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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-11963
----------------------------------------------------------
Dailey Petroleum Services Corp.
- --------------------------------------------------------------------------------
(Exact Name of Registrant in its Charter)
Delaware 76-0503351
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2507 North Frazier, Conroe, Texas 77305
- --------------------------------------------------------------------------------
(Address of Principal Executive Officers) (Zip Code)
713/350/3399
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
----- ----
Number of shares outstanding of issuer's Class A Common Stock as of March 1,
1997 was 4,270,000.
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DAILEY PETROLEUM SERVICES CORP.
FORM 10-Q FOR THE QUARTER ENDED JANUARY 31, 1997
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated balance sheets - January 31, 1997 and April 30, 1996 1
Consolidated statements of operations - Three months and nine months ended
January 31, 1997 and 1996 2
Consolidated statements of cash flows - Nine months ended January 31, 1997
and 1996 3
Notes to consolidated financial statements - January 31, 1997 4-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 13
Index to Exhibits 14
</TABLE>
i
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DAILEY PETROLEUM SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
ASSETS: 1997 1996
----------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 15,707 $ 1,967
Accounts receivable, net ........................................... 21,739 16,306
Accounts receivable from affiliates ................................ -- 436
Prepaid expenses ................................................... 356 422
Deferred income taxes .............................................. 1,464 389
Other current assets ............................................... 1,135 153
-------- --------
Total current assets ............................................... 40,401 19,673
Revenue-producing tools and inventory, net .................................. 35,711 29,208
Property and equipment, net ................................................. 5,073 5,121
Property and equipment held for sale, net ................................... 205 205
Deferred income taxes ....................................................... -- 1,384
Accounts receivable from officer ............................................ 250 --
Intangibles and other assets ................................................ 677 287
-------- --------
Total assets ....................................................... $ 82,317 $ 55,878
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued liabilities ........................... $ 9,751 $ 6,749
Accounts payable to affiliates ..................................... 340 --
Income taxes payable ............................................... 2,297 1,749
Short-term debt .................................................... -- 1,300
Current portion of long-term debt .................................. 1,711 1,738
Current portion of indebtedness to affiliate ....................... -- 660
-------- --------
Total current liabilities .......................................... 14,099 12,196
Long-term debt .............................................................. 5,583 6,866
Long-term indebtedness to affiliate ......................................... -- 1,100
Other noncurrent liabilities ................................................ 398 75
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
none issued ................................................... -- --
Common stock, Class A, $0.01 par value; 20,000,000
shares authorized; 3,970,000 issued and outstanding at January
31,1997; Class B, $0.01 par value; 10,000,000 shares authorized,
5,000,000 shares issued and out-
standing at January 31, 1997 and April 30, 1996 ................ 90 50
Treasury stock (24,000 shares) ..................................... (234) --
Paid-in capital .................................................... 38,284 4,559
Retained earnings .................................................. 24,097 31,032
-------- --------
Total stockholders' equity ......................................... 62,237 35,641
-------- --------
Total liabilities and stockholders' equity ......................... $ 82,317 $ 55,878
======== ========
</TABLE>
See accompanying notes
1
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DAILEY PETROLEUM SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income ........................... $ 13,116 $ 11,068 $ 38,291 $ 32,280
Sales of products and services .......... 4,367 3,534 13,103 11,901
----------- ----------- ----------- -----------
17,483 14,602 51,394 44,181
COSTS AND EXPENSES:
Cost of rentals ......................... 9,954 8,491 28,838 24,912
Cost of products and services ........... 2,094 1,965 6,893 6,101
Selling, general and administrative...... 4,009 3,160 9,977 8,687
Research and development ................ 266 241 665 559
----------- ----------- ----------- -----------
16,323 13,857 46,373 40,259
----------- ----------- ----------- -----------
Operating income .............................. 1,160 745 5,021 3,922
Other (income) expense:
Interest income ......................... (212) (46) (419) (68)
Interest expense-nonaffiliates .......... 159 194 539 598
Interest expense-affiliate .............. 0 41 172 132
Foreign exchange (gain) loss ............ (20) 111 (103) 221
Other, net .............................. 12 (136) (11) (73)
----------- ----------- ----------- -----------
Income before income taxes .................... 1,221 581 4,843 3,112
Provision for income taxes .................... 436 205 1,778 1,099
----------- ----------- ----------- -----------
Net income .................................... $ 785 $ 376 $ 3,065 $ 2,013
=========== =========== =========== ===========
Earnings per share ............................ $ 0.08 $ 0.40
=========== ===========
Pro forma earnings per share .................. $ 0.06 $ 0.30
=========== ===========
Weighted average shares outstanding ........... 9,400,276 7,709,735
=========== ===========
Pro forma weighted average shares
outstanding ................................ 6,610,000 6,610,000
=========== ===========
</TABLE>
See accompanying notes
2
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DAILEY PETROLEUM SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 31,
-----------------------------
1997 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ..................................................... $ 3,065 $ 2,013
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 4,786 4,271
Deferred income taxes ..................................... 550 (78)
Provision for doubtful accounts receivable ................ 235 181
Gain on sale and disposition of property and equipment .... (11) (5)
Provision for stock awards ................................ 894 --
Changes in operating assets and liabilities:
Accounts receivable - trade ............................... (5,668) (3,728)
Accounts receivable from/payable to officers and affiliates 526 (378)
Prepaid expenses and other ................................ (1,189) (188)
Accounts payable and accrued liabilities .................. 3,002 2,132
Income taxes payable ...................................... 548 566
-------- --------
Net cash provided by operating activities ...................... 6,738 4,786
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory ............. (16,580) (7,896)
Inventory transferred to cost of rentals ....................... 4,448 3,677
Revenue-producing tools lost in hole, abandoned, and sold ...... 1,534 1,793
Additions to property and equipment ............................ (702) (738)
Proceeds from sale of property and equipment ................... 90 521
-------- --------
Net cash used in investing activities .......................... (11,210) (2,643)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ............................. 400 --
Payments on outstanding debt ................................... (4,770) (1,363)
Payment of promissory note ..................................... (5,000) --
Purchase of treasury stock ..................................... (234) --
Net proceeds from sale of common stock ......................... 27,816 --
-------- --------
Net cash provided by (used in) financing activities ............ 18,212 (1,363)
-------- --------
Increase in cash and cash equivalents .......................... 13,740 780
Cash and cash equivalents at beginning of period ............... 1,967 1,796
-------- --------
Cash and cash equivalents at end of period ..................... $ 15,707 $ 2,576
======== ========
</TABLE>
See accompanying notes
3
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DAILEY PETROLEUM SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include
the accounts of Dailey Petroleum Services Corp. and its subsidiaries and
predecessors ("Dailey" or the "Company"), and have been prepared in accordance
with United States generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended January 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended April 30,
1997. For further information, reference is made to the consolidated financial
statements and footnotes thereto included in Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 7, 1996, as amended and supplemented, and included in the
Company's final prospectus dated August 14, 1996.
2. ORGANIZATION AND PUBLIC OFFERING
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. New Dailey Petroleum Services Corp. and its predecessor, Dailey Petroleum
Services Corp., are hereinafter referred to as the "Company" or "Dailey".
Prior to June 1996, Dailey was a wholly-owned subsidiary of Lawrence
Industries, Inc. ("Lawrence"). In June 1996, in preparation for the initial
public offering of Class A Common Stock of Dailey, Lawrence reorganized its
ownership of the Company into a holding company structure through a forward
triangular merger of Dailey Petroleum Services Corp., into a newly-formed,
wholly-owned indirect subsidiary of Lawrence, Dailey Corporation (the
"Reorganization"). Following the Reorganization, Dailey Corporation changed its
name to Dailey Petroleum Services Corp. The effect of the forward triangular
merger has been reflected retroactively in the accompanying financial
statements. On August 14, 1996, the Company commenced its initial public
offering of 3,910,000 shares of Class A Common Stock (the "Offering").
In connection with the Offering, the Company issued 3,910,000 shares
of Class A Common Stock. Net proceeds to the Company from the sale of the stock
were $27.8 million. The Company also used $5.0 million of the proceeds from the
Offering to repay the outstanding balance of a $10.0 million promissory note,
which was incurred in connection with a dividend declared on June 27, 1996 (the
"Dividend"). Prior to commencement of the Offering, the Company's sole
stockholder contributed to the capital of the Company the remaining $5.0
million of the outstanding principal
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of such note. The promissory note accrued interest at the prime rate. The
statements of operations for the 1996 fiscal period include pro forma per share
data which gives effect to the number of shares from which proceeds would have
been used to pay the Dividend (an additional 1,250,000 shares assuming a per
share offering price of $8.00, thus earnings per share for the periods ending
January 31, 1996 are based on 6,610,000 shares of all Common Stock
outstanding). Historical earnings per share excluding the pro forma effect of
the dividend was $0.07 per share and $0.38 per share for the three and nine
month periods ending January 31, 1996 respectively.
3. REVENUE-PRODUCING TOOLS AND INVENTORY
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenue-producing tools ................................... $ 54,967 $ 48,024
Accumulated depreciation .................................. (31,671) (29,740)
----------- -----------
23,296 18,284
Inventory:
Components, subassemblies and expendable parts ... 9,687 9,096
Rental tools and expendable parts
under production................................ 1,511 1,058
Raw materials .................................... 1,217 770
----------- -----------
12,415 10,924
----------- -----------
Revenue-Producing Tools and Inventory ... $ 35,711 $ 29,208
=========== ===========
</TABLE>
4. STOCK OPTIONS AND AWARDS
Prior to the Offering, the Company established its 1996 Key Employee
Stock Plan (the "1996 Plan") and its 1996 Non-Employee Director Stock Option
Plan (the "1996 Director Plan"). Pursuant to the 1996 Plan, the Board of
Directors of the Company are authorized to grant options or restricted stock
for Class A Common Stock to management personnel for up to 900,000 shares of
the Company's Class A Common Stock.
The Board granted options totaling 378,327 shares contemporaneously
with the Offering to various executive officers which were exercisable at the
initial public offering price, of which 159,591 vested immediately and 218,736
vest over three years. On October 2, 1996, the Company granted options, which
vest over three years, totaling 15,001 shares to an executive officer of the
Company exercisable at $9.00 per share. On December 5, 1996 and January 13,
1997, the Company granted options totaling 32,500 and 12,500 shares,
respectively, to various employees. These options, which vested immediately,
are exercisable at $10.75 and $9.75 per share, respectively. On December 17,
1996, upon the resignation of an executive officer, 19,199 shares were returned
to the 1996 Plan . On January 13, 1997, the Board approved the immediate
vesting of the remaining outstanding options.
Immediately following the Offering, restricted stock awards totaling
360,000 shares were
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granted to key officers. On October 2, 1996, a restricted stock award of 45,000
shares was granted to an executive officer. The awards vest over three years
and do not require any payment by the executive officers. In January 1997, the
Board approved the accelerated vesting of 60,000 shares of the restricted stock
awards.
The 1996 Director Plan has 100,000 shares authorized for the granting
of options to outside directors, of which 20,000 shares are issued and
outstanding at an exercise price of $8.875.
5. BORROWING ARRANGEMENTS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1997 1996
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Note payable to a bank .............................. $ 7,194 $ 8,444
Note payable to affiliates .......................... -- 1,760
Other notes payable ................................. 100 160
------- -------
7,294 10,364
Less current portion of long-term debt .............. 1,711 2,398
------- -------
Total long-term debt ....................... $ 5,583 $ 7,966
======= =======
</TABLE>
Proceeds from the Offering were used to repay debt during the second
quarter of fiscal 1997.
6. INCOME TAXES
Certain balance sheet reclassifications have been made which reflect a
change in management's estimate that the utilization of the net operating loss
carryforward will be accelerated. The amount of the reclassification from
long-term to current is approximately $736,000.
6
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DAILEY PETROLEUM SERVICES CORP.
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, the Company may make certain statements that
contain "forward-looking" information (as defined in the Private Securities
Litigation Reform Act of 1995) and that involve risk and uncertainty. Words
such as "anticipate", "expect", "estimate", "project" and similar expressions
are intended to identify such forward-looking statements. These
forward-looking statements may include, but are not limited to, future capital
expenditure plans, anticipated results from current and future operations,
earnings, margins, acquisitions, market trends in the oilfield services
industry, including demand for the Company's directional drilling services and
downhole tools, competition and various business trends. Forward-looking
statements may be made by management orally or in writing including, but not
limited to, the Management's Discussion and Analysis of Financial Condition and
Results of Operations section and other sections of the Company's filings with
the Securities and Exchange Commission under the Securities Act of 1933 and the
Securities Exchange Act of 1934.
Such forward-looking statements are subject to certain risks,
uncertainties and assumptions, including without limitation those identified
below. Should one or more of these risks or uncertainties materialize, or
should any of the underlying assumptions prove incorrect, actual results of
current and future operations may vary materially from those anticipated,
estimated or projected. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates.
Among the factors that have a direct bearing on the Company's results
of operations and the oilfield service industry in which it operates are
changes in the price of oil and natural gas; the impact of competitive products
and pricing; product demand and acceptance risks, including product
obsolescence risks, the presence of competitors with greater financial
resources; operating risks inherent in the oilfield service industry, including
risks of environmental liability; reliance on independent international agents
for the distribution of certain of its downhole tools; delays in receiving raw
materials utilized in the manufacture and assembly of the Company's downhole
tools and other difficulties in the manufacture, assembly or delivery of the
Company's downhole tools; world-wide political stability and economic growth
and other risks associated with international operations, including foreign
exchange risk, the Company's successful execution of internal operating plans
as well as regulatory uncertainties and legal proceedings.
Overview
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
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most recently, Venezuela and the Austin Chalk formation in Texas and Louisiana.
The Company operates in one business segment.
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 exploration 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.
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
toward use of technologically-advanced directional drilling services in order
to develop reservoirs that otherwise would have been marginal or uneconomical
using conventional drilling methods. The Company also believes that rentals of
its downhole tools have benefited from industry trends toward the use of
directional drilling techniques, in part because a growing percentage of the
Company's downhole tools are rented in connection with its drilling services.
Utilizing proceeds from the Offering, the Company invested $8.4 million in
downhole tools during the two most recent quarters ended January 31, 1997,
which the Company believes contributed to the increase in revenues during the
quarter and are expected to positively impact revenues during the remainder of
the year.
Quarter Ended January 31, 1997 Compared to the Quarter Ended January 31, 1996
Rental Income. Rental income for the quarter ended January 31, 1997
was $13.1 million, an increase of 19% from $11.1 million for the same quarter
last year. This was due to an increase in demand for directional and
horizontal drilling services and related products in the United States Gulf
Coast region and the Gulf of Mexico which resulted in a $ 1.1 million increase
in rentals. In addition, revenue from the rental of drilling jars and related
products increased $930,000 primarily in the United States as the result of
increased drilling activity.
Sales of Products and Services. Sales of products and services for
the quarter ended January 31, 1997 were $4.4 million, an increase of 24% from
$3.5 million for the same quarter last year. This increase was primarily the
result of an increase in tools lost-in-hole of $400,000 and an increase in
license fees related to a proprietary directional drilling method of $300,000.
Cost of Rentals. Cost of rentals for the quarter ended January 31,
1997 was $10.0 million, an increase of 17% from $8.5 million for the same
quarter last year. This increase was due primarily to the variable costs
associated with an increase in rental activity, including tool repair costs and
third party tool charges. As a percentage of rental income, cost of rentals
decreased from 77% in the third quarter of fiscal 1996 to 76% in the third
quarter of fiscal 1997 as the result of the fixed nature of the Company's cost
base.
Cost of Products and Services. Cost of products and services for the
quarter ended January
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31, 1997 was $2.1 million, which was a $129,000 increase from the same quarter
last year. The margin on sales of products and services for the third quarter
of fiscal 1997 was 52% compared to 44% for the same quarter last year. This
increase was due primarily to increased higher margin export sales of
mechanical jars, tools lost-in-hole and license fees which was partially offset
by decreased margins on revenues from directional drilling services.
Selling, General and Administrative. Selling, general and
administrative expenses for the quarter ended January 31, 1997 were $4.0
million, a 27% increase from $3.2 million for the same quarter last year. This
increase was primarily the result of compensation expense of $894,000 related
to non-cash stock awards granted to certain Officers under the 1996 Key
Employee Stock Plan. Through the quarter ending July 31, 1999, non-cash
compensation expense will be approximately $234,000 per quarter. In
addition, costs of $365,000 for settlement of an employment contract were
recognized in the quarter and are payable through fiscal year end 1999.
Exclusive of these two transactions, selling, general and administrative
expenses were $2.8 million, a decrease of 13% from the same period last year.
This was the result of decreased building rent and professional and legal fees.
Interest Income. Interest income for the quarter ended January 31,
1997 was $212,000, a 361% increase from the same quarter last year. This was
the result of interest earned on short term investments utilizing proceeds from
the Offering.
Income Tax Expense. Provision for income taxes for the quarter ended
January 31, 1997 was $436,000, an increase of 113% from $205,000 for the same
quarter last year. This was due to increased income before income taxes of
110% and a change in the effective tax rate from 35% to 36% due to increased
state income taxes.
Nine Months Ended January 31, 1997 Compared to the Nine Months Ended January
31, 1996
Rental Income. Rental income for the nine months ended January 31,
1997 was $38.3 million, an increase of 19% from $32.3 million for the same
period last year. This was due primarily to an increase in demand for the
Company's directional drilling services and related products in the United
States Gulf Coast region, Gulf of Mexico and Venezuela which resulted in
increased revenue of $3.4 million and $1.5 million, respectively. The
increase was also due to an increase in demand for the Company's drilling jars
domestically which resulted in increased revenue of $1.8 million. This was
partially offset by a decrease in demand primarily in Latin America which
resulted in decreased revenue of $600,000.
Sales of Products and Services. Sales of products and services for
the nine months ended January 31, 1997 were $13.1 million, an increase of 10%
from $11.9 million from the same period last year. This increase was due
primarily to increased demand for directional drilling services in the Gulf of
Mexico, the United States Gulf Coast region and Venezuela which resulted in
additional revenue of $1.0 million.
Cost of Rentals. Cost of rentals for the nine months ended January 31,
1997 was $28.8
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million, an increase of 16% from $24.9 million from the same period last year.
This increase was due primarily to the variable costs associated with an
increase in rental activity, including tool repair costs and third party tool
charges. As a percentage of rental income, cost of rentals decreased from 77%
for the nine months ended January 31, 1996 to 75% for the nine months ended
January 31, 1997 primarily as the result of the fixed nature of the Company's
cost base.
Cost of Products and Services. Cost of products and services for the
nine months ended January 31, 1997 was $6.9 million, a $792,000 increase from
the same period last year. The margin on sales of products and services for
the first nine months of fiscal 1997 was 47% compared to 49% for the same
period last year. This decrease in margin was due primarily to a decrease in
higher margin export sales of mechanical jars.
Selling, General and Administrative. Selling, general and
administrative expenses for the nine months ended January 31, 1997 was $10.0
million, a 15% increase from $8.7 million for the same period last year. This
increase was primarily the result of $894,000 of compensation expense related
to non-cash stock awards granted to certain Officers in the 1996 Key Employee
Stock Plan. In addition, costs of $621,000 for settlement of employment
contracts and severance costs were recognized, an increase of $573,000 from the
same period last year. Exclusive of these two transactions, selling, general
and administrative expenses were $8.5 million, a slight decrease from the same
period last year.
Interest Income. Interest income for the nine months ended January
31, 1997 was $419,000, a 516% increase from the same period last year. This
was the result of interest earned on short term investments utilizing proceeds
from the Offering.
Foreign Exchange (Gain) Loss. Foreign exchange gains of $103,000 for
the nine months ended January 31, 1997 compared to losses of $221,000 for the
same period last year were due primarily to favorable fluctuations in the
British pound exchange rate.
Income Tax Expense. Provision for income taxes for the nine months
ended January 31, 1997 was $1.8 million, an increase of 62% from $1.1 million
for the same period last year. This was due to a 56% increase in income before
income taxes and a change in the effective tax rate from 35% to 37% due to an
increase in state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. Cash provided by operating activities was $6.5
million during the nine months ended January 31, 1997. Other sources of cash
included net proceeds from the Offering of $27.8 million, $1.5 million from
revenue-producing tools lost-in-hole, abandoned and sold and $400,000 from
advances under the revolving line of credit discussed below. Principal uses of
cash for the nine months were to fund $12.8 million for capital expenditures,
$5.0 million for payment of a promissory note to Lawrence, $1.6 million for
payment of a note to affiliate (see Notes to Lawrence below), $1.7 million
repayment on line of credit (see Credit Facilities below) and $1.5 million for
repayment of long-term debt. During the past several years, working capital
requirements
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have been funded through cash generated from operations, credit facilities and
asset sales.
Credit Facilities. At January 31, 1997, bank debt of $7.2 million was
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.
Borrowing under the revolving credit facility is limited to the lesser of $3.0
million or a loan formula based upon the level of the Company's eligible
accounts receivable. At January 31, 1997, there were no outstanding advances
made pursuant to the revolving line of credit.
Notes to Lawrence. During the nine months ended January 31, 1997,
outstanding notes to Lawrence of $6.6 million were repaid utilizing a portion
of the net proceeds from the Offering. This repayment included a $5.0 million
payment on a $10.0 million promissory note incurred in connection with the
Dividend. The remainder of the promissory note, $5.0 million, was contributed
back to the capital of the Company by the stockholder prior to the Offering.
At January 31, 1997, there were no outstanding amounts due on these notes.
Capital Expenditures. Capital expenditures of approximately $12.7
million were made in the nine months ended January 31, 1997. Of this amount,
$12.0 million was for downhole tools, primarily MWD and other directional
equipment, hydraulic drilling jars, hydraulic fishing jars and related
inventory. Capital expenditures during the remaining three months of the
fiscal year are expected to be approximately $4.5 million. The Company
believes it has available resources through internally generated cash flow, the
existing Credit Agreement and the remaining net proceeds of the Offering to
fund its operations for at least the next 12 months.
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<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10-1 - $250,000 Promissory Note from James F. Farr dated
January 16, 1997
10-2 - Security Agreement between the Company and James F.
Farr dated January 16, 1997
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
12
<PAGE> 15
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dailey Petroleum Services Corp.
-------------------------------
(Registrant)
Date March 4, 1997
-------------- ---------------------------------
David T. Tighe
Senior Vice President &
Chief Financial Officer
and authorized to sign on
behalf of the Registrant
13
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
10-1 $250,000 Promissory Note from James F. Farr dated
January 16, 1997
10-2 Security Agreement between the Company and James F.
Farr dated January 16, 1997
27 Financial Data Schedule
</TABLE>
14
<PAGE> 1
PROMISSORY NOTE
$250,000 Houston, Texas January 16, 1997
FOR VALUE RECEIVED AND ON DEMAND, the undersigned, James F. Farr, an
individual, ("Maker"), promises to pay to the order of Dailey Petroleum
Services Corp, a Delaware corporation ("Dailey"), the principal amount of two
hundred fifty thousand dollars ($250,000), together with interest on the
outstanding balance of said principal amount from time to time remaining
outstanding, pursuant to the following terms:
1. Interest. Interest will accrue on the outstanding principal
balance hereof from the date hereof until the final payment thereof at the rate
of eight percent (8%) per annum.
2. Interest Payments. Maker will pay to Dailey accrued and
unpaid interest on the outstanding principal balance hereof monthly, on the
10th day of each calendar month following the date hereof.
3. Principal Payments. Maker will pay the entire outstanding
principal balance hereof plus all accrued and unpaid interest thereon in one
installment on the fifth anniversary of the date hereof. Notwithstanding the
foregoing, Maker may prepay the entire outstanding principal balance, or a
portion thereof, plus accrued and unpaid interest, at any time without penalty.
4. Place of Payment. Principal and interest payments hereunder
shall be payable at Dailey's principal business offices, 2507 North Frazier,
P.O. Box 1863, Conroe, Texas 77305, or at such other place as Dailey, from
time to time, may designate in writing. All payments of principal and interest
on this Note shall be made to and received by Dailey 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(defined below)). 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. Business Day means any day on which commercial banks are not required or
authorized to close in Conroe, Texas.
5. Event of Default. An Event of Default under this Note shall
occur if (i) Maker fails to pay any amount of interest or principal on this
Note on the day on which such payment is due, whether at the stated maturity or
due date therefor, by acceleration or otherwise; (ii) the failure of Maker to
duly perform or observe any obligation, covenant or agreement on its part
contained in this Note or under the Security Agreement between Maker and Dailey
dated the date hereof (the "Security Agreement"); (iii) any breach or
inaccuracy in any representation contained in this Note or in the Security
Agreement; or (iv) Maker is dismissed from his employment with Dailey for Cause
(as such term is defined in Section 5.1(b) of the Employment Agreement dated
November 27, 1996, between Maker and Dailey).
6. Remedies. Upon the occurrence of an Event of Default, Dailey,
at its option and without notice to Maker, may declare immediately due and
payable the entire unpaid balance of principal and accrued and unpaid interest
thereon. Payment thereof may be enforced and recovered by Dailey in whole or
in part at any time and from time to time by one or more of the remedies
provided to Dailey in this Note or in the Security Agreement or as otherwise
provided at law or in equity, all of which remedies are cumulative and
concurrent.
7. WAIVERS. MAKER AND ALL ENDORSERS HEREBY, JOINTLY AND
SEVERALLY, WAIVE PRESENTMENT FOR PAYMENT, DEMAND, NOTICE OF DEMAND, NOTICE OF
NONPAYMENT OR DISHONOR, PROTEST AND NOTICE OF PROTEST OF THIS NOTE, AND ALL
OTHER NOTICES IN CONNECTION WITH THE DELIVERY, ACCEPTANCE, PERFORMANCE, DEFAULT
OR ENFORCEMENT OF PAYMENT OF THIS NOTE.
<PAGE> 2
8. Attorneys Fees. 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 Dailey.
9. Miscellaneous. If any provisions of this Note shall be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision hereof. This Note has been delivered and shall be governed
by and construed with the laws of the state of Texas without regard to the law
of conflicts. This Note shall be binding upon Maker's successors, assigns,
heirs, executors and independent administrators
IN WITNESS WHEREOF, Maker, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first written above.
/s/ James F. Farr
-----------------------------
JAMES F. FARR
-2-
<PAGE> 1
SECURITY AGREEMENT
(PLEDGE)
THIS SECURITY AGREEMENT (Pledge) is made as of January 16, 1997, by
James F. Farr, an individual, with his principal business at 2507 North
Frazier, P.O. Box 1863, Conroe, Texas 77305 ("Pledgor"); in favor of Dailey
Petroleum Services Corp., a Delaware corporation, with its principal business
at 2507 North Frazier, P.O. Box 1863, Conroe, Texas 77305 ("Secured Party").
RECITALS
A. On the date hereof, the Pledgor entered into a $250,000
Promissory Note (the "Promissory Note"), with the obligations thereunder to be
secured by a pledge of certain shares of stock owned by Pledgor.
B. Therefore, in view of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Pledgor and Secured Party agree as follows:
ARTICLE I
Definitions
Section 1.01 Terms Defined Above or in the Promissory Note. As
used in this Security Agreement, the terms defined above shall have the
meanings respectively assigned to them. Other capitalized terms which are
defined in the Promissory Note, but which are not defined herein shall have the
same meanings as defined in the Promissory Note.
Section 1.02 Certain Definitions. As used in this Security
Agreement, the following terms shall have the following meanings, unless the
context otherwise requires:
"Code" shall mean the Uniform Commercial Code as presently in effect
in the State of Texas. Unless otherwise indicated by the context herein, all
uncapitalized terms which are defined in the Code shall have their respective
meanings as used in Article 8 and 9 of the Code.
"Collateral" shall mean the following types or items of property:
(a) The securities described or referred to in Exhibit A attached
hereto and made a part hereof; and
(b) (i) shares of, all securities convertible or exchangeable
into, and all warrants, options or other rights to purchase shares of, stock of
Secured Party; (ii) all certificates or instruments representing such
additional shares, convertible or exchangeable securities, warrants, and other
rights and all proceeds, income and profits thereon, and all interest,
dividends and other payments, property and
<PAGE> 2
distribution with respect thereto; (iii) all proceeds received or receivable by
the Pledgor in cash, stock or otherwise, from any sale of substantially all the
assets of Secured Party; (iv) all proceeds received or receivable by the
Pledgor, in cash, stock or otherwise, from any recapitalization,
reclassification, merger, dissolution, liquidation or other termination of the
existence of Secured Party; (v) all other proceeds or assets received or
receivable by the Pledgor in respect of its status as a shareholder of the
Issuer; and (vi) any proceeds of any of the foregoing. The inclusion of
proceeds in this Agreement does not authorize the Pledgor to sell, dispose of
or otherwise use the Collateral in any manner not specifically authorized
hereby. Contemporaneously with the execution and delivery hereof, the Pledgor
is delivering to Secured Party in pledge hereunder the certificates and other
instruments evidencing all Pledged Securities owned by the Pledgor as of the
date hereof.
(c) It is expressly contemplated that additional securities or
other property may from time to time be pledged, assigned or granted to Secured
Party as additional security for the Obligations, and the term "Collateral" as
used herein shall be deemed for all purposes hereof to include all such
additional securities and property, together with all other property of the
types described above related thereto.
"Event of Default" shall mean any event specified in Section 6.01.
"Obligations" shall mean: (i) the indebtedness described in the
Promissory Note and any and all renewals, extensions for any period,
rearrangements or enlargements thereof and any interest accrued thereon,
whether pre-petition or post-petition; (ii) the performance of all obligations
and agreements under this Security Agreement; and (iii) all interest accrued
and earned, charges, expenses, attorney's or other fees and any other sums
payable to or incurred by Secured Party in connection with the execution,
administration or enforcement of their rights and remedies hereunder or in the
Promissory Note.
"Obligor" shall mean any Person, other than Pledgor, liable (whether
directly or indirectly, primarily or secondarily) for the payment or
performance of any of the Obligations whether as maker, co-maker, endorser,
guarantor, accommodation party, general partner or otherwise.
"Pledged Securities" shall mean all of the securities and other
property (whether or not the same constitutes a "security" under the Code)
referred to in Section 1.02 and all additional securities (as that term is
defined in the Code), if any, constituting Collateral under this Security
Agreement.
"Security Agreement" shall mean this Security Agreement, as the same
may from time to time be amended or supplemented.
-2-
<PAGE> 3
ARTICLE II
Security Interest
Section 2.01 Pledge. Pledgor hereby pledges, assigns and grants
to Secured Party, for its benefit, a security interest in the Collateral to
secure the prompt payment and performance of the Obligations. This security
interest is granted as security only and shall not subject Secured Party to, or
transfer or in any way affect or modify, any obligation or liability of the
Pledgor or any Obligor with respect to any of the Collateral, the Obligations
or any transaction in connection therewith.
Section 2.02 Transfer of Collateral. All certificates or
instruments representing or evidencing the Pledged Securities shall be
delivered to and held pursuant hereto by Secured Party or a person designated
by Secured Party and shall be in suitable form for transfer by delivery, or
shall be accompanied by duly executed instruments of transfer or assignment in
blank, and accompanied by any required transfer tax stamps, or (in the case of
either certificated or uncertificated securities) Secured Party shall have been
provided with evidence that the Pledged Securities have been otherwise
transferred to Secured Party in accordance with Section 8.301 of the Code, all
in form and substance satisfactory to Secured Party. Notwithstanding the
preceding sentence, at Secured Party's discretion, all Pledged Securities must
be delivered or transferred in such manner as to permit Secured Party to be a
"protected purchaser" to the extent of its security interest as provided in
Section 8.303 of the Code (if Secured Party otherwise qualifies as a bona fide
purchaser). Upon the occurrence and continuance of an Event of Default and
Secured Party shall have the right, at any time in its discretion and without
notice to Pledgor, to transfer to or to register in the name of Secured Party
or any of its nominees any or all of the Pledged Securities, subject only to
the revocable rights specified in Section 6.06. In addition, upon the
occurrence and continuance of an Event of Default, Secured Party shall have the
right at any time to exchange certificates or instruments representing or
evidencing Pledged Securities for certificates or instruments of smaller or
larger denominations.
ARTICLE III
Representations and Warranties
In order to induce Secured Party to accept this Security Agreement,
Pledgor represents and warrants to Secured Party (which representations and
warranties will survive the creation and payment of the Obligations) that:
Section 3.01 Ownership of Collateral; Encumbrances. Other than
subject to vesting provisions contained in the Restricted Stock Agreement
between Pledgor and Secured Party governing the Collateral, Pledgor is the
legal and beneficial owner of the Collateral free and clear of any adverse
claim, lien, security interest, option or other charge or encumbrance except
for the security interest created by this Security Agreement, and Pledgor has
full right, power and authority to pledge, assign and grant a security interest
in the Collateral to Secured Party.
-3-
<PAGE> 4
Section 3.02 Certain Actions. Pledgor has not performed or will
perform any acts which might prevent Secured Party from enforcing any of the
terms and conditions of this Security Agreement or which would limit Secured
Party in any such enforcement.
Section 3.03 Spousal Consent. Pledgor has notified his spouse of
the terms and conditions of this Security Agreement and the Promissory Note and
such spouse has raised no objection to such terms and conditions.
Section 3.01 First Priority Security Interest. The pledge of
Pledged Securities pursuant to this Security Agreement creates a valid and
perfected first priority security interest in the Collateral, enforceable
against Pledgor and all third parties and securing payment of the Obligations.
ARTICLE IV
Covenants and Agreements
Pledgor will at all times comply with the covenants and agreements
contained in this Article IV, from the date hereof and for so long as any part
of the Obligations are outstanding.
Section 4.01 Sale, Disposition or Encumbrance of Collateral.
Pledgor will not in any way encumber any of the Collateral (or permit or suffer
any of the Collateral to be encumbered) or sell, pledge, assign, lend or
otherwise dispose of or transfer any of the Collateral to or in favor of any
Person other than Secured Party. The Pledgor is not and will not become a
party to or otherwise be bound by any agreement, other than this Agreement,
which restricts in any manner the rights of any present or future holder of any
of the Pledged Securities with respect thereto.
Section 4.02 Dividends or Distributions. So long as no Event of
Default shall have occurred and be continuing, Pledgor shall be entitled to
receive and retain any and all dividends and interest paid in respect of the
Collateral, provided, however, that any and all:
(a) dividends and interest paid or payable other than in
cash in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange for
(including, without limitation, any certificate or share purchased or
exchanged in connection with a tender offer or merger agreement), any
Collateral,
(b) dividends and other distributions paid or payable in
cash in respect of any Collateral in connection with a partial or
total liquidation or dissolution or in connection with a reduction of
capital, capital surplus or paid-in surplus, or reclassification, and
(c) cash paid, payable or otherwise distributed in
respect of principal of, or in redemption of, or in exchange for, any
Collateral.
-4-
<PAGE> 5
shall be, and shall be forthwith delivered to Secured Party to hold as,
Collateral and shall, if received by Pledgor, be received in trust for the
benefit of Secured Party, be segregated from the other property or funds of
Pledgor, and be forthwith delivered to Secured Party as Collateral in the same
form as so received (with any necessary indorsement).
Section 4.03 Further Assurances. Upon the request of Secured
Party, Pledgor shall execute and deliver all such assignments, certificates,
instruments, securities, financing statements, notifications to financial
intermediaries, clearing corporation, issuers of securities or other third
parties or other documents and give further assurances and do all other acts
and things as Secured Party may reasonably request to perfect Secured Party's
interest in the Collateral or which is necessary to protect, enforce or
otherwise effect Secured Party's rights and remedies hereunder.
Section 4.04 Stock Powers. Pledgor shall furnish to Secured Party
such stock powers and other instruments as may be required by Secured Party to
assure the transferability of the Collateral when and as often as may be
requested by Secured Party.
Section 4.05 Reserved
Section 4.06 Voting and Other Consensual Rights. Except to the
extent otherwise provided in Section 6.06(d), Pledgor shall be entitled to
exercise any and all voting and other consensual rights pertaining to the
Collateral or any part thereof for any purpose not inconsistent with the terms
of this Security Agreement; provided however, that Pledgor shall not exercise
or refrain from exercising any such right if such action would have a material
adverse effect on the value of the Collateral or any part thereof, and,
provided, further, that upon request of Secured Party at any time or from time
to time, Pledgor shall give Secured Party prompt written notice of the manner
in which Pledgor has exercised, or the reasons for refraining from exercising,
any such right.
ARTICLE V
Rights, Duties and Powers of Secured Party
The following rights, duties and powers of Secured Party are
applicable irrespective of whether an Event of Default occurs and is
continuing:
Section 5.01 Discharge Encumbrances. Secured Party may, at its
option, after giving Pledgor three (3) days prior notice, discharge any taxes,
liens, security interests or other encumbrances at any time levied or placed on
the Collateral. Pledgor agrees to reimburse Secured Party within 30 days of
demand for any payment so made, plus interest on the portion thereof from time
to time remaining unpaid from the date of Secured Party's demand at the rate of
interest set forth in the Promissory Note.
Section 5.02 Transfer of Collateral. Secured Party may, at its
option, after giving Pledgor three (3) days prior notice, transfer any or all
of the Obligations, and
-5-
<PAGE> 6
upon and such transfer Secured Party may transfer its interest in any or all of
the Collateral and shall be fully discharged thereafter from all liability
therefor. Any transferee of the Collateral shall be vested with all rights,
powers and remedies of Secured Party hereunder.
Section 5.03 Cumulative and Other Rights. The rights, powers and
remedies of Secured Party hereunder are in addition to all rights, powers and
remedies given by law or in equity. The exercise by Secured Party of any one
or more of the rights, powers and remedies herein shall not be construed as a
waiver of any other rights, powers and remedies, including, without limitation,
any other rights of set-off. If any of the Obligations are given in renewal,
extension for any period or rearrangement, or applied toward the payment of
debt secured by any lien, Secured Party shall be, and is hereby, subrogated to
all the rights, titles, interests and liens securing the debt so renewed,
extended, rearranged or paid.
Section 5.04 Disclaimer of Certain Duties.
(a) The powers conferred upon Secured Party by this
Agreement are to protect its interest in the Collateral and shall not
impose any duty upon Secured Party. Pledgor hereby agrees that
Secured Party shall not be liable for, nor shall the indebtedness
evidenced by the Obligations be diminished by, Secured Party's delay
or failure to collect upon, foreclose, sell, take possession of or
otherwise obtain value for the Collateral.
(b) To the fullest extent permitted by applicable law,
Secured Party shall be under no duty whatsoever (except as may be
required under the Promissory Note) to make or give any presentment,
notice of dishonor, protest, demand for performance, notice of
non-performance, notice of intent to accelerate, notice of
acceleration, or other notice or demand in connection with any
Collateral or the Obligations, or to take any steps necessary to
preserve any rights against any Obligor or other Person. Pledgor
waives any right of marshaling in respect of any and all Collateral,
and waives any right to require Secured Party, to proceed against any
Obligor or other person or entity, exhaust any Collateral or enforce
any other remedy which Secured Party, now has or may hereafter have
against any Obligor or other person or entity.
Section 5.05 Modification of Obligations; Other Security. Pledgor
waives (i) any and all notice of acceptance, creation, modification,
rearrangement, renewal or extension for any period of any instrument executed
by any Obligor in connection with the Obligations and (ii) to the fullest
extent permitted by applicable law, any defense of any Obligor by reason of
disability, lack of authorization, cessation of the liability of any Obligor or
for any other reason. Pledgor authorizes Secured Party, without notice or
demand and without any reservation of rights against Pledgor and without
affecting Pledgor's liability hereunder or on the Obligations, from time to
time to (x) take and hold other property, other than the Collateral, as
security for the Obligations, and exchange, enforce, waive and release any or
all of the Collateral, (y) apply the Collateral in the manner permitted by this
Security Agreement and (z) renew, extend for any period, accelerate, amend or
modify, supplement, enforce, compromise, settle, waive or
-6-
<PAGE> 7
release the obligations of any Obligor or any instrument or agreement of such
other Person with respect to any or all of the Obligations or Collateral.
Section 5.06 Custody and Preservation of the Collateral. Secured
Party shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral is accorded
treatment substantially equal to that which comparable secured parties accord
comparable collateral, it being understood and agreed, however, that Secured
Party shall not have responsibility for (i) ascertaining or taking action with
respect to calls, conversions, exchanges, maturities, tenders or other matters
relative to any Collateral, whether or not Secured party has or is deemed to
have knowledge of such matters, or (ii) taking any necessary steps to preserve
rights against any person or entities with respect to any Collateral.
ARTICLE VI
Events of Default
Section 6.01 Events. It shall constitute an Event of Default
under this Security Agreement if an Event of Default occurs and is continuing
under the Promissory Note.
Section 6.02 Remedies. Upon the occurrence and during the
continuance of any Event of Default, Secured Party may take any or all of the
following actions without notice (except where expressly required below or in
the Promissory Note) or demand to Pledgor;
(a) Declare all or part of the indebtedness pursuant to
the Obligations immediately due and payable and enforce payment of the
same by Pledgor or any Obligor.
(b) Sell, in one or more sales and in one or more
parcels, or otherwise dispose of any or all of the Collateral in any
commercially reasonable manner as Secured Party may elect, in a public
or private transaction, at any location as deemed reasonable by
Secured Party either for cash or credit or for future delivery at such
price as Secured Party may deem fair, and (unless prohibited by the
Code, as adopted in any applicable jurisdiction) Secured Party may
purchase of any or all Collateral so sold and may apply upon the
purchase price therefor any obligations secured hereby. Any such sale
or transfer by Secured Party either to itself or to any other person
or entity shall be absolutely free from any claim of right by Pledgor,
including any equity or right of redemption, stay or appraisal which
Pledgor has or may have under any rule of law, regulation or statute
now existing or hereafter adopted. Upon any such sale or transfer,
Secured Party shall have the right to deliver, assign and transfer to
the purchaser or transferee thereof the Collateral so sold or
transferred. If Secured Party deems it advisable to do so, it may
restrict the bidders or purchasers of any such sale or transfer to
Persons or entities who will represent and agree that they are
purchasing the Collateral for their own account and not with the view
to the distribution or resale of any of the Collateral. Secured Party
may, at its discretion, provide for a public sale, and any such public
sale shall be held at
-7-
<PAGE> 8
such time or times within ordinary business hours and at such place or
places as Secured Party may fix in the notice of such sale. Secured
Party shall not be obligated to make any sale pursuant to any such
notice. Secured Party may, without notice or publication, adjourn any
public or private sale by announcement at any time and place fixed for
such sale, and such sale may be made at any time or place to which the
same may be so adjourned. In the event any sale or transfer hereunder
is not completed or is defective in the opinion of Secured Party, such
sale or transfer shall not exhaust the rights of Secured Party
hereunder, and Secured Party shall have the right to cause one or more
subsequent sales or transfers to be made hereunder. If only part of
the Collateral is sold or transferred such that the Obligations remain
outstanding (in whole or in part), Secured Party's rights and remedies
hereunder shall not be exhausted, waived or modified, and Secured
Party is specifically empowered to make one or more successive sales
or transfers until all the Collateral shall be sold or transferred and
all the Obligations are paid. In the event that Secured Party elects
not to sell the Collateral, Secured Party retains its rights to
dispose of or utilize the Collateral or any part or parts thereof in
any manner authorized or permitted by law or in equity, and to apply
the proceeds of the same towards payment of the Obligations. Each and
every method of disposition of the Collateral described in this
subsection or in subsection (d) shall constitute disposition in a
commercially reasonable manner.
(c) Apply proceeds of the disposition of the Collateral
to the Obligations in any manner elected by Secured Party and
permitted by the Code or otherwise permitted by law or in equity.
Such application may include, without limitation, the reasonable
attorneys' fees and legal expenses incurred by Secured Party.
(d) Appoint any Person as agent to perform any act or
acts necessary or incident to any sale or transfer by Secured Party of
the Collateral.
(e) Execute, assign and endorse negotiable and other
instruments for the payment of money, documents of title or other
evidences of payment, shipment or storage for any form of Collateral
on behalf of and in the name of Pledgor.
Section 6.03 Attorney-in-Fact. Pledgor hereby irrevocably
appoints Secured Party as Pledgor's attorney-in-fact, with full authority in
the place and stead of Pledgor and in the name of Pledgor or otherwise, from
time to time in Secured Party's reasonable discretion upon the occurrence and
during the continuance of an Event of Default and after any applicable notice
and cure period provided for in the Credit Agreement, but at Pledgor's cost and
expense, to take any action and to execute any assignment, certificate,
financing statement, stock power, notification, document or instrument which
Secured Party may deem necessary or advisable to accomplish the purposes of
this Security Agreement, including, without limitation, to receive, endorse and
collect all instruments made payable to Pledgor representing any dividend,
interest payment or other distribution in respect of the Collateral or any part
thereof and to give full discharge for the same.
-8-
<PAGE> 9
Section 6.04 Liability for Deficiency. If any sale or other
disposition of Collateral by Secured Party or any other action of Secured Party
hereunder results in reduction of the Obligations, such action will not release
Pledgor from its liability to Secured Party for any unpaid Obligations,
including reasonable costs, charges and expenses incurred in the liquidation of
Collateral, together with interest thereon, and the same shall be immediately
due and payable to Secured Party at Secured Party's address set forth in the
opening paragraph hereof.
Section 6.05 Reasonable Notice. If any applicable provision of
any law requires Secured Party to give reasonable notice of any sale or
disposition or other action, Pledgor hereby agrees that fifteen (15) days'
prior written notice shall constitute reasonable notice thereof. Such notice,
in the case of public sale, shall state the time and place fixed for such sale
and, in the cases of private sale, the time after which such sale is to be
made.
Section 6.06 Pledged Securities. Upon the occurrence and during
the continuance of an Event of Default:
(a) All rights of Pledgor to receive the dividends and
interest payments which it would otherwise be authorized to receive
and retain pursuant to Section. 4.02 shall cease, and all such rights
shall thereupon become vested in Secured Party who shall thereupon
have the sole right to receive and hold as Collateral such dividends
and interest payments, but Secured Party shall have no duty to receive
and hold such dividends and interest payments and shall not be
responsible for any failure to do so or delay in so doing.
(b) All dividends and interest payments which are
received by Pledgor contrary to the provisions of this Section 6.06
shall be received in trust for the benefit of Secured Party, shall be
segregated from other funds of Pledgor and shall be forthwith paid
over to Secured Party as Collateral in the same form as so received
(with any necessary indorsement).
(c) Secured Party may exercise any and all rights of
conversion, exchange, subscription or any other rights, privileges or
options pertaining to any of the Pledged Securities as if it were the
absolute owner thereof, including without limitation, the right to
exchange at its discretion, any and all of the Pledged Securities upon
the merger, consolidation, reorganization, recapitalization or other
readjustment of any issuer of such Pledged Securities or upon the
exercise by Secured Party of any right, privilege or option pertaining
to any of the Pledged Securities, and in connection therewith, to
deposit and deliver any and all of the Pledged Securities with any
committee, depository, transfer agent, registrar or other designated
agency upon such terms and conditions as it may determine, all without
liability except to account for property actually received by it, but
Secured Party shall have no duty to exercise any of the aforesaid
rights, privileges or options and shall not be responsible for any
failure to do so or delay in so doing.
-9-
<PAGE> 10
(d) All rights of Pledgor to exercise the voting and
other consensual rights which Pledgor would otherwise be entitled to
exercise pursuant to Section 4.07 with respect to the Pledged
Securities issued by such Issuer shall cease, and all such rights
shall thereupon become vested in Secured arty who shall thereupon have
the sole right to exercise such voting and other consensual rights,
but Secured Party shall have no duty to exercise any such voting or
other consensual rights and shall not be responsible for any failure
to do so or delay in so doing.
Section 6.07 Non-judicial Enforcement. Secured Party may enforce
its rights hereunder without prior judicial process or judicial hearing, and to
the extent permitted by law Pledgor expressly waives any and all legal rights
which might otherwise require Secured Party to enforce its rights by judicial
process.
Section 6.08 Private Sale of Pledged Securities. Pledgor
recognizes that Secured Party may deem it impracticable to effect a public sale
of all or any part of the Pledged Securities and that Secured Party may,
therefore, determine to make one or more private sales of any such Pledged
Securities to a restricted group of purchasers who will be obligated to agree
among other things, to acquire such Pledged Securities for their own account,
for investment and not with a view to the distribution or resale thereof.
Pledgor acknowledges that any such private sale may be at prices and on terms
less favorable to the seller than the prices and other terms in which might
have been obtained at a public sale and, notwithstanding the foregoing, agrees
that such private sale shall be deemed to have been made in a commercially
reasonably manner and that Secured Party shall have no obligation to delay sale
of any such Pledged Securities for the period of time necessary to permit
Pledgor to register such Pledged Securities for public sale under the
Securities Act of 1933, as amended (the "Securities Act"). Pledgor further
acknowledges and agrees that any offer to sell such Pledged Securities which
has been (i) publicly advertised on a bona fide basis in a newspaper or other
publication of general circulation in the financial community of Houston, Texas
(to the extent that such an offer may be so advertised without prior
registration under the Securities Act), or (ii) made privately in the manner
described above to not less than fifteen (15) bona fide offerees shall be
deemed to involve a "public sale" for the purposes of Section 9-504(c) of the
Code (or any successor or similar, applicable statutory provision) as then in
effect in the State of Texas, notwithstanding that such sale may not constitute
a "public offering" under the Securities Act and that Secured Party or any
Lender may, in such event, bid for the purchase of such Pledged Securities.
ARTICLE VII
Miscellaneous
Section 7.01 Notices. Any notice required or permitted to be
given under or in connection with this Security Agreement shall be given in
writing at the addresses listed in the preamble to this Security Agreement or
at such other place as a party hereto may designate in writing.
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<PAGE> 11
Section 7.02 Amendments and Waivers. Secured Party's acceptance
of partial or delinquent payments or any forbearance, failure or delay by
Secured Party in exercising any right, power or remedy hereunder shall not be
deemed a waiver of any obligation of Pledgor or any Obligor, or of any right,
power or remedy of Secured Party; and no partial exercise of any right, power
or remedy shall preclude any other or further exercise thereof. Secured Party
may remedy any Event of Default hereunder or in connection with the Obligations
without waiving the Event of Default so remedied. Pledgor hereby agrees that
if Secured Party agrees to a waiver of any provision hereunder, or an exchange
of or release of the Collateral, or the addition or release of any Obligor or
other Person, any such action shall not constitute a waiver of any of Secured
Party's other rights or of Pledgor's obligations hereunder. This Security
Agreement may be amended only by an instrument in writing and may be
supplemented only by documents delivered or to be delivered in accordance with
the express terms hereof.
Section 7.03 Copy as Financing Statement. A photocopy or other
reproduction of this Security Agreement may be delivered by Pledgor or Secured
Party to any financial intermediary or other third party for the purpose of
transferring or perfecting any or all of the Pledged Securities to Secured
Party or its designee or assignee.
Section 7.04 Possession of Collateral. Secured Party shall be
deemed to have possession of any Collateral in transit to it or set apart for
it (or, in either case, any of its agents, affiliates or correspondents).
Section 7.05 Redelivery of Collateral. If any sale or transfer of
Collateral by Secured Party results in full satisfaction of the Obligations,
and after such sale or transfer and discharge there remains a surplus of
proceeds, Secured Party will deliver to Pledgor or such other Person as may be
required by a court of competent jurisdiction such excess proceeds in a
commercially reasonable time; provided, however, that Secured Party shall not
have any liability for any interest, cost or expense in connection with any
reasonable delay in delivering such proceeds to Pledgor.
Section 7.06 Governing Law; Jurisdiction. This Security Agreement
and the security interest granted hereby shall be construed in accordance with
and governed by the laws of the State of Texas (except to the extent that the
laws of any other jurisdiction govern the perfection and priority of the
security interests granted hereby).
Section 7.07 Continuing Security Agreement.
(a) Except as may be expressly applicable pursuant to
Section 9-505 of the Code, no action taken or omission to act by Secured Party,
including, without limitation, any exercise of voting or consensual rights
pursuant to Section 4.07 or any other action taken or inaction pursuant to
Section 6.02, shall be deemed to constitute a retention of the Collateral in
satisfaction of the Obligations or otherwise to be in full satisfaction of the
Obligations, and the Obligations shall remain in full force and effect, until
Secured Party shall have applied payments (including, without limitation,
collections from Collateral) towards the Obligations in the full amount then
outstanding or until such subsequent time as is hereinafter provided in
subsection (b) below.
-11-
<PAGE> 12
(b) To the extent that any payments on the Obligations or
proceeds of the Collateral are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to a trustee,
debtor in possession, receiver or other Person under any bankruptcy law, common
law or equitable cause, then to such extent the Obligations so satisfied shall
be revived and continue as if such payment or proceeds had not been received by
Secured Party, and Secured Party's security interest, rights, powers and
remedies hereunder shall continue in full force and effect. In such event,
this Security Agreement shall be automatically reinstated if it shall
theretofore have been terminated pursuant to Section 7.08.
Section 7.08 Termination. The grant of a security interest
hereunder and all of Secured Party's, the Issuing Banks' and the Lenders'
rights, powers and remedies in connection therewith shall remain in full force
and effect until the complete payment of the Obligations and the compliance by
Pledgor with all covenants and agreements hereof and the termination of the
Promissory Note, at which time Secured Party, at the written request and
expense of Pledgor, will release, reassign and transfer the Collateral to
Pledgor and declare this Security Agreement to be of no further force or
effect. Notwithstanding the foregoing, the provisions of Section 7.07(b) shall
survive the termination of this Security Agreement.
Section 7.09 Counterparts, Effectiveness. This Security Agreement
may be executed in two or more counterparts. Each counterpart is deemed an
original, but all such counterparts taken together constitute one and the same
instrument. This Security Agreement becomes effective upon the execution
hereof by Pledgor and delivery of the same to Secured Party, and it is not
necessary for Secured Party, any Issuing Bank or any Lender to execute any
acceptance hereof or otherwise signify or express its acceptance hereof.
Section 7.10 Amendment and Restatement. This Security Agreement
amends and restates in its entirety the Prior Security Agreement and all its
terms, provisions and conditions. Pledgor acknowledges that the liens, claims,
rights, titles, interests and benefits created and granted by the Prior
Security Agreement continue to exist, remain valid and subsisting, shall not be
impaired or released hereby, shall remain in full force and effect and are
hereby renewed, extended, carried forward and conveyed as security for the
Obligations.
[SIGNATURES BEGIN NEXT PAGE]
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<PAGE> 13
PLEDGOR:
By: /s/ James F. Farr
-----------------------------
James F. Farr
SECURED PARTY: DAILEY PETROLEUM SERVICES CORP.
By: /s/ William D. Sutton
-----------------------------
Name: William D. Sutton
---------------------------
Title: Senior Vice President
--------------------------
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<PAGE> 14
EXHIBIT A
36,000 shares of Class A Common Stock, $.01 par value, of Dailey Petroleum
Services Corp. registered in the name of James F. Farr.
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 15,707
<SECURITIES> 0
<RECEIVABLES> 23,165
<ALLOWANCES> 1,426
<INVENTORY> 0
<CURRENT-ASSETS> 40,401
<PP&E> 23,818
<DEPRECIATION> 18,540
<TOTAL-ASSETS> 82,317
<CURRENT-LIABILITIES> 14,099
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 62,147
<TOTAL-LIABILITY-AND-EQUITY> 82,317
<SALES> 0
<TOTAL-REVENUES> 51,394
<CGS> 0
<TOTAL-COSTS> 46,373
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 711
<INCOME-PRETAX> 4,843
<INCOME-TAX> 1,778
<INCOME-CONTINUING> 3,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,065
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
