invoiced amount shall accrue and bear interest from
the due date at the Prime Rate, as publicly announced from time to time by
First Interstate Bank of Texas, N.A. (Houston Branch), plus one percent per
annum until paid.
5.7 SELF INSURANCE. The Insured acknowledges that a substantial
portion of the risk covered by the Policies must be absorbed by the Insured
because of the level of deductibles established by the Policy Holder on its
Policies. The Insured agrees to bear all such risks of expense or loss and
provide funds to any claims administrator, insurance carrier or underwriter or
other arrangement which the Policy Holder establishes with third parties for
purposes of administering the deductible amounts, to the extent reasonably
applicable to the Insured.
5.8 INSURANCE EVENTS OF DEFAULT. Each of the following events
shall constitute an Insurance Event of Default:
(a) The Insured shall fail to make any payment on or
before the date due to any insurance carrier or the Policy Holder and
shall not cure this failure within ten business days of notice of such
failure from the Policy Holder or the insurance carrier; or
(b) The Insured shall fail to perform or observe any
other condition or agreement to be performed or observed by it (or by
the Policy Holder with respect to the Insured) under any of the
Policies or this Agreement and such failure shall continue for 30
business days after written notice thereof from the Policy Holder or
the insurance carrier to the Insured; or
(c) A petition in bankruptcy shall be filed by the
Insured or the Policy Holder, or the Insured or the Policy Holder
shall make an assignment of the benefit of creditors or consent to the
appointment of a trustee or receiver; or a trustee or receiver shall
be appointed for the Insured or the Policy Holder for a substantial
part of its property without its consent and shall not be dismissed
within a period of 60 days, or bankruptcy, reorganization or
insolvency proceedings shall be instituted against the Insured and
shall not be dismissed for
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a period of 60 days;
(d) The Insured has taken action with respect to any
insurance policy which has caused a cancellation of a policy of the
Policy Holder without its consent or approval.
5.9 EFFECTIVE DATES AND TERMINATION. This Article 5 shall commence
on the Effective Date (as defined in Section 9.1) and shall remain in effect
until April 30, 1997, unless terminated earlier pursuant to this Article 5.
This Article 5 may be terminated by either party immediately upon an Insurance
Event of Default and written notice to the defaulting party. Notwithstanding
the termination or expiration of this Article 5, the Insured shall remain fully
liable to the Policy Holder for all charges, fees, losses (paid and incurred),
premiums and all other sums due in accordance with the terms and provisions of
this Article 5, and all such obligations of the Insured shall be deemed to
survive any such termination. The Insured acknowledges that once this Article 5
is terminated, billings for losses, adjustments and premiums will, in all
likelihood, continue to occur for as long as the Policies remain valid which is
generally of an indefinite duration.
5.10 EXAMINATION OF RECORDS. The Insured shall have the right to
examine any claim file or other matters relating to a specific claim maintained
by any insurance carrier to the same extent the Policy Holder has such rights
and such examination shall be carried out in the same manner in which the
Policy Holder may carry out such an examination.
ARTICLE 6
BENEFIT PLANS
6.1 THRIFT PLAN. Lawrence agrees to use its best efforts to
continue to maintain the "Lawrence Companies Retirement Plan" or similar plan,
which complies with Section 401(k) of the Internal Revenue Code of 1986, as
amended and to allow the current and future employees of the Company to
participate therein (if meeting the eligibility requirements). The parties
mutually agree to bear that proportion of the administrative costs as such
party's participating employees bears to the total number of participants under
the plan.
6.2 REFORMATION. Notwithstanding any other provision of the
Agreement, the Company and Lawrence intend that all employee benefit matters
covered herein comply with the applicable laws of the affected jurisdiction,
and, to the extent of any noncompliance, the provisions herein shall be
reformed to achieve compliance in accordance with the intent of the parties
hereto.
ARTICLE 7
INDEMNIFICATION
7.1 INDEMNIFICATION GENERALLY. From and after the Closing Date,
the Company will indemnify and hold harmless Lawrence, each Person who controls
Lawrence within the meaning of the Securities Act and the Exchange Act and each
officer, director, employee or agent of Lawrence or any such Person, against
any losses, claims, damages or liabilities (including reasonable attorneys'
fees), joint or several, to which Lawrence, any such controlling Person or any
such officer, director,
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<PAGE> 9
employee or agent may become subject under the Securities Act, the Exchange Act
or otherwise, and will reimburse Lawrence, each such controlling Person and
each officer, director, employee or agent of Lawrence or any such Person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any press release or any document
filed pursuant to the Securities Act or the Exchange Act (excluding any
registration statement filed in connection with the Offering or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements made
therein not misleading.
7.2 INDEMNIFICATION FOR OFFERING. Lawrence will indemnify and hold
harmless the Company, each Person who controls the Company within the meaning
of the Securities Act and the Exchange Act and each officer, director, employee
or agent of the Company or any such Person, against any losses, claims, damages
or liabilities (excluding all attorneys' fees and other litigation expenses),
joint or several, to which the Company, any such controlling Person or any such
officer, director, employee or agent may become subject under the Securities
Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement for the Offering, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading. The Company will pay, or reimburse as
appropriate, any legal or other expenses incurred in connection with
investigating or defending any such loss, claim, damage, liability or action.
7.3 NOTICE. Promptly after receipt by an indemnified party under
this Article 7 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against an
indemnifying party under this Article 7, notify the indemnifying party in
writing thereof, but the omission so to notify the indemnifying party shall not
relieve it from any liability which it may have to any indemnified party other
than under this Article 7. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in and, to the extent it shall wish, to assume and undertake the defense
thereof with counsel reasonably satisfactory to such indemnified party and
after notice from the indemnifying party to such indemnified party of its
election so to assume and undertake the defense thereof, the indemnifying party
shall not be liable to such indemnified party under this Article 7 for any
legal expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation and of
liaison with counsel so selected; provided, however, that, in the case of a
claim under this Article 7, (i) if the indemnifying party has failed to assume
the defense and employ counsel or (ii) if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it that are different from or additional to those
available to the indemnifying party or if
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<PAGE> 10
the interests of the indemnified party reasonably may be deemed to conflict
with the interests of the indemnifying party then the indemnified party shall
have the right to select a separate counsel and to assume such legal defense
and otherwise to participate in the defense of such action, with the expenses
and fees of such separate counsel and other expenses related to such
participation to be reimbursed by the indemnifying party as incurred.
7.4 CONTRIBUTION. If the indemnification provided for in this
Article 7 is unavailable or insufficient to hold harmless the indemnified party
in respect of any losses, claims, damages or liabilities or actions in respect
thereof, then the indemnifying party shall in lieu of indemnifying such
indemnified party contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities or actions in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party, on the one hand, and the indemnified party, on the other,
in connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or actions as well as any other relevant equitable
considerations, including the failure to give any required notice. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the indemnifying party, on the one hand, or the indemnified party, on the
other, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
Lawrence agree that it would not be just and equitable if contribution pursuant
to this Section 7.4 were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 7.4. The amount paid or
payable by an indemnified party as a result of the losses, claims , damages,
liabilities or actions in respect thereof referred to above in this Section 7.4
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
ARTICLE 8
SALE OF STOCK
Whenever Lawrence shall desire to sell substantially all its shares as
a single block and such shares equal 5% or more of the then issued and
outstanding Common Stock (other than in an underwritten offering), it shall
give the Company written notice thereof (the "Initial Notice") setting forth
the number of shares of Common Stock it proposes to sell (the "Offered
Shares"). Within 15 days following such notice, the Company may offer in
writing to purchase such shares on specified terms and conditions (the "Company
Offer"). If Lawrence accepts the Company Offer by giving notice thereof to the
Company within 15 days of the Company Offer, the sale shall be concluded on the
terms set forth in the Company Offer within 30 days of Lawrence's acceptance
thereof. If there is no Company Offer or if Lawrence does not accept the
Company Offer, for a period of 180 days following (i) the date of the Initial
Notice if there is no Company Offer, or (ii) the date of the
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<PAGE> 11
Company Offer, Lawrence may sell the Offered Shares to any third party;
provided that, if there is a Company Offer, such sale must be made at a price
greater than that set forth in the Company Offer. Lawrence shall, prior to
consummating any such sale, present to the Company a copy of the agreement as
to the sale of the Offered Shares.
ARTICLE 9
TECHNICAL AND ADVISORY SERVICES
9.1 TECHNICAL SERVICES. Lawrence, or its Affiliates, shall
provide technical services to the Company as requested from time to time.
These services shall include technical consulting on design and performance
characteristics of drilling tools manufactured by Company, including, but not
limited to, the design, geometry, tolerances, metallurgy, welding procedures
and material specifications. The technical services shall involve providing
personnel to Company at its facility in Conroe, Texas, and such places as may
be agreed between Company and Lawrence. Lawrence shall, when requested by
Company, provide written reports and analyses to support the services provided.
9.2 FEES. On the tenth day of each month from the Effective
Date until April 30, 1999, Company shall pay Lawrence, or its designated
Affiliate a fee in the amount of Twenty Thousand Eight Hundred and Thirty-Three
Dollars as full consideration for the technical and advisory services provided.
ARTICLE 10
TERM
10.1 TERM. The term of this Agreement shall commence on the
closing date of the Company's initial public offering of its common stock (the
"Effective Date") and shall continue until April 30, 1999. In the event of a
material breach of this Agreement by a party hereto, the non-breaching party
may terminate this Agreement effective upon delivery to the breaching party of
a written termination notice.
10.2 TRANSFER OF RECORDS. Upon termination of this Agreement for
any reason, or upon removal of any Service from this Agreement, the Company
shall transfer to Lawrence all records, accounts, information and files,
including those in computer-readable form, that pertain to the Services which
the Company no longer will provide. Any out-of-pocket expenses paid or
incurred by the Company in connection with such transfer shall be reimbursed by
Lawrence upon receipt of such records.
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<PAGE> 12
ARTICLE 10
MISCELLANEOUS
11.1 RELATIONSHIP. This Agreement is not intended to create and
shall not be construed to create a partnership, joint venture or similar
business relation among the parties hereto. The respective rights and
obligations of the parties hereto shall in all respects be several and not
joint or collective.
11.2 REPRESENTATIONS OF LAWRENCE AND THE COMPANY. Each party hereto
represents end warrants (a) it is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, with
power and authority to carry on the business in which it is engaged and to
perform its obligations under this Agreement; (b) the execution and delivery of
this Agreement have been duly authorized and approved by all necessary
corporate action (including without limitation specific authorization by the
board of directors of each party hereto); (c) it has all requisite corporate
power and authority to enter into this Agreement and to perform its obligations
hereunder; and (d) the execution and delivery of this Agreement do not, and the
performance of this Agreement will not, violate any of the provisions of its
certificate of incorporation or bylaws or any applicable laws or regulations.
11.3 FURTHER ASSURANCES. Each party represents and warrants to the
other party that to such party's knowledge, it does not own or possess any
assets that are part of the business of the other party. The parties mutually
agree that, in the event it is found that a party owns assets (the "Holder")
that are part of the business of the other party (the "Operator"), the Holder
shall use its best efforts to transfer such assets to the Operator as promptly
as possible following determination that the Holder owns such assets, and
during the period such assets remain untransferred, or in the event such assets
cannot be transferred or the parties mutually determine that effectuating such
transfer would cause burdensome federal or state income or sales tax
consequences to the Operator or Holder, the Holder shall use its best efforts
to provide the Operator with the practicable benefits of such asset provided
that all out-of-pocket expenses incurred by the Holder with respect to
providing such benefits that would be incurred by the Operator if not for the
fact that such assets are not transferred, shall be reimbursed by the Operator.
11.4 INDEMNIFICATION. Lawrence does hereby unconditionally agree to
and shall indemnify, defend and hold harmless each of the Company, its
officers, directors and employees, and their respective heirs, executors,
administrators, personal representatives, successors and assigns from and
against and in respect of any and all manner of claims, costs, damages, losses,
expenses, obligations, liabilities, recoveries, suits, causes of action and
deficiencies, including without limitation, interest, penalties and reasonable
attorneys' fees (collectively "Claims"), that such indemnified or indemnifying
persons shall incur or suffer by reason of any manner or thing whatsoever
directly or indirectly arising out of, resulting from, or relating to this
Agreement and the performance or nonperformance of the Company's obligations
hereunder, regardless of whether any Claims are attributable in whole or in
part to the negligence act or omission of such indemnified persons.
11.5 NOTICES. Any notices, instruction, authorization, request or
demand required hereunder shall be in writing, and shall be delivered either by
personal delivery, by telegram, telex,
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<PAGE> 13
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 the parties hereto at the address indicated
beneath their respective signatures 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. Notices to the
Company shall be copied to William D. Sutton, Senior Vice President and General
Counsel, at the Company's address for notice, and to the General Counsel of
Lawrence, at Lawrence's address for notice, or to such other person at such
other address as the Company and Lawrence, respectively, may specify by written
notice.
11.6 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 a duly authorized executive officer of the party waiving
compliance. 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 of the breach or any other term, provision, covenant,
representation or warranty.
11.7 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
the Company'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 the Company shall not relieve it of any of its obligations hereunder.
11.8 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 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.
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<PAGE> 14
11.9 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, applicable in the
State of Texas. 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.
11.10 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 the Company and Lawrence
relating to the subject matter hereof.
11.11 COUNTERPARTS. The parties may execute this Agreement in any
manner of counterparts, each of which is an original, but all of which together
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by a duly authorized executive officer as of the date hereof but
effective as of the Effective Date.
DAILY PETROLEUM SERVICES CORP.
By
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Address: One Lawrence Centre
P.O. Box 2866
2507 North Frazier
Conroe, Texas 77305
Telecopy No.
-------------------------
Attention:
----------------------------
Copy to: William D. Sutton
Senior Vice President and
General Counsel
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<PAGE> 15
LAWRENCE INDUSTRIES, INC.
By
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
Address: One Lawrence Centre
P.O. Box 2866
2507 North Frazier
Conroe, Texas 77305
Telecopy No.
-------------------------
Attention:
----------------------------
Copy to: William D. Sutton
Senior Vice President and
General Counsel
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<PAGE> 1
EXHIBIT 10.4
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") made as of the
_____ day of _______________, 1996, among Dailey Petroleum Services Corp., a
Delaware corporation (the "Issuer") and Lawrence Industries, Inc., a Delaware
corporation (the "Stockholder").
W I T N E S S E T H :
WHEREAS, the authorized capital stock of the Issuer consists of
20,000,000 shares of Class A common stock, $.01 par value ("Class A Stock"),
10,000,000 shares of Class B common stock, $.01 par value ("Class B Stock") and
5,000,000 shares of preferred stock, $.01 par value;
WHEREAS, pursuant to the Company's Restated Certificate of
Incorporation, shares of Class B Stock convert into an equal number of shares
of Class A Stock (i) at any time at the option of the holder of such Class B
shares and (ii) immediately upon the sale or transfer of such Class B shares to
an individual or entity that is not a member of the Lawrence Group (as such
term is defined in the Company's Restated Certificate of Incorporation);
WHEREAS, the Stockholder beneficially owns, directly or indirectly,
5,000,000 shares of Class B Stock, which represents all of the issued and
outstanding shares of the Company's capital stock as of the date of this
Agreement;
WHEREAS, the Issuer intends to register pursuant to the Securities Act
approximately 4,000,000 shares of Class A Stock (the "Offering") and an
additional 600,000 shares of Class A Stock subject to an Underwriter's
overallotment option on a registration statement on Form S-1 (the "S-1") filed
with the Securities and Exchange Commission; and
WHEREAS, the Company and the Stockholder desire to memorialize their
agreement with respect to the future registration of the shares of Class B
Stock currently owned by the Stockholder;
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used in this Agreement shall (a) include the singular
as well as the plural, (b) include the masculine as well as the feminine and
neutral and (c) have the meanings given to them in this Article I, unless
defined elsewhere in this Agreement.
<PAGE> 2
"Business Day" means any day except Saturdays, Sundays and days on
which the offices of the Commission are not open for business;
"Commission" means the Securities and Exchange Commission of the United
States of America or any other federal agency at the time administering the
Securities Act;
"Common Stock" means (a) all shares now or hereafter authorized and
designated as the common stock of the Issuer, including (without limitation)
the Issuer's presently authorized Class A Stock and Class B Stock and (b) any
securities issued or issuable with respect to any such securities by way of
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation, or the reorganization or otherwise
upon any required adjustments, and securities of any other class with which
such securities may hereafter have been exchanged or reclassified;
A "Disadvantageous Condition" shall exist for purposes of this
Agreement if the Issuer shall furnish to the Requesting Holders a certified
resolution of the Issuer's Board of Directors stating that in the good faith
judgment of such Board of Directors it would (because of the existence of, or
in anticipation of, any acquisition or financing activity, or the inability for
reasons beyond the Issuer's control to provide any required financial
statements, or any other event or condition of similar significance to the
Issuer) be significantly disadvantageous to the Issuer or to its stockholders
for a registration statement to be maintained effective, or to be filed and
become effective;
"Exchange Act" means the Securities Exchange Act of 1934 of the United
States of America, as amended, and the regulations promulgated from time to
time thereunder;
"Governmental Entity" means the United States of America, any state,
province, territory, county, city, municipality and any subdivision thereof,
any court, administrative or regulatory agency, commission, department or body
or other governmental authority or instrumentality, the Commission, or any
entity or person exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government;
"Party" means any of the Issuer or the Stockholder; and "Parties" shall
mean all of such Persons, collectively;
"Person" means any natural person or entity of any kind, including
(without limitation) corporations, partnerships, limited liability companies,
Governmental Entities and any other entity organized or formed under the law of
any jurisdiction;
"Registrable Securities" means the 5,000,000 shares of Class B Stock
beneficially owned, directly or indirectly, by the Stockholder on the closing
date of the Offering and any shares of Class A Stock issued upon conversion of
such Class B shares and any securities issued or issuable with respect to any
such securities by
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<PAGE> 3
way of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation, or the reorganization or
otherwise upon any required adjustments, and securities of any other class with
which such securities may hereafter have been exchanged or reclassified. As to
any particular Registrable Securities, such securities shall cease to be
Registrable Securities when (a) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act
and such securities shall have been disposed of in accordance with such
registration statement, (b) they shall have been distributed to the public
pursuant to Rule 144 (or any successor provision) under the Securities Act, (c)
they shall have been otherwise transferred to a person or entity outside the
Lawrence Group and new certificates for them not bearing a legend restricting
further transfer shall have been delivered by the Issuer and subsequent
disposition of them shall not require registration or qualification of them
under the Securities Act or any similar state law then in force, or (e) they
shall have ceased to be outstanding;
"Registration Expenses" means all expenses incident to the Issuer's
performance of or compliance with Article IV, including (without limitation)
all registration, filing and National Association of Securities Dealers, Inc.
fees, all fees and expenses of complying with securities or blue sky laws, all
word processing, duplicating and printing expenses, messenger and delivery
expenses, the reasonable fees and disbursements of counsel for the Issuer and
of its independent public accountants, including the expenses of any special
audits or "cold comfort" letters required by or incident to such performance
and compliance, but excluding underwriting discounts and commissions and
transfer taxes, if any, relating solely to the Registrable Securities being
registered, provided that in any case where Registration Expenses are not to be
borne by the Issuer, such expenses shall not include salaries of Issuer
personnel or general overhead expenses of the Issuer, auditing fees, premiums
or other expenses relating to liability insurance required by underwriters of
the Issuer or other expenses for the preparation of financial statements or
other data normally prepared by the Issuer in the ordinary course of its
business or that the Issuer would have incurred in any event; and
"Securities Act" means the Securities Act of 1933, as amended, and the
regulations promulgated from time to time thereunder.
ARTICLE II
DEMAND REGISTRATIONS
2.1 Registration of Registrable Securities on Request.
(a) Request. Upon the written request of the Stockholder
that the Issuer effect the registration under the Securities Act of all or part
of the Registrable Securities (which request shall specify the intended method
of disposition thereof, including the name or names of the managing or
co-managing underwriters), the Issuer shall, subject to Section 2.1(b) below,
use all reasonable efforts to effect, as expeditiously as possible, the
registration under the Securities Act of the Registrable Securities that
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<PAGE> 4
the Issuer has been so requested to register by the Stockholder; all to the
extent requisite to permit the disposition (in accordance with the intended
methods thereof as aforesaid) of the Registrable Securities and such other
securities so to be registered.
(b) Certain Limitations. The foregoing notwithstanding,
the Issuer shall not be obligated to file and cause to become effective any
registration statement pertaining to Registrable Securities, (i) unless the
Stockholder requests the registration of at least that number of the
Registrable Securities equivalent to 500,000 shares of the Common Stock or (ii)
at any time during the existence of a Disadvantageous Condition. The
Stockholder may make only two requests pursuant to this Article II, provided,
however, that in the event J. D. Lawrence shall die during the term of this
Agreement and the Stockholder previously utilized its two requests hereunder,
the Stockholder shall be entitled to one additional request pursuant to this
Section 2.1 for the remainder of the term of this Agreement.
2.2 Registration of Other Securities. Whenever the Issuer shall
effect a registration pursuant to Article II upon the request of the
Stockholder, securities other than of the Stockholder shall be included in such
registration only to the extent that any managing underwriter of such offering
shall have advised the Stockholder that the inclusion of such other securities
would not adversely affect such offering, and if such managing underwriter
shall have advised that the inclusion of such other securities would adversely
affect such offering then Section 2.7 hereof shall apply.
2.3 Registration Statement Form. Registrations under this Article
II shall be on such appropriate registration form of the Commission (a) as
shall be selected by the Issuer and (b) as shall permit the disposition of such
Registrable Securities in accordance with the intended method or methods of
disposition specified in the Stockholder's request for such registration. The
Issuer agrees to include in any such registration statement all information
that the Stockholder shall reasonably request.
2.4 Expenses. The Issuer shall pay all Registration Expenses in
connection with the registrations that are requested and become effective
pursuant to this Article II. The Issuer shall not be liable for Registration
Expenses in connection with a registration that shall not have become effective
due to a revocation by the Stockholder or other holder of Registrable
Securities being registered. In such event, the obligation to pay the
Registration Expenses in connection with such revoked registration shall be due
and payable by the Stockholder and the Issuer's obligation to pay all
Registration Expenses in connection with two registrations shall continue
unabated to the extent unsatisfied by any prior registrations.
2.5 Effective Registration Statement. A registration requested
pursuant to this Article II shall not be deemed to have been effected unless a
registration statement relating thereto (a) has become effective under the
Securities Act and any of the Registrable Securities included in such
registration have actually been sold thereunder or (b) has remained effective
for a period of at least 90 days (or such shorter period in which all
Registrable Securities included in such registration have actually been sold
thereunder), provided that the Issuer may discontinue any effective
registration statement requested pursuant to this Article II if and so long as
a Disadvantageous
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<PAGE> 5
Condition shall exist, and, in such event, such registration statement shall be
at the sole expense of the Issuer and shall not be included as one of the two
registrations that may be requested pursuant to this Article II hereof, and
provided further that if after any registration statement requested pursuant to
this Article II becomes effective and (a) such registration statement is
interfered with by any stop order, injunction or other order or requirement of
the Commission or other Governmental Entity solely due to the actions or
omissions to act of the Issuer and (b) less than 75% of the Registrable
Securities included in such registration have been sold thereunder, such
registration statement shall be at the sole expense of the Issuer and shall not
be included as one of the two registrations that may be requested pursuant to
this Article II.
2.6 Underwriters. If any registration effected pursuant to this
Article II shall be an underwritten public offering, the managing underwriter
or underwriters thereof and the price, terms and provisions of the offering
shall be determined by the Stockholder.
2.7 Apportionment in Registrations Requested. If a registration
requested pursuant to this Article II is an underwritten offering and the
managing underwriter shall advise the Issuer in writing (with a copy to the
Stockholder) that, in its opinion, the number of securities requested to be
included in such registration exceeds the number that can be sold in such
offering within a price range acceptable to the Stockholder or would in any
other matter adversely effect such offering, the Issuer shall include in such
registration all of the Stockholder's Registrable Securities requested by the
Stockholder to be registered and only those additional Registrable Securities
that the Issuer is advised can be sold in such offering.
ARTICLE III
PIGGYBACK REGISTRATIONS
3.1 Right to Include Registrable Securities. If the Issuer at any
time proposes to register any of its Common Stock under the Securities Act
(other than a registration on Form S-4, Form S-8 or any successor or similar
form, or in connection with a tender offer, merger or other acquisition), for
sale for its own account or for another stockholder (the "Other Stockholder")
having the right to require the Company to register its securities, it shall
each such time give prompt written notice to the Stockholder of its intention
to do so and of the Stockholder's rights under this Article III. Upon the
written request of the Stockholder made within 10 days after the date of
receipt of such notice, the Issuer shall use its best efforts to effect the
registration under the Securities Act of all Registrable Securities that the
Issuer has been so requested to register by the Stockholder, to the extent
requisite to permit the disposition of such Registrable Securities so to be
registered, provided that if, at any time after giving written notice of its
intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the Issuer
shall determine for any reason not to register or to delay registration of such
securities, the Issuer may, at its election, give written notice of such
determination to the Stockholder and, thereupon, (a) in the case of a
determination not to register, shall be relieved of its obligation to register
any Registrable Securities in
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<PAGE> 6
connection with such registration (but not from its obligation to pay the
Registration Expenses in connection therewith), without prejudice, however, to
the rights of the Stockholder to request that such registration be effected as
a registration under Article II, and (b) in the case of a determination to
delay registering, shall be permitted to delay registering any Registrable
Securities for the same period as the delay in registering such other
securities. No registration effected under this Article III shall relieve the
Issuer of its obligation to effect any registration upon request under Article
II. The Issuer shall pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to this Article III,
which obligation shall be in addition to the Issuer's obligation under Section
2.4 hereof.
3.2 Apportionment in Incidental Registrations. (a) If the Issuer
initiated the registration process under this Article III for the sale of its
securities on its own account and if the managing underwriter of an
underwritten offering pursuant to this Article III shall inform the Issuer by
letter of its opinion that the number of securities requested to be included in
such registration exceeds the number that can be sold in (or during the time
of) such offering or that the inclusion would adversely affect the marketing of
the securities to be sold by the Issuer therein, then the Issuer may include
all securities proposed by the Issuer to be sold for its own account and may
decrease the number of Registrable Securities and other securities of the
Issuer so proposed to be sold and so requested to be included in such
registration (pro rata between the Stockholder and any other stockholders on
the basis of the percentage that the number of securities requested to be
registered by such holder constitutes of the total securities requested to be
registered (excluding the securities of the Issuer to be registered)) to the
extent necessary to reduce the number of securities to be included in the
registration to the level recommended by the managing underwriter.
(b) If the Issuer initiated the registration process under
this Article III for the sale of its securities for the account of an Other
Stockholder, and if the managing underwriter of an underwritten offering
pursuant to this Article III shall inform the Issuer by letter of its opinion
that the number of securities requested to be included in such registration
exceeds the number that can be sold in (or during the time of) such offering or
that the inclusion would adversely affect the marketing of the securities to be
sold by the Issuer therein, then the Issuer may include all securities proposed
by the Other Stockholder to be sold for its own account and may decrease the
number of Registrable Securities and other securities of the Issuer so proposed
to be sold and so requested to be included in such registration (pro rata
between the Stockholder and any other stockholders (including the Issuer) on
the basis of the percentage that the number of securities requested to be
registered by such holder constitutes of the total securities requested to be
registered (excluding the securities of the Other Stockholder to be
registered)) to the extent necessary to reduce the number of securities to be
included in the registration to the level recommended by the managing
underwriter.
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ARTICLE IV
REGISTRATION PROCEDURES
4.1 Procedures. If and whenever the Issuer is required to use its
reasonable best efforts to effect the registration of any Registrable
Securities under the Securities Act as provided in Articles II and III, the
Issuer shall as expeditiously as possible:
(a) prepare and as soon thereafter as is reasonably
practicable file with the Commission the requisite registration
statement to effect such registration and thereafter use its best
efforts to cause such registration statement to become effective,
provided that the Issuer may discontinue any registration of its
securities that are not Registrable Securities (and, under the
circumstances specified in Section 3.1, its securities that are
Registrable Securities) at any time prior to the effective date of the
registration statement relating thereto;
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such
registration statement until such time as all of such securities have
been disposed of in accordance with the intended methods of disposition
by the seller or sellers thereof set forth in such registration
statement or 90 days after the effective date of the registration
statement, whichever is shorter;
(c) furnish without charge to the Stockholder such number
of conformed copies of such registration statement and of each such
amendment and supplement thereto, such number of copies of the
prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 or Rule 430A under the Securities Act,
conforming with the requirements of the Securities Act and such other
documents as such seller may reasonably request;
(d) use its best efforts to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of
such jurisdictions in the United States as each seller thereof shall
reasonably request, keep such registration or qualification in effect
for so long as such registration statement remains in effect and take
any other action that may be reasonably necessary or advisable to
enable such seller to consummate the disposition in such jurisdictions
of the securities owned by such seller, except that the Issuer shall
not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would
not but for the requirements of this Section 4.1(d) be obligated to be
so qualified or to consent to general service of process in any such
jurisdiction;
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(e) furnish to each the Stockholder a signed counterpart,
addressed to the Stockholder, except as provided in Section 4.1(e)(ii)
below, (and the underwriters, if any) of
(i) an opinion of counsel for the Issuer, dated
the effective date of such registration statement (and, if
such registration includes an underwritten public offering,
dated the date of the closing under the underwriting
agreement), reasonably satisfactory in form, scope and
substance to such seller or, if such registration includes an
underwritten public offering, to such underwriter, and
(ii) a "comfort" letter, dated the effective date
of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of
the closing under the underwriting agreement), signed by the
independent public accountants who have certified the Issuer's
financial statements included in such registration statement,
addressed to each seller, to the extent the same can be
reasonably obtained, and addressed to the underwriters, if
any, covering substantially the same matters with respect to
such registration statement (and the prospectus included
therein) and with respect to events subsequent to the date of
such financial statements, as are customarily covered in
accountants' letters delivered to the underwriters in
underwritten public offerings of securities and such other
financial, tabular and statistical matters as are typically
covered in such a "comfort" letter or as the Stockholder (or
the underwriters, if any) may reasonably request, provided
that a letter covering such matters as are typically covered
in "comfort" letters satisfactory to the underwriters (if such
registration includes an underwritten public offering) shall
satisfy the requirements of this Section 4.1(e)(ii);
(f) immediately notify the Stockholder an each seller of
securities covered by the registration statement at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event
as a result of which, the prospectus included in such registration
statement, as then in effect includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, and at the request of
any such seller or holder promptly prepare and furnish to such seller
or holder a reasonable number of copies of a supplement to or an
amendment of such prospectus, and use its best efforts to cause any
such amendment, if a post-effective amendment, to be declared
effective, as may be necessary so that, as
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thereafter delivered to the purchasers of such securities, such
prospectus, as amended or supplemented, shall not include an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were
made; and
(g) otherwise use its reasonable best efforts to comply
with all applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably practicable,
an earnings statement covering the period of at least 12 months, but
not more than 18 months, beginning with the first full calendar month
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act;
4.2 Seller's Information. The Issuer may require the Stockholder
to promptly furnish the Issuer, as a condition precedent to including the
Registrable Securities in any registration, such information regarding the
Stockholder and the intended method of distribution of such securities by the
Stockholder as the Issuer may from time to time reasonably request in writing.
4.3 Discontinuance of Seller's Disposition. The Stockholder
agrees that upon receipt of any notice from the Issuer of the happening of any
event of the kind described in Section 4.1(f) hereof, the Stockholder shall
forthwith discontinue the Stockholder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until the Stockholder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 4.1(f) hereof and, if so directed by the
Issuer, shall deliver to the Issuer (at the Issuer's expense) all copies, other
than permanent file copies, then in the Stockholder's possession of the
prospectus relating to such Registrable Securities current at the time of
receipt of such notice, and in any such event, the period of time specified in
Section 4.1(b) hereof for which the Issuer is required to keep such
registration statement effective shall be extended by the number of days
elapsing from the date of the notice given by the Issuer of the occurrence of
an event referred to in Section 4.1(f) hereof to and including the date of
receipt by such holder of the copies of the supplemented or amended prospectus.
4.4 Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Issuer shall give the Stockholder, its
underwriters, if any, and its respective counsel, a reasonable period of time
prior to the filing thereof to review and comment upon such registration
statement, each prospectus included therein or filed with the Commission, and
each amendment thereof or supplement thereto, and shall give each of them such
opportunities to discuss the business of the Issuer with its officers and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of the Stockholders' and such underwriters'
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act.
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ARTICLE V
UNDERWRITTEN OFFERINGS
5.1 Requested Underwritten Offerings. If requested by the
underwriters for any offering pursuant to a registration requested under
Article II, the Issuer shall enter into an underwriting agreement with such
underwriters for such offering, such agreement to be satisfactory in substance
and form to the Issuer, the Stockholder and to the underwriters and to contain
such representations and warranties by the Issuer and such other terms as are
generally prevailing in agreements of this type, including (without limitation)
indemnities to the effect and to the extent provided in Article VII below. The
Stockholder shall cooperate with the Issuer in the negotiation of the
underwriting agreement and shall give consideration to the reasonable requests
of the Issuer regarding the form thereof, provided that nothing herein
contained shall diminish the foregoing obligations of the Issuer. The
Stockholder shall be a party to such underwriting agreement and may, at its
option, require that any or all of the conditions precedent to the obligations
of such underwriters under such underwriting agreement be conditions precedent
to the obligations of the Stockholder.
5.2 Incidental Underwritten Offerings. If the Issuer at any time
proposes to register any of the Common Stock under the Securities Act as
contemplated by Article III and such securities are to be distributed by or
through one or more underwriters, the Issuer shall, if requested by the
Stockholder, as provided in Article III and subject to the provisions of
Articles III and IV, arrange for such underwriters to include all the
Registrable Securities to be offered and sold by such holder among the
securities to be distributed by such underwriters. The Stockholder shall be a
party to the underwriting agreement between the Issuer and such underwriters
and may, at its option, require that any or all of the conditions precedent to
the obligations of such underwriters under such underwriting agreement be
conditions precedent to the obligations of the Stockholder.
ARTICLE VI
TERMINATION
The Issuer's obligations under this Agreement shall terminate after ten
years from the date hereof.
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification by the Issuer. In the event of any
registration of any securities of the Issuer under the Securities Act pursuant
to this Agreement, the Issuer shall, and hereby does, to the fullest extent
permitted by law, indemnify and hold harmless the seller of any Registrable
Securities covered by such registration statement, its directors and officers,
each other Person who participates as an underwriter in the offering or sale of
such securities and such other Person, if any, who controls is controlled by or
is under common control with such seller or any such underwriter
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within the meaning of the Securities Act or the Exchange Act, against any
losses, claims, damages or liabilities, joint or several, to which such seller
or any such director or officer or underwriter or controlling Person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Issuer shall
reimburse such seller and each such director, officer, underwriter and
controlling Person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any pending or threatened
such loss, claim, liability, action or proceeding, provided that the Issuer
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information
furnished to the Issuer through an instrument duly executed by such seller for
use in the preparation thereof and, provided further, that the Issuer shall not
be liable to any Person who participates as an underwriter, in the offering or
sale of Registrable Securities or any other Person, if any, who controls such
underwriter within the meaning of the Securities Act or the Exchange Act, in
any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of such Person's
failure to send or give a copy of the final prospectus, as the same may be then
supplemented or amended, to the Person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if such
statement or omission was corrected in such final prospectus or in such
amendment or supplement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such seller or any such
director, officer, underwriter or controlling Person and shall survive the
transfer of such securities by such seller.
7.2 Indemnification by the Stockholder. Each Person selling
Registerable Securities pursuant to a registration statement of the Issuer
shall, and hereby does, indemnify and hold harmless (in the same manner and to
the same extent as set forth in Section 7.1 each other seller, the Issuer, each
director of the Issuer, each officer of the Issuer and each other Person, if
any, who controls, is controlled by or is under common control with the Issuer
within the meaning of the Securities Act or the Exchange Act, with respect to
any statement or alleged statement in or omission or alleged omission from such
registration statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Issuer through an instrument duly executed by such seller for use in the
preparation of such registration statement, preliminary prospectus, final
prospectus, summary
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<PAGE> 12
prospectus, amendment or supplement. Such indemnity shall remain in full force
and effect, regardless of any investigation made by or on behalf of the Issuer
or any such director, officer or controlling Person and shall survive the
transfer of such securities by such seller. No Person selling Registrable
Securities shall be liable hereunder for any amount in excess of the product
obtained by multiplying (a) the purchase price per Registrable Security so sold
by such Person by (b) the number of Registrable Securities so sold by such
Person. In no event shall the liability of the Person selling Registrable
Securities hereunder be greater than the net proceeds received by such Person
upon the sale of the Registrable Securities giving rise to such indemnification
obligations.
7.3 Contribution. If the indemnification provided in Sections 7.1
and 7.2 is unavailable to an indemnified Party hereunder in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then the
indemnifying Party in lieu of indemnifying such indemnified Party, shall
contribute to the amount paid or payable by the such indemnified Party as a
result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
Party and the indemnified Party. The relative fault of such indemnifying Party
and indemnified Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact, has been made by, or related to information supplied by, such
indemnifying Party or indemnified Party, and the parties, relative intent,
knowledge, access to information and opportunity to correct or present such
action; provided however, that in no event shall the liability of the Person
selling Registrable Securities hereunder be greater than the net proceeds
received by such Person upon the sale of the Registrable Securities giving rise
to the indemnification obligation. The parties hereto agree that it would not
be just and equitable if contribution pursuant to this Section 7.3 were
determined by pro rata allocation or by any other method of allocations that
does not take into account the equitable considerations referred to in this
Section 7.3.
7.4 Notices of Claims, etc. Promptly after receipt by an
indemnified Party of notice of the assertion of any claim in respect of which
indemnification would be required pursuant to this Article VII or the
commencement of any action or proceeding involving a claim referred to in
Sections 7.1, 7.2 and 7.3, such indemnified Party shall, if a claim in respect
thereof is to be made against an indemnifying Party, give written notice to the
latter of such assertion or the commencement of such action; provided that the
failure of any indemnified Party to give notice as provided herein shall not
relieve the indemnifying Party of its obligations under this Article VII,
except to the extent that the indemnifying Party is actually prejudiced by such
failure to give notice. In case any such action is brought against an
indemnified Party, unless in such indemnified Party's reasonable judgment a
conflict of interest between such indemnified Party and indemnifying Parties
may exist in respect of such claim, the indemnifying Party shall be entitled to
participate in and to assume the defense thereof, jointly with any other
indemnifying Party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified Party, and after notice
from the indemnifying Party to such indemnified Party of its election so to
assume the defense thereof, the indemnifying Party shall not be liable to such
indemnified Party for any legal or other expenses subsequently incurred by the
latter in connection with the
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defense thereof other than reasonable costs of investigation unless in such
indemnified Party's reasonable judgment a conflict of interest between such
indemnified and indemnifying Parties arises in respect of such claim after the
assumption of the defense thereof, and the indemnifying Party shall not be
subject to any liability for any settlement made without its consent (which
consent shall not be unreasonably withheld). No indemnifying Party shall,
without the consent of the indemnified Party, consent to entry of any judgment
or enter into any settlement that does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified Party of a
release from all liability in respect to such claim or litigation.
7.5 Indemnification Payments. The indemnification or contribution
required by this Article VII shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as and when bills
are received or expense, loss, damage or liability is incurred subject to an
undertaking of the indemnified Party to repay or refund any amounts to which it
is not entitled under the provisions hereof.
ARTICLE VIII
RESOLUTION OF DISPUTES; JURISDICTION; VENUE
8.1 Resolution of Disputes between the Parties.
(a) Negotiation. The Parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement
promptly by negotiations between executives who have authority to
settle the controversy. Any Party may give the other Party written
notice of any dispute not resolved in the normal course of business.
Within five days after the effective date of such notice, executives of
the Parties shall agree upon a mutually acceptable time and place to
meet and shall meet at such time and place, and thereafter as often as
they reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. The first of such meetings shall take
place within 7 days of the effective date of the disputing Party's
notice. If the matter has not been resolved within 60 days of the
disputing Party's notice, or if the Parties fail to agree on a time and
place for an initial meeting within five days of such notice, either
Party may initiate mediation of the controversy or claim as provided
hereinafter. If a negotiator intends to be accompanied at a meeting by
an attorney, the other negotiator shall be given at least three
Business Days' notice of such intention and may also be accompanied by
an attorney. All negotiations pursuant to this Section 8.1 shall be
treated as compromise and settlement negotiations for the purposes of
federal and state rules of evidence and procedure.
(b) Mediation. If the dispute has not been resolved by
negotiation as provided herein, the Parties may endeavor to settle the
dispute by mediation under the then current CPR Model Procedure for
Mediation of Business Disputes. The neutral third party shall be
selected by the Parties from the CPR Panels of Neutrals. If the
Parties encounter difficulty in agreeing upon a neutral, they shall
seek the assistance of CPR in the selection process.
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(c) Arbitration. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity hereof or
thereof, which has not been resolved by non-binding procedures as
provided in Sections 8.1(a) or 8.1(b) hereof within 30 days of the
initiation of either or both of such procedures, shall be finally
settled by arbitration conducted expeditiously in accordance with the
CPR Rules for Non-Administered Arbitration of Business Disputes,
provided that if one Party has requested the other to participate in a
non- binding procedure and the other has failed to participate, the
requesting Party may initiate arbitration before the expiration of such
period. The arbitration shall be conducted by three independent and
impartial arbitrators. Each Party shall appoint one arbitrator and a
third arbitrator not appointed by the Parties shall be appointed from
the CPR Panels of Neutrals. The arbitration shall be governed by the
United States Arbitration Act and any judgment upon the award decided
upon by the arbitrators may be entered by any court having jurisdiction
thereof. The arbitrators are not empowered to award damages in excess
of compensatory damages and each Party hereby irrevocably waives any
damages in excess of compensatory damages. Each Party hereby
acknowledges that compensatory damages include (without limitation) any
benefit or right of indemnification given by another Party to the other
under this Agreement. Any arbitration conducted pursuant to this
Section 8.1(c) shall be held at a mutually acceptable location in
Houston, Texas, the United States of America.
8.2 Consent to Jurisdiction and Venue. Each of the Parties hereby
(a) irrevocably submits to the exclusive jurisdiction of the United States
Federal District Court for the Southern District of Texas, sitting in Harris
County, Texas, the United States of America, for the purposes of any suit,
action or proceeding arising out of or relating to this Agreement, (b) waives,
and agrees not to assert in any such suit, action or proceeding, any claim that
(i) it is not personally subject to the jurisdiction of such court or of any
other court to which proceedings in such court may be appealed, (ii) such suit,
action or proceeding is brought in an inconvenient forum or (iii) the venue of
such suit, action or proceeding is improper and (c) expressly waives any
requirement for the posting of a bond by the Party bringing such suit, action
or proceeding. Each of the Parties consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such Party at the
address in effect under Section 9.1 hereof, and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
in this Section 8.2 shall affect or limit any right to serve process in any
other manner permitted by law.
ARTICLE IX
MISCELLANEOUS
9.1 Notices. Any notice, request, response, instruction or other
document to be given hereunder by any Party to any other Party shall be in
writing and delivered personally, via telecopy (with receipt confirmed), by
recognized international courier service (with receipt confirmed) or by
registered or certified United States mail, postage prepaid, as follows:
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(a) if to the Issuer, to:
Dailey Petroleum Services Corporation
2507 North Frazier
P.O. Box 1863
Conroe, Texas 77305
Attention: General Counsel
Telecopy Number: (409) 760-3399 (confirm) (713) 350-3399
(b) if to the Stockholder:
J. D. Lawrence
2507 North Frazier
P.O. Box 1803
Conroe, Texas 77305
Telecopy Number: (409) 760-3399 (confirm) (713) 350-3399
or at such other addresses for a Party as shall be specified by like notice.
Any notice that is delivered personally in the manner provided herein shall be
deemed to have been duly given to the Party to whom it is directed upon actual
receipt by such Party (or its agent for notices hereunder). Any notice that is
addressed and mailed in the manner herein provided shall be conclusively
presumed to have been duly given to the Party to which it is addressed at the
close of business, local time of the recipient, on the tenth day after the day
it is so placed in the mail. Any notice that is sent by telecopy shall be
deemed to have been duly given to the Party to which it is addressed upon
telephonic confirmation of the same as provided herein. A copy of any notices
delivered by telecopy shall promptly be mailed in the manner herein provided to
the Party to which such notice was given. Any notice that is sent by
internationally recognized courier service shall be deemed to have been duly
given to the Party to which it is addressed upon confirmation of delivery in
writing by such delivery service. The following international delivery
services shall be deemed to be "recognized" for the purposes of this Agreement:
DHL, Federal Express, Airborne Express and Purolater.
9.2 No Third-Person Beneficiaries. This Agreement is intended
solely for the benefit of the Parties and their respective successors and
permitted assigns. Nothing in this Agreement shall be construed to create any
duty to, or standard of care with reference to, or liability of a Party to, any
Person not a Party.
9.3 Assignment. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the Parties and their respective heirs,
executors, successors and permitted assigns. The Agreement cannot be assigned
except that the Stockholder may assign its rights under this Agreement to any
member or members of the Lawrence Group upon prior written notice to the
Issuer.
9.4 Amendments and Waivers. This Agreement may be amended and the
Issuer may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Issuer shall have obtained the
written
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<PAGE> 16
consent to such amendment, action or omission to act, of the holder or holders
of 50% of the Registrable Securities. Each holder of any Registrable
Securities shall be bound by any consent given by a previous holder of such
Registrable Securities, whether or not such Registrable Securities shall have
been marked to indicate such consent. No waiver of any of the provisions of
this Agreement shall be deemed to or shall constitute a waiver of any other
provisions hereof (whether or not similar) or the same provision hereof at a
later time. No failure by a Party to insist upon the strict performance of any
term, covenant or condition of this Agreement, or to exercise any right or
remedy upon breach of any provision, and no acceptance of payment or
performance during the continuation of any such breach, shall constitute a
waiver of any term, covenant or condition herein or a waiver of any subsequent
breach or default in the performance of any term, covenant or condition herein.
9.5 Headings. The headings of the Articles and Sections of this
Agreement are included for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof or
thereof.
9.6 Severability of Provisions. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any rule
of law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic and
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any Party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
Parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the Parties as closely as possible in an acceptable
manner to the end that transactions contemplated hereby are fulfilled to the
extent possible.
9.7 Entire Agreement. This Agreement constitutes the sole
understanding of the Parties with respect to the matters provided for herein
and supersedes any previous agreements and understandings between the Parties
with respect to the subject matter hereof.
9.8 Construction and Reference. Words used in this Agreement,
regardless of the number or gender specifically used, shall be deemed and
construed to include any other number, singular or plural, and any other
gender, masculine, feminine or neuter, as the context shall require. Unless
otherwise specified, all references in this Agreement to Articles, Sections,
paragraphs or clauses are deemed references to the corresponding Articles,
Sections, paragraphs or clauses in this Agreement.
9.9 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
9.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS
OF THE STATE OF TEXAS (REGARDLESS OF LAWS THAT MIGHT OTHERWISE GOVERN UNDER
APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS).
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IN WITNESS WHEREOF, the Parties have hereunto executed this Agreement
as of the date first set forth in the introduction to this Agreement.
DAILEY PETROLEUM SERVICES CORP.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
LAWRENCE INDUSTRIES, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
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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. 2 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
June 28, 1996
