<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1997
REGISTRATION NO. 333-
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
DAILEY INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C> <C>
DELAWARE 1389 76-0503351
(State or other jurisdiction of Primary Industrial Classification (I.R.S. Employer
incorporation or organization) Code Number Identification No.)
</TABLE>
2507 NORTH FRAZIER
CONROE, TEXAS 77305
(281) 350-3399
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
WILLIAM D. SUTTON
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
DAILEY PETROLEUM SERVICES CORP.
2507 NORTH FRAZIER
CONROE, TEXAS 77305
(281) 350-3399
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPY TO:
ROBERT F. GRAY, JR.
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77010-3095
(713) 651-5151
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box: [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9 3/4% Senior Notes due 2007, $1,050 per $1,000
Series B........................ $115,000,000 principal amount $120,750,000 $36,591
- ------------------------------------------------------------------------------------------------------------------
Subsidiary Guarantees of 9 3/4%
Senior Notes due 2007, Series
B............................... -- -- (2)
- ------------------------------------------------------------------------------------------------------------------
$1,050 per $1,000
Total............................. $115,000,000 principal amount $120,750,000 $36,591
==================================================================================================================
</TABLE>
(1) Pursuant to Rule 457(f) under the Securities Act of 1933, the registration
fee has been calculated based on the average of the bid and asked prices in
the PORTAL market on October 15, 1997, of the 9 3/4% Senior Notes due 2007,
Series A of the Company, for which the securities registered hereby will be
exchanged.
(2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is
payable for the Guarantees.
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
ADDRESS, INCLUDING
ZIP CODE, AND
TELEPHONE
NUMBER,
INCLUDING AREA
STATE OR PRIMARY STANDARD CODE, OF
OTHER INDUSTRIAL REGISTRANT'S
JURISDICTION OF CLASSIFICATION IRS EMPLOYER PRINCIPAL EXECUTIVE
NAME INCORPORATION CODE NO. ID NO. OFFICES
---- --------------- ---------------- ------------ -------------------
<S> <C> <C> <C> <C>
Dailey Energy Services, Inc. ......... Delaware 8999 76-0066576 *
Dailey International Sales
Corporation......................... Delaware 8999 74-1869524 *
Columbia Petroleum Services
Corporation......................... Delaware 8999 76-0074604 *
International Petroleum Services,
Inc................................. Delaware 8999 76-0084387 *
Dailey Environmental Remediation
Technologies, Inc................... Texas 8999 76-0276940 *
Dailey Worldwide Services, Corp....... Texas 8999 76-0477660 *
Air Drilling International, Inc....... Delaware 1380 84-1305964 *
Air Drilling Services, Inc............ Wyoming 1380 83-0181069 *
</TABLE>
- ---------------
* 2507 North Frazier, Conroe, Texas 77305, telephone (281) 350-3399.
<PAGE> 3
DAILEY INTERNATIONAL INC.
CROSS-REFERENCE SHEET
(PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
FORM S-4 ITEM AND CAPTION LOCATION OR PROSPECTUS CAPTION
------------------------- ------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front Cover Page
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information........... Prospectus Summary; Risk Factors
4. Terms of the Transaction.................. Prospectus Summary; The Exchange Offer;
Description of the Exchange Notes;
Certain Federal Income Tax Consequences
5. Pro Forma Financial Information........... Incorporation of Certain Documents
6. Material Contacts with the Company Being
Acquired................................ Not Applicable
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to Be Underwriters...................... Not Applicable
8. Interests of Named Experts and Counsel.... Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
10. Information with Respect to S-3 Prospectus Summary; Risk Factors;
Registrants............................. Description of Certain Indebtedness
11. Incorporation of Certain Information by
Reference............................... Incorporation of Certain Documents
12. Information with Respect to S-2 or S-3
Registrants............................. Not Applicable
13. Incorporation of Certain Information by
Reference............................... Not Applicable
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants....... Not Applicable
15. Information with Respect to S-3
Companies............................... Not Applicable
16. Information with Respect to S-2 or S-3
Companies............................... Not Applicable
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies......... Not Applicable
18. Information if Proxies, Consents or
Authorizations are to be Solicited...... Not Applicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer................. Incorporation of Certain Documents
</TABLE>
<PAGE> 4
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 OCTOBER 17, 1997
PROSPECTUS
OFFER TO EXCHANGE
ALL OUTSTANDING
9 3/4% SENIOR NOTES DUE 2007, SERIES A
($115,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
9 3/4% SENIOR NOTES DUE 2007, SERIES B
($115,000,000 PRINCIPAL AMOUNT)
OF
[DAILEY LOGO]
UNCONDITIONALLY GUARANTEED BY:
<TABLE>
<S> <C> <C>
DAILEY ENERGY SERVICES, INC. INTERNATIONAL PETROLEUM DAILEY WORLDWIDE SERVICES,
DAILEY INTERNATIONAL SALES SERVICES, INC. CORP.
CORPORATION DAILEY ENVIRONMENTAL AIR DRILLING INTERNATIONAL,
COLUMBIA PETROLEUM SERVICES REMEDIATION INC.
CORP. TECHNOLOGIES, INC. AIR DRILLING SERVICES, INC.
</TABLE>
---------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED.
---------------------
Dailey International Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter
of Transmittal"), to exchange up to an aggregate principal amount of
$115,000,000 of its Senior Notes due 2007, Series B (the "Exchange Notes") for
an equal principal amount of its outstanding 9 3/4% Senior Notes due 2007,
Series A (the "Outstanding Notes"), in integral multiples of $1,000. The
Exchange Notes and the Outstanding Notes are sometimes referred to herein
collectively as the "Notes". The Exchange Notes will be senior unsecured
obligations of the Company and are substantially identical (including principal
amount, interest rate, maturity and redemption rights) to the Outstanding Notes
for which they may be exchanged pursuant to this offer, except for certain
transfer restrictions and registration rights relating to the Outstanding Notes
and except for certain interest provisions relating to such rights. The
Outstanding Notes have been, and the Exchange Notes will be, issued under an
Indenture dated as of August 19, 1997 (the "Indenture"), among the Company, the
Subsidiary Guarantors and U.S. Trust Company of Texas, N.A., as trustee (the
"Trustee"). See "Description of Exchange Notes". There will be no proceeds to
the Company from this offering; however, pursuant to a Registration Rights
Agreement dated as of August 19, 1997 (the "Registration Rights Agreement")
among the Company, the Subsidiary Guarantors (as defined) and the Initial
Purchaser (as defined) of the Outstanding Notes, the Company will bear certain
offering expenses.
(Cover text continued on next page)
---------------------
SEE "RISK FACTORS" ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED BY HOLDERS WHO TENDER OUTSTANDING NOTES IN THE EXCHANGE OFFER.
---------------------
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.
---------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER , 1997
<PAGE> 5
The Company will accept for exchange any and all validly tendered
Outstanding Notes on or prior to 5:00 p.m., New York City time, on ,
1997, unless extended (the "Expiration Date"). Tenders of Outstanding Notes may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date; otherwise such tenders are irrevocable. U.S. Trust Company of
Texas, N.A. is acting as Exchange Agent in connection with the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of
Outstanding Notes being tendered for exchange, but is otherwise subject to
certain customary conditions.
The Exchange Notes will bear interest from the date of issuance (or the
most recent Interest Payment Date (as defined) to which interest on such
Exchange Notes has been paid), at a rate equal to 9 3/4% per annum and on the
same terms as the Outstanding Notes. Interest on the Exchange Notes will be
payable semiannually on February 15 and August 15 of each year commencing
February 15, 1998. Accrued interest on the Outstanding Notes that are tendered
in exchange for the Exchange Notes will be payable on or before February 15,
1998. Outstanding Notes that are accepted for exchange will cease to accrue
interest on and after the date on which interest on the Exchange Notes will
begin to accrue.
The Company's obligation to pay the principal of, premium, if any, and
interest on the Exchange Notes will be unconditionally guaranteed, on a joint
and several basis, by the following subsidiaries of the Company: Dailey Energy
Services, Inc., Dailey International Sales Corporation, Columbia Petroleum
Services Corporation, International Petroleum Services, Inc., Dailey
Environmental Remediation Technologies, Inc., Dailey Worldwide Services, Corp.,
Air Drilling International, Inc. and Air Drilling Services, Inc. (the
"Subsidiary Guarantors").
The Outstanding Notes were sold by the Company on August 19, 1997 to the
Initial Purchaser in transactions not registered under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the Securities Act. The
Initial Purchaser subsequently placed the Outstanding Notes with qualified
institutional buyers and with a limited number of institutional accredited
investors in reliance upon Rule 144A under the Securities Act. Accordingly, the
Outstanding Notes may not be reoffered, resold or otherwise transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy the obligations of the Company
under the Registration Rights Agreement. See "The Exchange Offer".
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that Exchange Notes issued pursuant to this
Exchange Offer may be offered for resale, resold and otherwise transferred by a
holder who is not an affiliate of the Company without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the Exchange Notes in its ordinary course of
business and is not participating in and has no arrangement or understanding
with any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes. Persons wishing to exchange Outstanding
Notes in the Exchange Offer must represent to the Company that such conditions
have been met.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
Exchange Notes. A broker-dealer that delivers such a prospectus to purchasers in
connection with such resales will be subject to certain of the civil liability
provisions under the Securities Act and will be bound by the provisions of the
Registration Rights Agreement (including certain indemnification rights and
obligations). This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Outstanding Notes where such Outstanding Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, if requested by a
Participating Broker-Dealer, it will use its best efforts to make this
Prospectus available to any Participating Broker-Dealer for use in connection
with any such resale for a period of up to or such earlier date
as such Participating Broker-Dealer shall have notified the Company in writing
that such Participating Broker-Dealer has resold all Exchange Notes acquired in
the Exchange Offer. See "Plan of Distribution".
ii
<PAGE> 6
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. The Initial
Purchaser has advised the Company that they intend to make a market in the
Exchange Notes; however, they are not obligated to do so and any market-making
may be discontinued at any time without notice. Accordingly, no assurance can be
given that an active public or other market will develop for the Exchange Notes
or as to the liquidity of or the trading market for the Exchange Notes.
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered
Outstanding Notes could be adversely affected. Following consummation of the
Exchange Offer, the holders of Outstanding Notes will continue to be subject to
the existing restrictions upon transfer thereof.
The Company expects that the Exchange Notes issued pursuant to this
Exchange Offer will be issued in the form of a Global Exchange Notes (as defined
herein), which will be deposited with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in its name or in the name of Cede &
Co., its nominee. Beneficial interests in the Global Exchange Notes representing
the Exchange Notes will be shown on, and transfers thereof to qualified
institutional buyers will be effected through, records maintained by the
Depositary and its participants. After the initial issuance of the Global
Exchange Notes, Exchange Notes in certificated form will be issued in exchange
for the Global Exchange Notes on the terms set forth in the Indenture. See
"Description of Exchange Notes -- Book Entry; Delivery and Form".
---------------------
UNTIL , 1997 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
Suite 1400, Northwestern Atrium Center, 500 West Madison Avenue, Chicago,
Illinois 60661-2511, and at Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission, at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Company's Class A Common Stock
is traded on the Nasdaq National Market and such reports, proxy and
informational statements and other information may be inspected and copied at
the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. In
addition, the Commission maintains a site on the World Wide Web that contains
reports, proxy and information statements and other information filed
electronically by the Company with the Commission which can be accessed over the
Internet at http://www.sec.gov. While any Notes remain outstanding, the Company
will make available, upon request, to any holder and any prospective purchaser
of Notes, the information required pursuant to Rule 144A(d)(4) under the
Securities Act during any period in which the Company is not subject to Section
13 or 15(d) of the Exchange Act. Any such request should be directed to the
Secretary of the Company, 2507 North Frazier, P.O. Box 1863, Conroe, Texas
77305.
iii
<PAGE> 7
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
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), including certain statements in this Prospectus. Words such
as "anticipate", "expect", "estimate", "project" and similar expressions are
intended to identify such forward-looking statements. Forward-looking statements
may be made by management orally or in written material such as press releases,
portions of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business and Properties" contained in this
Prospectus, and portions of the Company's filings with the Commission under the
Securities Act and the Exchange Act.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Such forward-looking statements
are subject to certain risks, uncertainties and assumptions, including without
limitation those identified below and under "Risk Factors". 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 will have a direct bearing on the Company's results
of operations and the oilfield services industry in which it operates are
changes in the price of oil and natural gas; the impact of competitive products
and pricing; the presence of competitors with greater financial resources;
product demand and acceptance risks, including product obsolescence risks with
respect to its downhole tools; risks associated with the acquisition of Air
Drilling International, Inc., including failure to successfully manage the
Company's growth and integrate the operations of Air Drilling International,
Inc.; typical operating risks inherent in the oilfield service industry,
including risks of environmental liability; 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; worldwide political stability and economic growth and other
risks associated with international operations, including foreign exchange risk;
and the Company's successful execution of internal operating plans as well as
regulatory uncertainties and legal proceedings. In addition, the Company's
substantial leverage following this offering will have a direct bearing on its
results of operations. See "Risk Factors".
iv
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information set forth herein reflects the Company's
recent acquisition (the "ADI Acquisition") of Air Drilling International, Inc.
("ADI"). As used herein, unless the context otherwise requires, the term
"Dailey" refers to Dailey International Inc. and its consolidated subsidiaries
prior to consummation of the ADI Acquisition and the term the "Company" refers
to the post-closing combined operations of Dailey and ADI and their respective
consolidated subsidiaries. Unless the context otherwise requires, the pro forma
information contained herein gives effect to the ADI Acquisition, the issuance
of the Outstanding Notes and the application of the proceeds therefrom as if
they were completed as of the beginning of the periods presented. Investors
should carefully consider the information set forth under "Risk Factors".
THE COMPANY
The Company is a leading provider of specialty drilling services to the oil
and gas industry and designs, manufactures and rents proprietary downhole tools
for oil and gas drilling and workover applications worldwide. In June 1997,
Dailey acquired ADI, a leading worldwide provider of air drilling services for
underbalanced drilling applications. The Company believes the ADI Acquisition
will enable it to cross market its proprietary downhole tools and directional
drilling services to ADI's customers and positions the Company to benefit from
anticipated growth in demand for underbalanced drilling services. For the fiscal
year ended April 30, 1997 and the three months ended July 31, 1997, the Company
generated $92.6 million and $27.2 million, respectively, in pro forma revenues.
DRILLING SERVICES
Directional Drilling Services. Directional drilling services involve
assisting oil and gas operators in the controlled drilling of a wellbore to a
prescribed bottomhole location. 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, drilling horizontally through a formation
characterized by multiple vertical fractures can result in substantial
reductions in drilling costs and improved well productivity because fewer wells
are required compared to a vertical development program. Recent developments in
multilateral technology, which allows two or more wells to be drilled from the
same vertical wellbore, have further enhanced well productivity and development
efficiency.
Based on published industry sources, the number of oil and gas wells
drilled in the United States using directional and horizontal technology
increased 80% from 2,110 in 1990 to 3,808 in 1996, and as a percentage of total
oil and gas wells drilled in the United States, wells drilled using directional
and horizontal technology has increased from 7% in 1990 to 16% in 1996. This
growth has been driven primarily by the substantial cost savings, improvements
to drilling efficiency and enhancements to reservoir production that such
techniques can provide to operators. In addition, recent advances in directional
drilling techniques combined with advances in the identification and location of
oil and gas reserves (such as 3-D seismic technology) have made many marginal or
otherwise uneconomical reservoirs economically feasible to produce. The Company
expects directional and horizontal drilling to continue to represent an
increasing percentage of total wells drilled in the United States and
internationally.
The Company provides skilled personnel to manage the drilling of
directional wells. The directional drilling services offered by the Company
consist of well planning, on-site supervisory services to maximize drilling
efficiency, measurement-while-drilling ("MWD") services and related equipment
rentals, downhole motor rentals and post-well analysis. MWD technology allows
measurements of wellbore trajectory to be relayed to the surface in real time
during the drilling process without removing the drillstring, thereby providing
faster and more accurate service. As drilling progresses, the data is decoded
and plotted graphically to monitor the direction of the wellbore and to verify
that the drill bit is aimed at the prescribed bottomhole location. The Company
also derives revenue from its directional drilling services by renting MWD
units,
1
<PAGE> 9
thrusters, downhole motors and nonmagnetic stabilizers. Directional drilling
services accounted for approximately $27.3 million and $9.7 million, or 29% and
35%, of the Company's pro forma revenue for the fiscal year ended April 30, 1997
and the three months ended July 31, 1997, respectively.
Air Drilling Services. As a result of the ADI Acquisition, the Company is a
worldwide leader in providing air drilling services to the oil and gas and
geothermal industries. Air drilling, which is used in underbalanced drilling
applications, involves maintaining the pressure in a well at less than that of
the surrounding formation using air, nitrogen, mist, foam or light-weight
drilling fluids as the circulation medium instead of mud. The Company provides
air drilling equipment packages consisting of compressors, boosters, mist pumps
and related equipment along with specially trained personnel to operate the
equipment. Underbalanced drilling techniques can lead to substantial increases
in rates of penetration and drill bit life resulting in substantially less time
and costs for a drilling program, and also substantially reduce the risks of
formation damage. The use of underbalanced drilling techniques in Canada has
experienced rapid growth over the past few years and is increasing in other
countries, including the United States.
Horizontal and directional wells are frequently drilled using underbalanced
drilling technology to reduce the risk of formation damage and improve the flow
of hydrocarbons in low pressure or depleted reservoirs. The Company expects
cross-marketing opportunities will develop for its directional and underbalanced
drilling services as approximately 20% of ADI's underbalanced drilling jobs
during 1996 were performed in conjunction with directional and horizontal wells.
Air drilling services accounted for approximately $23.5 million and $6.9
million, or 25% and 26%, of the Company's pro forma revenue for the fiscal year
ended April 30, 1997 and the three months ended July 31, 1997, respectively.
DOWNHOLE TOOLS
The Company currently offers an array of technologically-advanced downhole
tools, which it selectively markets in every major oil and gas exploration and
production region in the world. Dailey began renting downhole tools in 1945 and
introduced the first drilling jar to the oil and gas industry in 1965. The
Company is currently the leading supplier of drilling jars to the rental tool
market worldwide. A drilling jar is an impact tool that is placed in the lower
section of a drillstring as part of the bottomhole assembly which, when
activated, delivers a sharp, powerful impact to free the drillstring should it
become lodged in the hole. In addition to drilling jars, the Company rents other
proprietary downhole tools including hydraulic fishing jars, coiled tubing jars,
drilling shock absorbers, drilling thrusters and drilling slingers.
Dailey traditionally has marketed its array of proprietary downhole tools
directly to the end-user through its direct sales force and agents, rather than
rely on third-party distribution of its products. The Company believes this
strategy results in higher profit margins, and that this direct interaction with
the end-user assists the Company in identifying demand for new and improved
products and better enables it to design and develop such products in a timely
manner. The Company also believes that the proprietary designs of many of its
products provide it with important competitive advantages.
In conjunction with its rental services, the Company also sells certain of
its downhole tools, primarily to state-owned oil companies. The Company derives
revenues from the sale of mechanical drilling jars that no longer have patent
protection and also from other tools when they are lost-in-hole by the operator.
Downhole tool rentals and sales accounted for approximately $39.2 million and
$10.4 million, or 42% and 38%, of the Company's pro forma revenue for the fiscal
year ended April 30, 1997 and the three months ended July 31, 1997,
respectively.
PIPELINE TESTING SERVICES
The Company is one of the largest fully-integrated pipeline testing
companies in Canada. The Company believes it is the only company operating in
Canada capable of providing pneumatic pipeline testing services and is the
leading provider of hydrostatic testing services to major Canadian pipeline
construction companies that lack the capability to perform such testing
in-house. The Company believes that the planned addition of new pipeline
capacity in Canada over the next few years, as well as increased environmental
concerns relating to existing pipelines, should result in increased demand for
the Company's pipeline testing services. Pipeline
2
<PAGE> 10
testing services accounted for $2.6 million and $272,000, or 3% and 1%, of the
Company's pro forma revenue for the fiscal year ended April 30, 1997 and the
three months ended July 31, 1997, respectively.
BUSINESS STRATEGY
The Company's strategy is to expand and diversify the range of products and
services it provides to the oil and gas industry through internal growth and
acquisitions. The Company expects to continue to effect internal growth
primarily by cross marketing its directional drilling services with its air
drilling services and rental tool operations.
In addition, as consolidation of the oil and gas services industry
continues in response to increased demand for companies offering a broad range
of services, the Company intends to continue expanding its products and services
through strategic acquisitions. The Company continuously evaluates potential
acquisition candidates in the oilfield services industry, including companies
providing directional drilling, underbalanced drilling, fishing and enhanced
recovery services, as well as companies supplying specialized downhole tools and
other equipment to the oil and gas industry. The Company is reviewing several
attractive acquisition opportunities that, if consummated, would allow it to
continue to expand the breadth and scope of the products and services it offers
as well as create additional cross-marketing opportunities for internal growth.
THE ADI ACQUISITION
Consistent with its strategy, on June 20, 1997, Dailey acquired ADI for
$46.4 million, including the repayment of approximately $16.8 million in
indebtedness (the "ADI Debt"). The Company believes that the ADI Acquisition
positions it in the growing market for underbalanced drilling of oil and gas and
geothermal wells. The Company repaid debt incurred to finance the ADI
Acquisition with a portion of the proceeds from the issuance of the Outstanding
Notes.
3
<PAGE> 11
THE EXCHANGE NOTE OFFERING
The Outstanding Notes...... The Outstanding Notes were sold by the Company on
August 19, 1997, to Jefferies & Company, Inc., (the
"Initial Purchaser") pursuant to a Purchase
Agreement dated August 14, 1997 (the "Purchase
Agreement"). The Initial Purchaser subsequently
resold the Outstanding Notes to qualified
institutional buyers and to a limited number of
institutional accredited investors pursuant to Rule
144A under the Securities Act.
Registration
Requirements............... Pursuant to the Purchase Agreement, the Company and
the Initial Purchaser entered into a Registration
Rights Agreement dated August 19, 1997 (the
"Registration Rights Agreement"), which grants the
holders of the Outstanding Notes certain exchange
and registration rights. The Exchange Offer is
intended to satisfy such exchange rights, which
terminate upon the consummation of the Exchange
Offer. If applicable law or applicable
interpretations of the staff of the Commission do
not permit the Company to effect the Exchange
Offer, or in certain other circumstances, the
Company has agreed to file a shelf registration
(the "Shelf Registration Statement") covering
resales of Transfer Restricted Securities (as
defined). See "The Exchange Offer -- Resale of
Exchange Notes".
THE EXCHANGE OFFER
Securities Offered......... $115,000,000 aggregate principal amount of 9 3/4%
Senior Notes due 2007, Series B.
The Exchange Offer......... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of
Outstanding Notes. As of the date hereof,
$115,000,000 aggregate principal amount of
Outstanding Notes are outstanding. The Company will
issue the Exchange Notes to holders on
, 1997 (the "Exchange Date").
Based on an interpretation of the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for
resale, resold and otherwise transferred by any
holder thereof (other than any such holder which is
an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holder's business and that
such holder does not intend to participate and has
no arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes.
Each Participating Broker-Dealer must acknowledge
that it will deliver a prospectus in connection
with any resale of Exchange Notes. A broker-dealer
that delivers such a prospectus to purchasers in
connection with such resales will be subject to
certain of the civil liability provisions under the
Securities Act and will be bound by the provisions
of the Registration Rights Agreement (including
certain indemnification rights and obligations).
This Prospectus, as it may be amended or
supplemented from time to time, may be used by a
broker-dealer in connection
4
<PAGE> 12
with resales of Exchange Notes received in exchange
for Outstanding Notes where such Outstanding Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities. The Company has agreed that, if
requested by a Participating Broker-Dealer, it will
use its best efforts to make this Prospectus
available to any Participating Broker-Dealer for
use in connection with any such resale for a period
of up to or such earlier date as such
Participating Broker-Dealer shall have notified the
Company in writing that such Participating
Broker-Dealer has resold all Exchange Notes
acquired in the Exchange Offer. See "Plan of
Distribution".
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes can not rely on the position of the staff of
the Commission enunciated in Exxon Capital Holdings
Corporation (available April 13, 1989) or similar
no-action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with the resale
transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities Act
for which the holder is not indemnified by the
Company.
Expiration Date............ 5:00 p.m., New York City time, on ,
1997.
Interest on the Notes...... The Exchange Notes will bear interest from the date
of issuance of the Exchange Notes. Interest on the
Outstanding Notes that are tendered in exchange for
the Exchange Notes that has accrued from August 19,
1997, the date of issuance of the Outstanding
Notes, through the Exchange Date will be payable on
or before February 15, 1998.
Procedures for Tendering
Outstanding Notes........ Each holder of Outstanding Notes wishing to accept
the Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Outstanding Notes and
any other required documentation to the Exchange
Agreement at the address set forth herein. By
executing the Letter of Transmittal, each holder
will represent to the Company that, among other
things, the holder or the person receiving such
Exchange Notes, whether or not such person is the
holder, is acquiring the Exchange Notes in the
ordinary course of business and that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes. In lieu of physical delivery of the
certificates representing Outstanding Notes,
tendering holders may transfer notes pursuant to
the procedure for book-entry transfer as set forth
under "The Exchange Offer -- Procedures for
Tendering".
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Outstanding Notes are
registered in the name of a broker-dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the
5
<PAGE> 13
Letter of Transmittal and delivering its
Outstanding Notes, either make appropriate
arrangements to register ownership of the
Outstanding Notes in such owner's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time.
Guaranteed Delivery
Procedures............... Holders of Outstanding Notes who wish to tender
their Outstanding Notes and whose Outstanding Notes
are not immediately available or who cannot deliver
their Outstanding Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Outstanding
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures".
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date
pursuant to the procedures described under "The
Exchange Offer -- Withdrawal of Tenders".
Acceptance of Outstanding
Notes and Delivery of
Exchange Notes........... Subject to certain conditions, the Company will
accept for exchange any and all Outstanding Notes
that are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant
to the Exchange Offer will be delivered on the
Exchange Date. See "The Exchange Offer -- Terms of
the Exchange Offer".
Federal Income Tax
Consequences............. The exchange pursuant to the Exchange Offer should
not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Consequences".
Private Exchange Notes..... The Registration Rights Agreement provides that if,
prior to consummation of the Exchange Offer, the
Initial Purchaser holds any Outstanding Notes
acquired by it and having, or which are reasonably
likely to be determined to have, the status of an
unsold allotment in the initial distribution, or
any other holder of Outstanding Notes is not
entitled to participate in the Exchange Offer for
certain reasons, the Company upon the request of
the Initial Purchaser or any such holder shall,
simultaneously with the delivery of the Exchange
Notes in the Exchange Offer, issue and deliver to
the Initial Purchaser and any such holder, in
exchange (the "Private Exchange") for such
Outstanding Notes held by such Initial Purchaser
and any such holder, a like principal amount of
debt securities of the Company that are identical
in all material respects to the Exchange Notes (the
"Private Exchange Notes") (and which were issued
pursuant to the same indenture as the Exchange
Notes). The Private Exchange Notes are not covered
by the registration statement of which this
Prospectus is a part and are not being offered
hereby. Any Private Exchange Notes will be entitled
to all the rights and subject to all the
limitations applicable thereto under the Indenture,
and will be subject to the same restrictions on
transfer applicable to untendered Outstanding
Notes. See "The Exchange Offer -- Consequences of
Failure to Exchange". However, pursuant to the
Registration Rights Agree-
6
<PAGE> 14
ment, holders of Private Exchange Notes have
certain rights to require the Company to file and
maintain a shelf registration statement that would
allow resales of such Private Exchange Notes owned
by such holders. See "The Exchange Offer -- Shelf
Registration Statement".
Effect on Holders of
Outstanding Notes........ As a result of the making of this Exchange Offer,
the Company will have fulfilled one of its
obligations under the Registration Rights
Agreement, and, with certain exceptions noted
below, holders of Outstanding Notes who do not
tender their Outstanding Notes will not have any
further registration rights under the Registration
Rights Agreement or otherwise. Such holders will
continue to hold the untendered Outstanding Notes
and will be entitled to all the rights and subject
to all the limitations applicable thereto under the
Indenture, except to the extent such rights or
limitations, by their terms, terminate or cease to
have further effectiveness as a result of the
Exchange Offer. All untendered Outstanding Notes
will continue to be subject to certain restrictions
on transfer. Accordingly, if any Outstanding Notes
are tendered and accepted in the Exchange Offer,
the trading market of the untendered Outstanding
Notes could be adversely affected. See "The
Exchange Offer -- Consequences of Failure to
Exchange".
Shelf Registration
Statement.................. If (i) the Company is not permitted to consummate
the Exchange Offer because the Exchange Offer is
not permitted by any applicable law or applicable
interpretation of the Commission or the staff of
the Commission or (ii) any holder of an Outstanding
Note notifies the Company on or prior to the
Exchange Date that (A) due to a change in law or
policy it is not entitled to participate in the
Exchange Offer, (B) due to a change in law or
policy it may not resell the Exchange Notes
acquired by it in the Exchange Offer to the public
without delivering a prospectus and this prospectus
is not appropriate or available for such resales by
such holder or (C) it is a broker-dealer that owns
Outstanding Notes (including the initial purchaser
that holds Outstanding Notes as part of an unsold
allotment from the original offering of the
Outstanding Notes) acquired directly from the
Company or an affiliate of the Company or (iii) any
holder of Private Exchange Notes so requests within
120 days after the consummation of the Private
Exchange, the Company has agreed to file and
maintain a shelf registration statement that would
allow resales of transfer restricted Outstanding
Notes, Exchange Notes or Private Exchange Notes
owned by such holders.
Exchange Agent............. U.S. Trust Company of Texas, N.A.
SUMMARY OF TERMS OF THE EXCHANGE NOTES
Securities Offered......... $115,000,000 principal amount of 9 3/4% Senior
Notes due 2007, Series B.
Maturity Date.............. August 15, 2007.
Interest Rate and Payment
Dates.................... The Exchange Notes will bear interest at a rate of
9 3/4% per annum. Interest on the Exchange Notes
will accrue from the date of issuance thereof and
will be payable semi-annually in cash in arrears on
each February 15 and August 15, commencing February
15, 1998.
7
<PAGE> 15
Optional Redemption........ The Exchange Notes will be redeemable at the option
of the Company, in whole or in part, from time to
time on or after August 15, 2002, at the redemption
prices set forth herein, plus accrued and unpaid
interest to the applicable redemption date. In
addition, prior to August 15, 2000, $40.25 million
in principal amount of the Exchange Notes are
redeemable at the option of the Company, in whole
or in part, from time to time, at 109 3/4% of the
principal amount thereof, with the Net Proceeds (as
defined) of any Public Equity Offering (as defined)
provided that at least $74.75 million in aggregate
principal amount of Notes remains outstanding
immediately after such redemption. See "Description
of the Exchange Notes -- Redemption and
Repurchase".
Change of Control.......... In the event of a Change of Control (as defined),
the Company will be required to make an offer to
repurchase the Exchange Notes at 101% of the
principal amount thereof, plus accrued and unpaid
interest to the date of repurchase. See
"Description of the Exchange Notes -- Change of
Control".
Certain Covenants.......... The Exchange Notes will be issued under the
Indenture, which contains covenants, including but
not limited to covenants with respect to the
following matters: (i) limitations on incurrence of
additional indebtedness; (ii) limitations on
restricted payments; (iii) limitations on
disposition of assets; (iv) limitation on dividends
and other payment restrictions affecting
subsidiaries; (v) limitations on transactions with
affiliates; (vi) limitations on liens; and (vii)
restrictions on mergers, consolidations and
transfers of assets. See "Description of the
Exchange Notes -- Certain Covenants".
Ranking.................... The Exchange Notes will be senior unsecured
obligations of the Company, ranking pari passu in
right of payment with all other Senior Indebtedness
of the Company and senior to all subordinated
Indebtedness of the Company. The Exchange Notes and
the Subsidiary Guarantees will be effectively
subordinated to secured Indebtedness of the Company
and the Subsidiary Guarantors, respectively,
including any Indebtedness under the Company's
Third Amended and Restated Credit Facility dated
June 20, 1997 with Wells Fargo Bank, National
Association, as Agent (the "Credit Facility"),
which is secured by liens on substantially all of
the assets of the Company and its Subsidiaries. At
July 31, 1997, pro forma for the offering of the
Outstanding Notes and the application of the net
proceeds therefrom, the Exchange Notes and the
Subsidiary Guarantees would have been effectively
subordinated to $0.8 million of secured
Indebtedness (excluding letters of credit) of the
Company and the Subsidiary Guarantors. The
Indenture permits the Company and its Subsidiaries
to incur additional Indebtedness in the future,
subject to certain limitations. See "Description of
the Exchange Notes -- Ranking" and "-- Certain
Covenants -- Limitation on Incurrence of Additional
Indebtedness".
Subsidiary Guarantees...... The Exchange Notes will be unconditionally
guaranteed on a senior unsecured basis by all of
the Company's Subsidiaries other than any Exempt
Foreign Subsidiary, as designated by the Company,
and such Subsidiary Guarantees will rank pari passu
in right of payment with all Senior Indebtedness of
the Subsidiary Guarantors and senior to all
subordinated Indebtedness of the Subsidiary
Guarantors. The Subsidiary
8
<PAGE> 16
Guarantees may be released under certain
circumstances. See "Description of the Exchange
Notes -- Subsidiary Guarantees".
RISK FACTORS
An investment in the Notes involves certain risks that a potential investor
should carefully evaluate prior to making an investment in the Notes. See "Risk
Factors".
9
<PAGE> 17
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents for the periods indicated certain historical
consolidated financial data and certain pro forma combined financial data for
the Company. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the results of operations and
financial position that would have been achieved had the transactions reflected
therein been consummated on the dates indicated. This information should be read
in conjunction with "Unaudited Pro Forma Combined Financial Statements",
"Selected Consolidated Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of Dailey and ADI and the notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
FISCAL YEAR ENDED APRIL 30, 1997 PRO ------------------------------------------
--------------------------- FORMA(1) 1996 1997 PRO FORMA
1995 1996 1997 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)(1)
------- ------- ------- ----------- ----------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Rental income............... $36,691 $42,987 $49,497 $49,497 $12,121 $15,602 $15,602
Sales of products and
services.................. 12,172 15,952 16,954 19,553 4,637 4,523 4,750
Underbalanced drilling
revenues.................. -- -- -- 23,542 -- 2,894 6,882
------- ------- ------- ------- ------- ------- -------
Total revenues....... 48,863.. 58,939 66,451 92,592 16,758 23,019 27,234
Cost of rentals and services:
Cost of rentals............. 29,685 33,019 37,655 37,655 9,346 10,646 10,646
Cost of products and
services.................. 6,889 7,927 8,890 10,160 2,536 3,007 3,175
Cost of underbalanced
drilling revenues......... -- -- -- 15,023 -- 1,841 3,946
------- ------- ------- ------- ------- ------- -------
Total cost of rentals
and services....... 36,574 40,946 46,545 62,838 11,882 15,494 17,767
Selling, general and
administrative expenses..... 9,607 12,083 11,893 18,492 2,900 4,218 5,686
Reorganization costs(2)....... -- -- -- -- -- 2,453 2,453
Non-cash compensation
expense(3).................. -- -- 2,807 2,807 -- 478 478
Research and development
expenses.................... 775 728 850 850 175 120 120
------- ------- ------- ------- ------- ------- -------
Operating income.............. 1,907 5,182 4,356 7,605 1,801 256 730
Interest expense, net......... 1,001 863 193 11,232 301 301 2,849
Other expense, net............ 190 39 169 372 (39) 128 151
Foreign exchange (gain)
loss........................ (90) 239 19 34 (7) 16 16
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes....................... 806 4,041 3,975 (4,033) 1,546 (189) (2,286)
Income tax expense
(benefit)................... 838 1,427 1,511 (970) 584 (83) (1,177)
------- ------- ------- ------- ------- ------- -------
Net income (loss)............. $ (32) $ 2,614 $ 2,464 $(3,063) $ 962 $ (106) $(1,109)
======= ======= ======= ======= ======= ======= =======
OTHER FINANCIAL DATA:
Capital expenditures:
Maintenance(4).............. $ 2,631 $ 3,049 $ 2,848 $ 4,256 $ 971 $ 1,146 $ 1,146
Discretionary(5)............ 8,165 5,103 12,110 13,910 1,840 3,608 3,608
Depreciation and
amortization................ 5,428.. 5,726.. 6,593 10,164 1,479 2,301 2,492
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1997
------------------------
PRO FORMA(1)
ACTUAL (UNAUDITED)
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................ $ 1,754 $ 65,901
Working capital............................................. 15,334 79,481
Total assets................................................ 129,960 198,557
Long-term debt, less current portion........................ 45,656 114,253
Stockholders' equity........................................ 62,881 62,881
</TABLE>
10
<PAGE> 18
(1) Adjusted in the case of statement of operations data to reflect the
consummation of the ADI Acquisition, the issuance of the Outstanding Notes
and the application of the net proceeds therefrom as if each had occurred on
May 1, 1996, and in the case of balance sheet data, to reflect the issuance
of the Outstanding Notes and the application of the net proceeds therefrom
as if it had occurred on July 31, 1997.
(2) Reorganization costs relate primarily to staff reductions, severance
settlements and various costs associated with a cost reduction program
implemented in June 1997 to flatten the Company's management structure and
streamline its operations.
(3) Non-cash compensation expense relates to accelerated vesting of restricted
stock that was granted to certain executive officers of the Company during
the year ended April 30, 1997 and the three months ended July 31, 1997.
(4) Maintenance capital expenditures are primarily comprised of expenditures for
the replacement of downhole tools lost-in-hole or scrapped.
(5) Discretionary capital expenditures are primarily comprised of expenditures
for additions to the downhole tool fleet and property and equipment.
11
<PAGE> 19
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
factors as well as the other information provided elsewhere in this Prospectus
before deciding to invest in the Notes. See "Disclosure Regarding
Forward-Looking Statements".
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer to such Outstanding Notes as set forth in the
legend thereon as a consequence of the issuance of the Outstanding Notes
pursuant to exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Outstanding Notes that are not tendered, or are tendered but not
accepted, may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Outstanding Notes under the
Securities Act. In addition, upon the consummation of the Exchange Offer holders
of Outstanding Notes which remain outstanding will not be entitled to any rights
to have such Outstanding Notes registered under the Securities Act or to any
similar rights under the Registration Rights Agreement. To the extent that
Outstanding Notes are tendered and accepted in the Exchange Offer, a holder's
ability to sell untendered, or tendered but unaccepted, Outstanding Notes could
be adversely affected. The Registration Rights Agreement provides that if (i)
the Exchange Offer has not been consummated within 30 days of the effectiveness
of the Registration Statement, (ii) a shelf registration statement has not been
declared effective by February 15, 1998, or (iii) this Registration Statement is
filed and declared effective but shall thereafter cease to be effective and is
not immediately followed by an additional Registration Statement that is filed
and declared effective, the interest rate on the Outstanding Notes will increase
by an amount of 0.5% for each 90-day period following such Registration Default,
up to a maximum amount of 2.0% per annum, until such Registration Default is
cured.
INCURRENCE OF SUBSTANTIAL INDEBTEDNESS
At July 31, 1997, on a pro forma basis after giving effect to the issuance
of the Outstanding Notes and the application of the net proceeds therefrom as
set forth herein under "Use of Proceeds," the Company would have had
approximately $114.9 million in total indebtedness, compared with total actual
indebtedness of $46.3 million at such date. The Company historically has
operated at substantially lower levels of debt than will be outstanding after
giving effect to the offering of the Outstanding Notes. The Company's level of
indebtedness will have several important effects on its future operations,
including, without limitation, (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest and principal
on its indebtedness, (ii) the Company's leveraged position will substantially
increase its vulnerability to adverse changes in general economic and industry
conditions, as well as to competitive pressure, and (iii) the Company's ability
to obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate and other purposes may be limited. The Company's
ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon the Company's future performance, which will
be subject to general economic conditions, industry cycles and financial,
business and other factors affecting the operations of the Company, many of
which are beyond its control. There can be no assurance that the Company's
business will continue to generate cash flow at or above current levels. If the
Company is unable to generate sufficient cash flow from operations in the future
to service its debt, it may be required, among other things, to seek additional
financing in the debt or equity markets, to refinance or restructure all or a
portion of its indebtedness, including the Notes, or to sell selected assets or
reduce or delay planned capital expenditures or acquisitions. There can be no
assurance that any such measures would be sufficient to enable the Company to
service its debt or that any such financing, refinancing or sale of assets would
be available on economically favorable terms.
12
<PAGE> 20
EFFECTIVE SUBORDINATION
The Exchange Notes will be unsecured and effectively subordinated in right
of payment to all existing and future secured Indebtedness of the Company and
the Subsidiary Guarantors, which will include any future draws under the Credit
Facility. As of July 31, 1997, after giving pro forma effect to the issuance of
the Outstanding Notes and the application of the net proceeds therefrom, the
Company would have had no Senior Indebtedness outstanding but had $15.0 million
available under the Credit Facility which, if borrowed, would be included as
Senior Indebtedness. The Credit Facility will be secured by liens on certain
assets of the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
Accordingly, lenders under the Credit Facility have claims with respect to the
assets constituting collateral for any indebtedness thereunder that will be
satisfied prior to the unsecured claims of the holders of the Notes. See
"Description of the Notes -- Ranking". In the event of a default on the Exchange
Notes or a bankruptcy, liquidation or reorganization of the Company, such assets
will be available to satisfy obligations with respect to the indebtedness
secured thereby before any payment therefrom could be made on the Notes. Thus,
the Exchange Notes and the Subsidiary Guarantees will be effectively
subordinated to claims of the lenders under the Credit Facility to the extent of
such pledged collateral. At July 31, 1997, pro forma for the issuance of the
Outstanding Notes and the application of the net proceeds therefrom, the
Exchange Notes and the Subsidiary Guarantees would have been effectively
subordinated to $772,000 of secured Indebtedness (excluding letters of credit)
of the Company or the Subsidiary Guarantors.
The Exchange Notes are also effectively subordinated to all existing and
future debt and other liabilities of the Company's subsidiaries that do not
guarantee the Exchange Notes. While the Company's subsidiaries do not presently
carry a significant amount of debt, the Indenture permits the existing
subsidiaries to incur additional debt under certain circumstances. In the event
of an insolvency, liquidation or other reorganization of any of the subsidiaries
of the Company, creditors of such subsidiaries, including trade creditors, would
be entitled to payment in full from the assets of such subsidiaries before the
Company, as a stockholder, would be entitled to receive any distribution
therefrom.
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Subsidiary Guarantors' issuance of the Guarantees. To the
extent that a court were to find that (x) a Guarantee was incurred by a
Subsidiary Guarantor with intent to hinder, delay or defraud any present or
future creditor or the Subsidiary Guarantor contemplated insolvency with a
design to prefer one or more creditors to the exclusion in whole or in part of
others or (y) a Subsidiary Guarantor did not receive fair consideration or
reasonably equivalent value for issuing its Guarantee and such Subsidiary
Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the
issuance of such Guarantee, (iii) was engaged or about to engage in a business
or transaction for which the remaining assets of such Subsidiary Guarantor
constituted unreasonably small capital to carry on its business or (iv) intended
to incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, the court could avoid or subordinate such Guarantee in
favor of the Subsidiary Guarantor's creditors. Among other things, a legal
challenge of a Guarantee on fraudulent conveyance grounds may focus on the
benefits, if any, realized by the Subsidiary Guarantor as a result of the
issuance by the Company of the Notes. The Indenture contains a savings clause,
which generally limits the obligations of each Subsidiary Guarantor under its
Guarantee to the maximum amount as will, after giving effect to all of the
liabilities of such Subsidiary Guarantor, result in such obligations not
constituting a fraudulent conveyance. To the extent a Guarantee of any
Subsidiary Guarantor was avoided as a fraudulent conveyance or held
unenforceable for any other reason, holders of the Exchange Notes would cease to
have any claim against such Subsidiary Guarantor and would be creditors solely
of the Company and any Subsidiary Guarantor whose Guarantee was not avoided or
held unenforceable. In such event, the claims of the holders of the Exchange
Notes against the issuer of an invalid Guarantee would be subject to the prior
payment of all liabilities of such Subsidiary Guarantor. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Exchange Notes relating to
any avoided portions of any of the Guarantees.
13
<PAGE> 21
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Subsidiary Guarantor may be considered insolvent if the sum of its debts,
including contingent liabilities, was greater than the fair market value of all
of its assets at a fair valuation or if the present fair market value of its
assets was less than the amount that would be required to pay its probable
liability on its existing debts, including contingent liabilities, as they
become absolute and mature.
Based upon financial and other information, the Company and the Subsidiary
Guarantors believe that the Guarantees are being incurred for proper purposes
and in good faith and that the Company and each Subsidiary Guarantor is solvent
and will continue to be solvent after issuing its Guarantee, will have
sufficient capital for carrying on its business after such issuance and will be
able to pay its debts as they mature. There can be no assurance, however, that a
court passing on such standards would agree with the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the Exchange
Notes -- Subsidiary Guarantees of Notes".
RESTRICTIONS IMPOSED BY LENDERS
The Credit Facility and the Indenture contain a number of covenants that
restrict the ability of the Company to dispose of assets, merge or consolidate
with another entity, incur additional indebtedness, create liens, make capital
expenditures, pay dividends or make other investments or acquisitions and
covenants that otherwise restrict corporate activities. The Credit Facility also
contains requirements that the Company maintain certain financial ratios and may
restrict the Company from prepaying the Company's other indebtedness. The
ability of the Company to comply with such provisions may be affected by events
that are beyond the Company's control. The breach of any of these covenants
could result in a default under the Credit Facility and the Indenture and a
subsequent acceleration of such indebtedness. In addition, as a result of these
covenants, the ability of the Company to respond to changing business and
economic conditions and to secure additional financing, if needed, may be
restricted significantly, and the Company may be prevented from engaging in
transactions that might otherwise be considered beneficial to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of the Exchange Notes--Certain Covenants".
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Company to repurchase all or a portion of such holder's Notes at
101% of the principal amount of the Notes, together with accrued and unpaid
interest, if any, to the date of repurchase. The Indenture requires that prior
to such a repurchase, the Company must either prepay all outstanding Senior
Indebtedness or obtain any required consents to such repurchase. The occurrence
of a Change of Control may result in a default under the Company's existing line
of credit or any future credit facilities. If a Change of Control were to occur,
the Company may not have the financial resources to prepay all of the Senior
Indebtedness, the Notes and the other Indebtedness that would become payable
upon the occurrence of such Change of Control or may be prohibited from
repurchasing the Notes. See "Description of the Exchange Notes -- Change of
Control".
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Outstanding Notes have not been registered under the Securities Act and
are subject to significant restrictions on resale. The Exchange Notes will
constitute a new issue of securities with no established trading market. The
Company does not intend to apply for listing of the Outstanding Notes or the
Exchange Notes on any securities exchange or to seek the admission thereof to
trading in the National Association of Securities Dealers Automated Quotation
System. The Initial Purchaser has informed the Company, that, following the
completion of the Exchange Offer, it currently intends to make a market in the
Notes. However, it is not obligated to do so, and any such market making may be
discontinued at any time without notice. In addition, any such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer or the pendency of the
Shelf Registration Statement. See "Description of the Exchange Notes" and
"Exchange Offer; Registration Statement". Accordingly, no
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assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of or the trading market for the
Exchange Notes.
DEPENDENCE ON OIL AND GAS INDUSTRY
Demand for the Company's directional drilling services, underbalanced
drilling services and downhole tools 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 products and
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 products and services. A material decline in oil or
natural gas prices or activities could materially adversely affect the demand
for the Company's products and services and, therefore, the Company's results of
operations and financial condition.
COMPETITION
The markets for the Company's products and services 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 services and 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
companies to employ the most reputable, qualified and experienced 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".
ASSIMILATION OF ACQUIRED BUSINESSES
The ADI Acquisition has required the Company to integrate and manage
businesses that are related to, but substantially different from, Dailey's
traditional directional drilling and rental tool business. No assurance can be
given that the Company will be successful in managing and incorporating such
businesses into its existing operations or that such activities will not require
a disproportionate amount of management's attention. The Company's failure to
successfully incorporate the acquired businesses into its existing operations,
or the occurrence of unexpected costs or liabilities in the acquired businesses,
could have a material adverse effect on the Company.
ACQUISITION STRATEGY
The Company is actively seeking strategic acquisitions that will provide
additional and complementary products and services. 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 the
extent permitted by the Indenture and the Credit Facility, 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. There also can be no assurance
that the Company will successfully integrate the operations and
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<PAGE> 23
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 material adverse effect on the
Company's results of operations and financial condition. See "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 operating personnel, particularly
James F. Farr, President and Chief Executive Officer of the Company. Effective
November 27, 1996, the Company entered into a three-year employment agreement
with Mr. Farr. The loss of the services of Mr. Farr could have a material
adverse effect on the Company. The Company does not maintain key employee
insurance. See "Management".
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. Claims for loss of oil and gas production and damages
to formations can occur in drilling and workover operations. 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".
RISK OF INTERNATIONAL OPERATIONS
The Company's international operations (including Canada), which the
Company estimates to be 55% and 53% of the total combined pro forma revenues of
Dailey and ADI for the fiscal year ended April 30, 1997 and the three months
ended July 31, 1997, respectively, 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. 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. The Company currently does not hedge against foreign
currency fluctuations. Accordingly, its profitability has been and will continue
to be affected by fluctuations in foreign exchange rates. The Company believes
that revenues from transactions denominated in foreign currencies will increase
as a percentage of total revenues due to the ADI Acquisition and continued
expansion of the Company's international operations, primarily in Venezuela. In
addition, 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
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<PAGE> 24
"Business and Properties -- International Operations" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Inflation and Foreign Exchange".
TECHNOLOGICAL EVOLUTION AND PRODUCT OBSOLESCENCE
The markets for directional drilling and underbalanced 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 and underbalanced
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,
underbalanced drilling or rental tool industries, its results of operations and
financial condition could be materially adversely affected.
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 1997 and 2011. 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. See "Business and Properties -- Intellectual
Property".
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 experienced 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 -- Manufacturing
and Maintenance".
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 and Maintenance".
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<PAGE> 25
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 -- Drilling
Services -- Directional Drilling Services".
RELATIONSHIP WITH LAWRENCE
The Company currently has two classes of voting stock, Class A Common Stock
and Class B Common Stock (together, the "Common Stock"). 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. Lawrence Industries, Inc. ("Lawrence"), which is owned by the
Chairman of the Board of the Company and trusts for his family, beneficially
owns all of the Class B Common Stock, and controls approximately 89% of the
combined voting power of the outstanding Common Stock. Accordingly, Lawrence and
the Company's Chairman of the Board, J.D. Lawrence, will be in a position to
elect the Company's board of directors and otherwise control the business
policies of the Company. See "Certain Relationships and Related Transactions"
and "Securities Ownership of Management and Principal Stockholder".
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<PAGE> 26
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on August 19, 1997, to the
Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently placed the Outstanding Notes with qualified institutional buyers
and with a limited number of institutional accredited investors in reliance on
Rule 144A under the Securities Act. As a condition of the purchase of the
Outstanding Notes by the Initial Purchaser, the Company and the Subsidiary
Guarantors entered into the Registration Rights Agreement with the Initial
Purchaser, which requires, among other things, that the Company file with the
Commission a registration statement under the Securities Act with respect to an
offer by the Company to the holders of the Outstanding Notes to issue and
deliver to such holders, in exchange for Outstanding Notes, a like principal
amount of Exchange Notes. The Company is required to use its best efforts to
cause the Registration Statement relating to the Exchange Offer to be declared
effective by the Commission under the Securities Act and commence the Exchange
Offer and use best efforts to issue, on or prior to the Exchange Date, the
Exchange Notes. The Exchange Notes are to be issued without a restrictive legend
and may be reoffered and resold by the holder without restrictions or
limitations under the Securities Act (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act). A copy of the Registration Rights Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The term
"Holder" with respect to the Exchange Offer means any person in whose name the
Outstanding Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all
Outstanding Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. On the Exchange Date, the Company will
issue $1,000 principal amount of Exchange Notes in exchange for $1,000 principal
amount of Outstanding Notes accepted in the Exchange Offer. Holders may tender
some or all of their Outstanding Notes pursuant to the Exchange Offer. However,
Outstanding Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that (i) the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof and (ii) the holders of the Exchange Notes will not be entitled
to certain rights under the Registration Rights Agreement. The Exchange Notes
will evidence the same debt as the Outstanding Notes and will be entitled to the
benefits of the Indenture.
As of the date of this Prospectus, $115,000,000 aggregate principal amount
of the Outstanding Notes was outstanding. Of such amount, $113,750,000 aggregate
principal amount is registered in the name of Cede & Co., as nominee for the
Depository Trust Company, and $1,250,000 is registered in the name of the
beneficial owners thereof or their nominees. The Company has fixed the close of
business of , 1997, as the record date for the Exchange Offer for
purposes of determining the person to whom this Prospectus and the Letter of
Transmittal will be mailed initially.
Holders of Outstanding Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder, including Rule 14e-1
thereunder.
The Company shall be deemed to have accepted validly tendered Outstanding
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the Exchange Notes from the Company.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted
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<PAGE> 27
Outstanding Notes will be returned, without expense, to the tendering Holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "-- Fees and Expenses".
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from the date of issuance of the
Exchange Notes. Interest on the Outstanding Notes that are tendered in exchange
for the Exchange Notes that has accrued from August 19, 1997, the date of
issuance of the Outstanding Notes, through the Exchange Date will be payable on
or before February 15, 1998. Interest on the Exchange Notes will be payable
semi-annually on each February 15 and August 15, commencing February 15, 1998.
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes may tender such Outstanding Notes in the
Exchange Offer. To tender in the Exchange Offer, a Holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Outstanding Notes and any other required documents, to the Exchange Agent
prior to 5:00 p.m., New York City time, on the Expiration Date. To be tendered
effectively, the Outstanding Notes, Letter of Transmittal and other required
documents must be received by the Exchange Agent at the address set forth below
under "Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. Delivery of the Outstanding Notes may be made by book-entry transfer in
accordance with the procedures described below. Confirmation of such book-entry
transfer must be received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representation set forth below in the second paragraph under the
heading "Resale of Exchange Notes".
The tender by a Holder and the acceptance thereof by the Company will
constitute the agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Outstanding Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Outstanding Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national
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<PAGE> 28
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Outstanding Notes listed therein, such Outstanding
Notes must be endorsed or accompanied by a properly completed bond power, signed
by such registered Holder as such registered Holder's name appears on such
Outstanding Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Exchange Notes at the DTC (the "Book-Entry Transfer Facility") for the
purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of the Outstanding Notes
by causing such Book-Entry Transfer Facility to transfer such Outstanding Notes
into the Exchange Agent's account with respect to the Outstanding Notes in
accordance with the Book-Entry Transfer Facility's procedures for such transfer.
Although delivery of the Outstanding Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility,
an appropriate Letter of Transmittal properly completed and duly executed with
any required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures; provided, however, that a
participant in DTC's book-entry system may, in accordance with DTC's Automated
Tender Offer Program procedures and in lieu of physical delivery to the Exchange
Agent of a Letter of Transmittal, electronically acknowledge its receipt of, and
agreement to be bound by, the terms of the Letter of Transmittal. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Outstanding Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Outstanding Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Outstanding Notes must be cured within such time as
the Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Outstanding Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Outstanding Notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Outstanding Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders,
unless other provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
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<PAGE> 29
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available, (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other required documents to
the Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Outstanding Notes and the principal amount of Outstanding Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five New York Stock Exchange trading days after the Expiration
Date, the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Outstanding Notes (or a confirmation of
book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility) and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Outstanding Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility) and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent
within five New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Outstanding Notes in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Outstanding Notes to be withdrawn (the
"Depositor"), (ii) identify the Outstanding Notes to be withdrawn (including the
certificate number(s) and principal amount of such Outstanding Notes, or, in the
case of Outstanding Notes transferred by book-entry transfer, the name and
number of the account at the Book-Entry Transfer Facility to be credited), (iii)
be signed by the Holder in the same manner as the original signature on the
Letter of Transmittal by which such Outstanding Notes were tendered (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Outstanding Notes register
the transfer of such Outstanding Notes into the name of the person withdrawing
the tender, (iv) specify the name in which any such Outstanding Notes are to be
registered, if different from that of the Depositor and (v) if applicable
because the Outstanding Notes have been tendered pursuant to book-entry
procedures, specify the name and number of the participant's account at DTC to
be credited, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Outstanding Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Outstanding Notes so withdrawn are
validly retendered. Any Outstanding Notes which have been tendered but which are
not accepted for exchange, will be returned to the Holder thereof without cost
to such Holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be
retendered by following
22
<PAGE> 30
one of the procedures described above under "-- Procedures for Tendering" at any
time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to issue Exchange Notes for, any
Outstanding Notes, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Outstanding Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
that might materially impair the ability of the Company to proceed with the
Exchange Offer or any material adverse development has occurred in any
existing action or proceeding with respect to the Company or any of its
subsidiaries; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred that might materially impair the ability of the Company to
proceed with the Exchange Offer; or
(c) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted that might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(d) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in good faith and in the exercise of its
reasonable discretion that any of the conditions are not satisfied, the Company
may (i) refuse to accept any Outstanding Notes and return all tendered
Outstanding Notes to the tendering Holders, (ii) extend the Exchange Offer and
retain all Outstanding Notes tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of Holders to withdraw such Outstanding
Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Outstanding Notes which have not been withdrawn. If such waiver constitutes a
material change to the Exchange Offer, the Company will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to the
registered Holders, and, depending upon the significance of the waiver and the
manner of disclosure to the registered Holders, the Company will extend the
Exchange Offer for a period of five to 10 business days if the Exchange Offer
would otherwise expire during such five to 10 day period.
EXCHANGE AGENT
U.S. Trust Company of Texas, N.A. has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<CAPTION>
<C> <C> <C>
By Registered or Certified Mail: By Overnight Mail or Hand: By Facsimile:
</TABLE>
23
<PAGE> 31
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation is being made by mail; however,
additional solicitation may be made by telegraph, telephone or in person by
officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and registration expenses,
including fees and expenses of the Trustee, filing fees, blue sky fees and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Outstanding Notes pursuant to the Exchange Offer. If, however,
certificates representing the Exchange Notes or the Outstanding Notes for the
principal amounts not tendered or accepted for exchange are to be delivered to,
or are to be issued in the name of, any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of the Outstanding Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered Holder or
any other person) will be payable by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, which is face value as adjusted for original issue discount,
as reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be amortized over the term of the Exchange
Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Outstanding Notes
may be offered for resale, resold and otherwise transferred by any holder of
such Exchange Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the Exchange Notes may not rely on the position of the staff
of the Commission enunciated in Exxon Capital Holdings Corporation (available
April 13, 1989) and Morgan Stanley & Co., Incorporated (June 5, 1991), or
similar no-action letters, but rather must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. In addition, any such resale transaction should be covered
by an effective registration statement containing the selling security holders
information required by Item 507 of Regulation S-K of the Securities Act. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Outstanding Notes, where such Outstanding Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution".
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a Holder,
(ii) neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) the Holder and such other person acknowledge that if
they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such
24
<PAGE> 32
Holder incurring liability under the Securities Act for which such Holder is not
indemnified by the Company. Further, by tendering in the Exchange Offer, each
Holder that may be deemed an "affiliate" (as defined under Rule 405 of the
Securities Act) of the Company will represent to the Company that such Holder
understands and acknowledges that the Exchange Notes may not be offered for
resale, resold or otherwise transferred by that Holder without registration
under the Securities Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
PRIVATE EXCHANGE NOTES
The Registration Rights Agreement provides that if, prior to consummation
of the Exchange Offer, the Initial Purchaser holds any Outstanding Notes
acquired by it and having, or which are reasonably likely to be determined to
have, the status of an unsold allotment in the initial distribution, or any
other holder of Outstanding Notes is not entitled to participate in the Exchange
Offer for certain reasons, the Company upon the request of such Initial
Purchaser or any such holder shall, simultaneously with the delivery of the
Exchange Notes in the Exchange Offer, issue and deliver to the Initial Purchaser
and any such holder, in exchange (the "Private Exchange") for such Outstanding
Notes held by the Initial Purchaser and any such holder, Private Exchange Notes.
Any Private Exchange Notes will be issued pursuant to the same indenture as the
Exchange Notes. The Private Exchange Notes are not covered by the registration
statement of which this Prospectus is a part and are not being offered hereby.
Any Private Exchange Notes will be entitled to all the rights and subject to all
the limitations applicable thereto under the Indenture, and will be subject to
the same restrictions on transfer applicable to untendered Outstanding Notes.
See "-- Consequences of Failure to Exchange". However, pursuant to the
Registration Rights Agreement, holders of Private Exchange Notes have certain
rights to require the Company to file and maintain a shelf registration
statement that would allow resales of such Private Exchange Notes owned by such
holders. See "-- Shelf Registration Statement".
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement, and,
except as described under "-- Shelf Registration Statement", Holders of
Outstanding Notes who do not tender their Outstanding Notes will not have any
further registration rights under the Registration Rights Agreement or
otherwise. Accordingly, any Holder of Outstanding Notes that does not exchange
that Holder's Outstanding Notes for Exchange Notes will continue to hold the
untendered Outstanding Notes and will be entitled to all the rights and
limitations applicable thereto under the Indenture, except to the extent such
rights or limitations that, by their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
The Outstanding Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Outstanding Notes may be resold only (i) to the Company (upon redemption thereof
or otherwise), (ii) pursuant to an effective registration statement under the
Securities Act, (iii) so long as the Outstanding Notes are eligible for resale
pursuant to Rule 144A, to a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act in a transaction meeting the requirements of
Rule 144A, (iv) outside the United States to a foreign person pursuant to the
exemption from the registration requirements of the Securities Act provided by
Regulation S thereunder, (v) to an institutional accredited investor that, prior
to such transfer, furnishes to U.S. Trust Company of Texas, N.A., as trustee, a
signed letter containing certain representations and agreements relating to the
restrictions on transfer of the Outstanding Notes evidenced thereby (the form of
which letter can be obtained from such trustee) or (vi) pursuant to another
available exemption from the registration requirements of the Securities Act, in
each case in accordance with any applicable securities laws of any state of the
United States.
Accordingly, to the extent that Outstanding Notes are tendered and accepted
in the Exchange Offer, the trading market for the untendered Outstanding Notes
could be adversely affected.
25
<PAGE> 33
SHELF REGISTRATION STATEMENT
If (i) the Company is not permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by any applicable law or applicable
interpretation of the Commission or the staff of the Commission or (ii) any
holder of an Outstanding Note notifies the Company on or prior to the Exchange
Date that (A) due to a change in law or policy it is not entitled to participate
in the Exchange Offer, (B) due to a change in law or policy it may not resell
the Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and this prospectus is not appropriate or available for
such resales by such holder or (C) it is a broker-dealer that owns Outstanding
Notes (including an initial purchaser that holds Outstanding Notes as part of an
unsold allotment from the original offering of the Outstanding Notes) acquired
directly from the Company or an affiliate of the Company or (iii) any holder of
Private Exchange Notes so requests within 120 days after the consummation of the
Private Exchange, the Company has agreed to file and maintain a registration
statement that would allow resales of transfer restricted Outstanding Notes,
Exchange Notes or Private Exchange Notes owned by such holders.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Outstanding Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
The Company may in the future seek to acquire untendered Outstanding Notes
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plans to acquire any Outstanding
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Outstanding Notes, except for the
filing, if required, of the Shelf Registration Statement.
26
<PAGE> 34
THE COMPANY
The Company is a leading provider of specialty drilling services to the oil
and gas industry and designs, manufactures and rents proprietary downhole tools
for oil and gas drilling and workover applications worldwide. Dailey began
operations in the fishing tool business in 1945 as Dailey Oil Tools and changed
its name to Dailey Petroleum Services Corp. in 1984. On October 7, 1997, the
Company changed its name to Dailey International Inc.
In August 1996, Dailey completed an initial public offering of its Class A
Common Stock (the "1996 IPO") and immediately embarked on a focused growth
strategy aimed at expanding the drilling services and fleet of rental tools it
offers by increasing its investment in additional downhole tools and identifying
and acquiring complementary businesses and assets. To date, this growth strategy
has resulted in the Company increasing its revenues to $92.6 million on a pro
forma basis for the year ended April 30, 1997, from $58.9 million on an
historical basis for the year ended April 30, 1996.
Pursuant to its strategy, the Company acquired ADI in June 1997. As a
result of the ADI Acquisition, the Company became a leading provider of air
drilling services worldwide. The Company believes the ADI Acquisition will
enable it to cross market its proprietary downhole tools and directional
drilling services to ADI's customers and positions the Company to benefit from
anticipated growth in demand for underbalanced drilling services.
The Company's executive offices are located in Conroe, Texas, approximately
50 miles north of Houston. The Company's address is 2507 North Frazier, P.O. Box
1863, Conroe, Texas 77305, and its telephone number is (281) 350-3399.
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the Exchange
Notes offered hereby. In consideration for issuing the Exchange Notes
contemplated in this Prospectus, the Company will receive Outstanding Notes in
like principal amount, the form and terms of which are the same as the form and
terms of the Exchange Notes (which they replace), except as otherwise described
herein. The Outstanding Notes surrendered in exchange for Exchange Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase or decrease in the indebtedness
of the Company.
The net proceeds to the Company from the issuance of the Outstanding Notes
were approximately $109.6 million after deducting the estimated fees and
expenses of the issuance of the Outstanding Notes.
The Company used approximately $45.5 million of the net proceeds from the
issuance of the Outstanding Notes to repay outstanding indebtedness under the
Credit Facility. Borrowings under the Credit Facility were utilized by the
Company to finance the ADI Acquisition and repay certain outstanding
indebtedness of Dailey and ADI. The Credit Agreement provides for a term loan
(the "Term Loan") and a revolving line of credit (the "Revolving Credit Line").
As of June 23, 1997, the outstanding principal balance under the Term Loan was
$41.5 million and the outstanding principal balance of advances made pursuant to
the Revolving Credit Line was $4.0 million. Principal payments on the Term Loan
of $350,000 are payable quarterly through July 1998, with increasing payments
thereafter until maturity on June 30, 2002, at which time the obligation of the
lenders to make revolving credit advances also terminates. Interest on the Term
Loan and Revolving Credit Line is variable and will fluctuate based on leverage
ratios at a variable margin over the applicable prime rate or at a LIBOR-based
rate. On June 23, 1997, the date of funding, the average interest rate on
revolving advances was 8.0%.
The Company intends to use approximately $18.0 million of the net proceeds
from the issuance of the Outstanding Notes for capital expenditures to increase
its fleet of downhole tools and for equipment utilized in its directional and
air drilling operations. The Company's inventory expansion will focus primarily
upon MWD units, drilling and fishing jars and mud motors as well as compressors
and mist pumps utilized in the
27
<PAGE> 35
Company's air drilling operations. Since downhole tools and the equipment
utilized in the Company's air drilling operations can be transported cost
effectively between its main geographic markets, the Company intends to utilize
its expanded inventory in all or some of its markets depending on demand for
such tools and equipment at any given time.
The remaining net proceeds from the issuance of the Outstanding Notes 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 other general purposes. Pending application of the
net proceeds from the issuance of the Outstanding Notes, the Company has
invested such net proceeds in short-term, interest-bearing, investment grade
securities.
28
<PAGE> 36
CAPITALIZATION
The following table sets forth as of July 31, 1997, the cash and cash
equivalents, current debt and capitalization of the Company and its Subsidiaries
on an actual consolidated and as adjusted basis to reflect the issuance of the
Outstanding Notes and the application of the net proceeds therefrom, as
described under "Use of Proceeds". This information should be read in
conjunction with "Unaudited Pro Forma Combined Financial Statements",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the consolidated financial statements of Dailey, including the
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 31, 1997
-----------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,754 $ 65,901
======== ========
Total current debt.......................................... $ 616 $ 616
======== ========
Long-term debt:
Bank loan................................................. 45,500 --
Other..................................................... 156 156
9 3/4% Senior Notes, net of original issue discount....... -- 114,097
-------- --------
Total long-term debt.............................. $ 45,656 $114,253
-------- --------
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; (4,315,000 issued and outstanding)......... 43 43
Class B common stock, $.01 par value, 10,000,000 shares
authorized; (5,000,000 shares issued and
outstanding)........................................... 50 50
Paid-in capital........................................... 40,449 40,449
Treasury stock............................................ (1,047) (1,047)
Retained earnings......................................... 23,386 23,386
-------- --------
Total stockholders' equity........................ 62,881 62,881
-------- --------
Total capitalization.............................. $108,537 $177,134
======== ========
</TABLE>
- ---------------
(1) Adjusted to reflect the issuance of the Outstanding Notes and the
application of the net proceeds therefrom, as if it had occurred on July 31,
1997.
29
<PAGE> 37
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The ADI Acquisition was consummated on June 20, 1997. Accordingly, the
Unaudited Pro Forma Combined Statement of Operations for the three months ended
July 31, 1997 combines the unaudited operating results for Dailey for the three
months ended July 31, 1997, and the unaudited operating results for ADI for the
period beginning on May 1, 1997 and ending on June 20, 1997. The Unaudited Pro
Forma Combined Statement of Operations for the three months ended July 31, 1997
also reflects the issuance of the Outstanding Notes and the application of
proceeds therefrom as if it had occurred on May 1, 1996. The Unaudited Pro Forma
Combined Statement of Operations for the year ended April 30, 1997 combines the
audited operating results for Dailey for fiscal 1997 and the unaudited operating
results of ADI for the twelve months ended April 30, 1997. The Unaudited Pro
Forma Combined Statement of Operations for the year ended April 30, 1997
reflects (i) the ADI Acquisition and (ii) the issuance of the Outstanding Notes
and the application of the net proceeds therefrom as if such transactions had
occurred on May 1, 1996.
The Unaudited Pro Forma Combined Statements of Operations should be read in
conjunction with the notes thereto and the historical financial statements of
Dailey and ADI, including the notes thereto, included elsewhere herein.
The pro forma adjustments to give effect to the various events described
above are based upon currently available information and upon certain
assumptions that management believes are reasonable. The ADI Acquisition was
accounted for by the Company under the purchase method of accounting, and the
assets and liabilities of ADI have been recorded at their estimated fair market
values at the date of the acquisition. The adjustments included in the Unaudited
Pro Forma Combined Statements of Operations reflect the Company's preliminary
determination of these adjustments based upon available information. There can
be no assurance that the actual adjustments will not vary significantly from the
estimated adjustments reflected in the Unaudited Pro Forma Combined Statements
of Operations.
The Unaudited Pro Forma Combined Statements of Operations do not purport to
be indicative of the results of operations that would actually have occurred if
the transactions described had occurred as presented in such statements or that
may be obtained in the future. In addition, future results may vary
significantly from the results reflected in such statements due to general
economic conditions, oil and gas commodity prices, the demand and prices for
contract drilling services and rental tools, the Company's ability to
successfully integrate the operations of ADI with its current business and
several other factors, many of which are beyond the Company's control. See
"Disclosure Regarding Forward-Looking Statements" and "Risk Factors".
30
<PAGE> 38
DAILEY INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD
THREE BEGINNING
MONTHS MAY 1, 1997
ENDED AND ENDING ADJUSTMENTS
JULY 31, 1997 JUNE 20, 1997 ADI FOR
------------- ------------- ACQUISITION PRO FORMA OUTSTANDING
DAILEY ADI(A) ADJUSTMENTS ACQUISITION NOTES PRO FORMA
------------- ------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income................. $15,602 $ -- $15,602 $15,602
Sales of products and
services.................... 4,523 227 4,750 4,750
Underbalanced drilling
revenues.................... 2,894 3,988 6,882 6,882
------- ------ ------- ------- -------
Total revenues......... 23,019 4,215 27,234 27,234
COSTS AND EXPENSES:
Cost of rentals............... 10,646 -- 10,646 10,646
Cost of products and
services.................... 3,007 168 3,175 3,175
Cost of underbalanced drilling
revenues.................... 1,841 2,105 3,946 3,946
Selling, general and
administrative.............. 4,218 1,277 $ 191(B) 5,686 5,686
Reorganization costs.......... 2,453 -- 2,453 2,453
Non-cash compensation......... 478 -- 478 478
Research and development...... 120 -- 120 120
------- ------ ----- ------- ------- -------
22,763 3,550 191 26,504 26,504
------- ------ ----- ------- ------- -------
Operating income................ 256 665 (191) 730 730
Interest income................. (122) -- (122) (122)
Interest expense................ 423 15 438 $ 2,422(F) 2,971
111(F)
Other (income) expense (net).... 128 23 151 151
Foreign exchange (gain) loss.... 16 -- 16 16
------- ------ ----- ------- ------- -------
Income (loss) before income
taxes......................... (189) 627 (191) 247 (2,533) (2,286)
Provision for income taxes
(benefit)..................... (83) 41 (20)(E) (62) (1,115)(F) (1,177)
------- ------ ----- ------- ------- -------
Net income (loss)............... $ (106) $ 586 $(171) $ 309 $(1,418) $(1,109)
======= ====== ===== ======= ======= =======
Earnings (loss) per share....... $ (.01) $ (.12)
======= =======
</TABLE>
31
<PAGE> 39
DAILEY INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED APRIL 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED ADJUSTMENTS
APRIL 30, 1997 ADI FOR
----------------- ACQUISITION PRO FORMA OUTSTANDING
DAILEY ADI(A) ADJUSTMENTS ACQUISITION NOTES PRO FORMA
------- ------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income....................... $49,497 $49,497 $49,497
Sales of products and services...... 16,954 $ 2,599 19,553 19,553
Underbalanced drilling revenues..... -- 23,542 23,542 23,542
------- ------- ------- ------- ------- -------
Total revenues............... 66,451 26,141 92,592 92,592
COSTS AND EXPENSES:
Cost of rentals..................... 37,655 -- 37,655 37,655
Cost of products and services....... 8,890 1,270 10,160 10,160
Cost of underbalanced drilling
revenues.......................... -- 15,023 15,023 15,023
Selling, general and
administrative.................... 11,893 5,249 $ 1,350(B) 18,492 18,492
Non-cash compensation............... 2,807 -- 2,807 2,807
Research and development............ 850 -- 850 850
------- ------- ------- ------- ------- -------
62,095 21,542 1,350 84,987 84,987
------- ------- ------- ------- ------- -------
Operating income...................... 4,356 4,599 (1,350) 7,605 7,605
Interest expense...................... 833 2,459 472(C) 3,764 $ 7,663(F) 11,872
445(F)
Interest income....................... (640) -- (640) (640)
Other (income) expense (net).......... 169 (236) 439(D) 372 372
Foreign exchange (gain) loss.......... 19 15 34 34
------- ------- ------- ------- ------- -------
Income (loss) before income taxes..... 3,975 2,361 (2,261) 4,075 (8,108) (4,033)
Provision for income taxes............ 1,511 1,041 (441)(E) 2,111 (3,081)(F) (970)
------- ------- ------- ------- ------- -------
Net income (loss) before extraordinary
item................................ $ 2,464 $ 1,320 $(1,820) $ 1,964 $(5,027) $(3,063)
======= ======= ======= ======= ======= =======
Earnings (loss) per share before
extraordinary item.................. $ 0.30 $ 0.24 $ (0.38)
======= ======= =======
</TABLE>
32
<PAGE> 40
DAILEY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(A) The unaudited statement of operations for the period beginning May 1, 1997
through June 20, 1997 were derived from the unaudited financial statements
of ADI for such period. The unaudited statement of operations of ADI for the
twelve months ended April 30, 1997 was derived from the audited statement of
operations of ADI for the year ended December 31, 1996 and the unaudited
statements of operations of ADI for the four month periods ending April 30,
1997 and 1996 included elsewhere in this Prospectus.
To record the consolidation effects of combining Dailey and ADI:
(B) To record additional depreciation and amortization expense associated with
the purchase price adjustment assuming a 20-year life for goodwill ($1.1
million per year, $275,000 per quarter) and an average life for fixed assets
of eight years ($250,000 per year, $63,000 per quarter).
(C) To record interest expense on (i) the net impact of the interim financing at
an assumed fixed rate of 8% (the rate at funding), and (ii) extinguishment
of debt of Dailey and ADI. The interim financing is variable and fluctuates
at a variable margin over the bank's prime rate or at a LIBOR-based rate. A
1/8% increase in the assumed interest rate would have increased annual pro
forma interest expense $57,000.
(D) To remove the gain on the sale of stock not assumed in the ADI Acquisition.
(E) To record consolidated income tax expense.
To record the effect of the issuance of Outstanding Notes:
(F) To record incremental interest expense on the issuance of Outstanding Notes
and related income tax benefit. The adjusted interest amount reflects $115
million of Outstanding Notes at a fixed interest rate of 9 3/4% and
amortization of original issue discount and debt issuance costs over the
10-year period of the Outstanding Notes. All other interest expense is
eliminated, except $214,000 and $34,000 on other borrowings for the fiscal
year ended April 30, 1997 and the three months ended July 31, 1997,
respectively, to reflect the partial use of proceeds from this issuance of
Outstanding Notes to extinguish the interim financing.
33
<PAGE> 41
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the fiscal
years in the five-year period ended April 30, 1997 have been derived from
audited consolidated financial statements of the Company. The Consolidated
Statement of Operations Data for the years ended April 30, 1995, 1996 and 1997
and the Consolidated Balance Sheet Data as of April 30, 1996 and 1997 are
derived from the Company's audited consolidated financial statements appearing
elsewhere in this Prospectus. The following selected consolidated financial data
for the three months ended July 31, 1996 and 1997 have been derived from the
unaudited financial statements of the Company appearing elsewhere in this
Prospectus. The selected consolidated financial data should be read in
conjunction with, and is qualified in its entirety by, the consolidated
financial statements of the Company and the related notes and other financial
data included elsewhere in this Prospectus and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
FISCAL YEAR ENDED APRIL 30, (UNAUDITED)
-------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Rental income...................... $ 28,746 $ 32,393 $ 36,691 $ 42,987 $ 49,497 $ 12,121 $ 15,602
Sales of products and services..... 8,742 11,422 12,172 15,952 16,954 4,637 4,523
Underbalanced drilling revenues.... -- -- -- -- -- -- 2,894
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues............... 37,488 43,815 48,863 58,939 66,451 16,758 23,019
Cost of rentals and services:
Cost of rentals.................... 25,078 27,384 29,685 33,019 37,655 9,346 10,646
Cost of products and services...... 4,003 5,124 6,889 7,927 8,890 2,536 3,007
Cost of underbalanced drilling
revenues......................... -- -- -- -- -- -- 1,841
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of rentals and
services................... 29,081 32,508 36,574 40,946 46,545 11,882 15,494
Selling, general and administrative
expenses........................... 6,783 7,085 9,607 12,083 11,893 2,900 4,218
Reorganization expense(1)............ -- -- -- -- -- -- 2,453
Non-cash compensation expense(2)..... -- -- -- -- 2,807 -- 478
Research and development expenses.... 1,262 736 775 728 850 175 120
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income..................... 362 3,486 1,907 5,182 4,356 1,801 256
Interest expense, net................ 285 513 1,001 863 193 301 301
Other (income) expense, net.......... (435) (225) 190 39 169 (39) 128
Foreign exchange (gain) loss......... 228 122 (90) 239 19 (7) 16
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes........... 284 3,076 806 4,041 3,975 1,546 (189)
Income tax expense................... 898 1,075 838 1,427 1,511 584 (83)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (614) $ 2,001 $ (32) $ 2,614 $ 2,464 $ 962 $ (106)
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share............ $ (.11) $ .37 $ (.01) $ .30 $ (.01)
========== ========== ========== ========== ==========
Pro forma earnings per share......... $ .40 $ .15
========== ==========
Average common and common equivalent
shares outstanding(3).............. 5,360,000 5,360,000 5,360,000 6,610,000 8,094,880 6,610,000 9,252,046
OTHER FINANCIAL DATA:
Capital expenditures
Maintenance(4)..................... $ 1,206 $ 1,848 $ 2,631 $ 3,049 $ 2,848 $ 971 $ 1,146
Discretionary(5)................... 4,042 6,872 8,165 5,103 12,110 1,840 3,608
Depreciation and amortization........ 4,114 4,323 5,428 5,726 6,593 1,479 2,301
Ratio of earnings to fixed
charges(6)......................... -- 3.6x 1.2x 3.2x 5.7x 4.1x --
PRO FORMA FINANCIAL DATA:
Ratio of earnings to fixed
charges(6)....................... N/A N/A N/A N/A -- N/A --
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................... $ 2,588 $ 10,542 $ 6,405 $ 7,477 $ 21,938 $ 15,334
Total assets......................... 45,523 53,621 54,408 55,878 82,359 129,960
Long-term debt, less current
portion............................ 2,814 9,743 8,604 6,866 5,155 45,656
Long-term debt payable to affiliate,
less current portion............... 2,061 2,420 1,760 1,100 -- --
Stockholders' equity................. 31,058 33,059 33,027 35,641 63,327 62,881
</TABLE>
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- ---------------
(1) Reorganization costs relate primarily to staff reductions, severance
settlements and various costs associated with a cost reduction program
implemented in June 1997 to flatten the Company's management structure and
streamline its operations.
(2) Non-cash compensation expense relates to accelerated vesting of restricted
stock that was granted to certain executive officers of the Company during
the year ended April 30, 1997 and the three months ended July 31, 1997.
(3) The average number of shares outstanding at April 30, 1993 through 1996 has
been adjusted to give pro forma effect to a reorganization and the issuance
of an aggregate of 360,000 restricted shares of Class A Common Stock
contemporaneously with the Company's initial public offering. See "Notes to
Consolidated Financial Statements".
(4) Maintenance capital expenditures are primarily comprised of expenditures for
the replacement of downhole tools lost-in-hole or scrapped.
(5) Discretionary capital expenditures are primarily comprised of expenditures
for additions to the downhole tool fleet and property and equipment.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
are computed as income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle, plus fixed charges.
Fixed charges consist of interest, whether expensed or capitalized, certain
non-cash charges and expenses and amortization of debt issuance costs.
Earnings were insufficient to cover fixed charges by $106,000 for fiscal
1993 and $341,000 for the three months ended July 31, 1997, respectively.
Pro forma earnings were insufficient to cover pro forma fixed charges by
$4.6 million and $2.4 million for the year ended April 30, 1997 and the
three months ended July 31, 1997, respectively.
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<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
ADI Acquisition. The Company's operations and future results will be
significantly impacted by the ADI Acquisition, which was consummated on June 20,
1997. Dailey acquired ADI for $46.4 million, including the repayment of the ADI
Debt. As a result of the ADI Acquisition, the Company became a leading worldwide
provider of air drilling services for underbalanced drilling applications.
The Company expects to experience significant revenue growth as a result of
the ADI Acquisition. On a pro forma basis for the year ended April 30, 1997 and
the three months ended July 31, 1997, the Company had revenues of $92.6 million
and $27.2 million, respectively, compared to historical revenues of $66.5
million and $23.0 million, respectively, for the same periods. The ADI
Acquisition also will significantly expand the Company's presence
internationally, primarily in Canada, where the Company previously did not
derive a significant amount of revenues. On a pro forma basis, the Company
generated 55% of its revenues during fiscal 1997 internationally (including
Canada), compared to 39% of historical revenues for fiscal 1997.
The ADI Acquisition was accounted for under the purchase method of
accounting. As a result, the assets and liabilities of ADI were recorded at
their estimated fair market values as of the date of the ADI Acquisition. The
Company recorded goodwill of approximately $22.3 million relating to the excess
of the fair market value of ADI's assets over the purchase price paid for ADI,
which will be amortized over 20 years and result in approximately $900,000 in
amortization expense during the year ended April 30, 1998, and approximately
$1.1 million per year thereafter. Since the goodwill associated with the ADI
Acquisition will not be amortized for tax purposes, the Company expects its
effective tax rate shown on its financial statements to increase significantly
as a result of the ADI Acquisition.
The ADI Acquisition has significantly increased the Company's debt levels.
The Company borrowed approximately $45.5 million under the Credit Facility to
finance the acquisition as well as to repay the ADI Debt, existing Dailey bank
debt and accrued interest thereon. The issuance of the Outstanding Notes further
increased the Company's debt levels. On a pro forma basis after giving effect to
the sale of the Outstanding Notes and the use of proceeds therefrom, the Company
would have had $114.9 million of total debt outstanding on July 31, 1997
compared to actual total debt of $46.3 million on such date. The substantial
increase in debt levels will result in a significantly higher level of interest
expense and increased percentage of cash flows being used for debt service and
may limit the Company's ability to obtain additional debt financing for future
acquisitions and capital expenditures.
June 1997 Management Reorganization. Following the ADI Acquisition in June
1997, the Company implemented a cost-reduction program to flatten its corporate
management structure and streamline the Company's operations (the "Management
Reorganization"). As a result of such program, the Company incurred a $2.5
million restructuring charge during the three months ended July 31, 1997,
associated primarily with staff reductions, severance settlements and various
reorganization costs. The Company expects the Management Reorganization to
result in annual savings of approximately $1.8 million, although there can be no
assurance in this regard.
1996 Initial Public Offering. The Company's operations during 1997 and the
three months ended July 31, 1997, reflect the effects of the 1996 IPO. Dailey's
net proceeds of $27.6 million from such offering were utilized to repay debt to
affiliates of Dailey, to acquire certain business assets and to increase
Dailey's inventory of downhole tools. Utilization of these additional tools
increased Dailey's revenues for the year ended April 30, 1997, primarily during
the third and fourth quarters, and are expected to impact future periods as such
tools are utilized in the Company's business.
Credit Facility. On June 20, 1997, the Company's Amended and Restated
Credit Agreement dated December 31, 1995, as amended on June 5, 1996 (the "Prior
Credit Agreement"), that provided for the Term Loan and the Revolving Credit
Line, was amended by the Credit Facility to increase the outstanding principal
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<PAGE> 44
balance of the Term Loan to $41.5 million and the maximum amount available for
borrowings under the Revolving Credit Line to $15.0 million.
RESULTS OF OPERATIONS
Dailey derives rental income from its fleet of downhole tools, and to a
lesser extent, from downhole tools owned by third parties. Dailey typically
charges its customers a daily rental rate for downhole tools, except for its
downhole drilling motors, which are rented at an hourly rate. In international
markets, Dailey also often charges its customers a refurbishment charge, which
is included in rental income.
Revenues from sales of products and services consist of directional
drilling services, lost-in-hole charges and sales of its mechanical drilling
jars. Revenues from services of Dailey's directional drillers and MWD
technicians are generally billed on a per person/per day basis for the time on
assignment at the customer's drill site. Although Dailey considers rentals of
its downhole drilling motors and MWD equipment to be a significant part of its
directional drilling services, revenues from such rentals are currently recorded
as rental income for financial statement purposes. Dailey's lost-in-hole
revenues consist of replacement charges that Dailey's customers pay each time a
Dailey downhole tool is lost-in-hole. Dailey sells mechanical drilling jars in a
limited number of international markets, primarily to state-owned oil and gas
companies.
The operating costs associated with Dailey's rentals consist primarily of
expenses associated with depreciation, transportation, maintenance and repair
and related direct overhead. The costs associated with Dailey'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 Dailey's directional drillers and MWD technicians.
With respect to allowances for bad debts, Dailey's policy is to
specifically identify at-risk receivables and reserve for any balances which, in
the opinion of management, are probable or reasonably possible of not being
collected. Dailey's bad debt allowance primarily consists of reserves for
receivables from customers that are in bankruptcy, receivables from sales to
agents (based on billings to their customers) that the agent has identified as
potentially uncollectible and receivables from extremely slow-paying domestic
customers. The allowance also contains a reserve for slower-paying, higher-risk
international customers, which have become an increasingly larger percentage of
Dailey's customer base in recent years. Similarly, Dailey identifies inventory
that, due to changes in demand for certain specialized downhole tools, is not
expected to generate revenue in the immediate future and establishes a reserve
for that inventory.
QUARTER ENDED JULY 31, 1997 COMPARED TO THE QUARTER ENDED JULY 31, 1996
Rental Income. Rental income for the three months ended July 31, 1997 was
$15.6 million, an increase of 29% from $12.1 million for the same three months
last year. This increase in revenue was due to the introduction of additional
directional drilling equipment acquired with proceeds from the 1996 IPO and
increased demand for these products and services primarily in the United States
Gulf Coast region and the Gulf of Mexico which resulted in a $1.7 million
increase in rentals. In addition, revenue from the rental of drilling jars and
related products increased $823,000 in the United States primarily due to a 23%
increase in the average domestic rig count during the period compared to the
same period last year and $935,000 internationally, primarily in Indonesia,
Australia and Venezuela, as the result of increased drilling activity.
Sales of Products and Services. Sales of products and services for the
three months ended July 31, 1997 were $4.5 million, a decrease of 2% from $4.6
million for the same three months last year. This decrease in revenue was
primarily the result of a decrease in tools lost-in-hole of $189,000 and a
decrease in sales of mechanical jars of $380,000. This decrease in revenue was
partially offset by increased revenue from directional services of $407,000
primarily in the United States Gulf Coast Region, the Gulf of Mexico and
Venezuela and a nominal increase from ADI revenue being included in operating
results since June 20, 1997.
Underbalanced Drilling Services Revenue. Underbalanced drilling services
revenue for the three months ended July 31, 1997 was $2.9 million resulting from
ADI revenue being included in operating results since June 20, 1997.
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<PAGE> 45
Cost of Rentals. Cost of rentals for the three months ended July 31, 1997
was $10.6 million, an increase of 14% from $9.3 million for the same three
months last year. This increase in cost was due primarily to increased variable
costs, primarily tool repair costs and third party tool charges, associated with
increased rental activity in regions where the Company had an existing operating
and administrative infrastructure. As a result, margins increased from 23% for
the three months ended July 31, 1996 to 32% for the three months ended July 31,
1997 due to the fixed nature of the Company's cost base.
Cost of Products and Services. Cost of products and services for the three
months ended July 31, 1997 was $3.0 million, which was a $471,000 increase from
the same three months last year including a nominal increase due to ADI. The
margin on sales of products and services for the three months ended July 31,
1997 was 34% compared to 45% for the same three months last year. This decrease
in the margin was primarily due to decreased higher margin export sales of
mechanical jars and tools lost-in-hole combined with increased revenues from
lower margin directional drilling services.
Cost of Underbalanced Drilling Services. Cost of underbalanced drilling
services for the three months ended July 31, 1997 was $1.8 million resulting
from the ADI Acquisition in June 1997.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended July 31, 1997 were $4.2 million, a 45%
increase from $2.9 million for the same three months last year. This increase
was primarily the result of increased compensation expense related to salary
increases and incentive compensation programs combined with the inclusion of ADI
expenses since June 20, 1997.
Reorganization Costs. Reorganization costs for the three months ended July
31, 1997 were $2.5 million. In June 1997, a cost-reduction program was
implemented to flatten the corporate management structure and streamline
operations. The reorganization costs primarily consist of the cost of staff
reductions, severance settlements and various restructuring costs. The Company
expects the reorganization to result in annual savings of approximately $1.8
million, although there can be no assurance in this regard.
Non-cash Compensation. Non-cash compensation for the three months ended
July 31, 1997 was $478,000 which related solely to the accelerated vesting of
restricted stock that had been granted to certain executive officers of the
Company in connection with the 1996 IPO. The Company currently does not have any
issued, unvested restricted stock that will result in compensation expense in
future periods; however, there can be no assurance that additional non-cash
compensation will not be granted to the Company's executive officers in the
future.
Interest Expense -- Non-affiliate. Interest expense for the three months
ended July 31, 1997 was $423,000 compared to $202,000 for the same three months
last year. This increase is the result of a significant increase in debt related
to the ADI Acquisition.
Income Tax Provision (Benefit). The provision for income taxes for the
three months ended July 31, 1997 was a benefit of $83,000, a decrease from
$584,000 of expense for the same three months last year. The decrease in tax
expense was due to a decrease in income before income taxes of $1.7 million
partially offset by a change in the effective tax rate from 38% to 44% due to
increased state income taxes and the non-deductibility of goodwill from the ADI
Acquisition.
YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996
Rental Income. Rental income for the year ended April 30, 1997, was $49.5
million, an increase of 15% from $43.0 million for the year ended April 30,
1996. This increase was due primarily to increased demand for directional
drilling services and related products in Latin America, the Gulf of Mexico and
the U.S. Gulf Coast region, which resulted in a $5.8 million increase in rentals
from MWD equipment, downhole motors and other directional drilling tools. In
addition, domestic rental income from drilling and fishing jars and slingers
increased $1.3 million which was partially offset by decreased foreign rental
income from drilling and fishing jars and slingers of $892,000.
Sales of Products and Services. Sales of products and services for the year
ended April 30, 1997, were $17.0 million, an increase of 6% from $16.0 million
for the year ended April 30, 1996. This increase was due
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<PAGE> 46
primarily to increased demand for directional drilling services and related
products in Latin America, the Gulf of Mexico and the U.S. Gulf Coast region,
which resulted in a $1.4 million increase in directional services revenue. In
addition, revenues from license fees related to a proprietary directional
drilling method increased by $300,000. This was partially offset by decreased
sales of tools and parts of $684,000.
Cost of Rentals. Cost of rentals for the year ended April 30, 1997, was
$37.7 million, an increase of 14% from $33.0 million for the year ended April
30, 1996. This increase was due primarily to the variable costs associated with
an increase in rental activity, such as tool repair costs and third-party tool
charges. As a percentage of rental income, cost of rentals decreased from 77% in
fiscal 1996 to 76% in fiscal 1997, which reflects the fixed nature of the cost
base.
Cost of Products and Services. Cost of products and services for the year
ended April 30, 1997, was $8.9 million, an increase of 12% from $7.9 million for
the year ended April 30, 1996. The increase was due primarily to higher
personnel costs associated with an increase in directional drilling services in
the Gulf of Mexico, the U.S. Gulf Coast region and Venezuela. The gross profit
margin on sales of products and services for fiscal 1997 was 48% compared to 50%
for fiscal 1996. This decrease in gross profit margin was due to a decrease in
higher margin export sales of mechanical jars.
Selling, General and Administrative Expenses. For the year ended April 30,
1997, selling, general and administrative expenses, including a $2.8 million
non-cash compensation expense, were $14.7 million, an increase of 22% from the
$12.1 million for the year ended April 30, 1996. The non-cash compensation
expense was the result of non-cash stock awards granted to certain officers
pursuant to the 1996 Key Employee Stock Plan. Exclusive of these non-cash
changes, selling, general and administrative expenses were $11.9 million, a 2%
decrease from fiscal 1996.
Research and Development Expenses. Research and development expenses for
the year ended April 30, 1997, were $850,000, compared to $728,000 for the year
ended April 30, 1996, which reflects a relatively constant level of research and
development activity.
Interest Income. Interest income for the year ended April 30, 1997, was
$640,000, an increase of $536,000 from the year ended April 30, 1996. This was
the result of interest earned on short-term investments utilizing net proceeds
from the 1996 IPO.
Interest Expense -- Nonaffiliates. Interest expense to nonaffiliates for
the year ended April 30, 1997 was $671,000, a decrease of 15% from $785,000 for
the year ended April 30, 1996. This decrease was primarily the result of
scheduled payments of principal and interest on bank debt.
Interest Expense -- Affiliate. Interest expense to affiliate for the year
ended April 30, 1997, was $162,000, a 11% decrease from $182,000 for the year
ended April 30, 1996. This decrease was primarily the result of the repayment of
a term loan to an affiliate with proceeds from the 1996 IPO, partially offset by
interest paid on a promissory note to an affiliate that was issued in connection
with a dividend on June 27, 1996 and repaid with proceeds from the 1996 IPO.
Foreign Exchange (Gain) Loss. Foreign exchange loss for the year ended
April 30, 1997 was $19,000 compared to a loss of $239,000 for the year ended
April 30, 1996. This decrease was due primarily to favorable fluctuations in the
British pound exchange rate relative to the U.S. dollar.
Income Tax Expense. Income tax expense for the year ended April 30, 1997,
was $1.5 million, an increase of 6% from $1.4 million for the year ended April
30, 1996. This increase was primarily the result of an increase in the effective
tax rate to 38% for fiscal 1997 from 35% for fiscal 1996 due to the full
utilization of the state net operating loss carryforwards in fiscal 1996.
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 increased demand for Dailey's
directional drilling services and related products in Venezuela, the Gulf of
Mexico and the U.S. Gulf Coast region, which resulted in a $4.2 million increase
in rentals from MWD equipment, downhole motors and
39
<PAGE> 47
other directional drilling tools. During fiscal 1996, Dailey purchased MWD
equipment for use in Venezuela. Dailey also experienced increased demand for its
directional drilling services in the Gulf of Mexico and the U.S. Gulf Coast
region due to escalating gas prices and a corresponding increase in drilling
activity. In addition, rental income from Dailey's drilling jars and slingers
increased $1.4 million due primarily to increased demand in Latin America and to
a slight increase in pricing worldwide. Also in fiscal 1996, Dailey increased
its distribution of fishing jars in the U.S. 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 increased demand for
Dailey's directional drilling services in the Gulf of Mexico, the U.S. 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. Dailey 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 Dailey'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 higher
personnel costs associated with an increase in directional drilling services in
the Gulf of Mexico, the U.S. 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 Dailey'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 Dailey'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 Dailey's
bank debt, which was partially offset by advances in the second half of fiscal
1996 of $1.3 million against the revolving line of credit associated with
Dailey'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 compared to $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.
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<PAGE> 48
Income Tax Expense. Provision for income taxes for the year ended April 30,
1996, was $1.4 million compared to $838,000 for the year ended April 30, 1995.
The increase was due primarily to an increase in income in countries in which
Dailey was subject to income or withholding taxes, which resulted in the
effective tax rate decreasing from 104% to 35% from fiscal 1995 to fiscal 1996.
In fiscal 1996, Dailey 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.
INFLATION AND FOREIGN EXCHANGE
Inflation has not had a significant impact on Dailey's comparative results
of operations. For the year ended April 30, 1997, transactions conducted in
United States dollars accounted for approximately 74% 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 and the ADI
Acquisition. The Company currently does not engage in hedging transactions to
protect itself against foreign currency fluctuations, but rather 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. Cash used by operating activities was $454,000 during the
three months ended July 31, 1997. Sources of cash included net proceeds from the
issuance of debt of $45.5 million, $815,000 from revenue-producing tools
lost-in-hole, abandoned and sold and $931,000 proceeds from the sale of property
and equipment. Principal uses of cash for the three months were to fund
acquisitions (net of cash acquired) of $46.2 million, repayment of bank debt of
$6.8 million, repurchase treasury stock of $813,000 and fund capital
expenditures of $6.4 million. During the past several years, working capital
requirements have been funded through cash generated from operations, credit
facilities and asset sales.
Senior Notes. On August 19, 1997, the Company issued the Outstanding Notes
to qualified institutional buyers and accredited investors in a private
placement. The Outstanding Notes were issued at a discount of 0.785%. The net
proceeds from the issuance of the Outstanding Notes of approximately $109.6
million were used to repay the $45.5 million outstanding under the Term Loan and
Revolving Credit Line. The remaining proceeds will be used to fund planned
capital expenditures related to downhole tools and directional and air drilling
operations, finance acquisitions and for general working capital purposes. The
Outstanding Notes bear interest at 9.75% payable semi-annually on February 15
and August 15 of each year commencing February 15, 1998 and mature August 15,
2007 but are redeemable at the option of the Company on or after August 15,
2002. The Outstanding Notes are unconditionally guaranteed on a senior unsecured
basis by each of the Company's domestic subsidiaries and contain affirmative and
negative covenants customary in such private placements, including limitations
on dividends, distributions and other restricted payments and limitations on
additional indebtedness unless certain pro forma coverage ratios are met.
Revolving Credit Line. The Company currently does not have any outstanding
borrowings under its Revolving Credit Line. Borrowings under the Revolving
Credit Line are limited to the lesser of $15.0 million or a loan formula based
upon the level of eligible accounts receivable. The Revolving Credit Line is
collateralized by substantially all of the Company's and its subsidiaries'
assets. It contains restrictive covenants and events of defaults customary in
loan transactions of that type.
Capital Expenditures. Capital expenditures of approximately $6.4 million
were made during the three months ended July 31, 1997. Of this amount, $4.1
million was for downhole tools, primarily MWD and other directional equipment,
hydraulic drilling jars, hydraulic fishing jars and related inventory. Capital
expenditures during the next nine months are expected to be approximately $17.7
million. The Company believes it has available resources through internally
generated cash flow, availability under the Revolving Credit Line and the
remaining proceeds from the 1996 IPO and the Outstanding Notes to fund
operations for at least the next 12 months. In addition, as part of its business
strategy, the Company is continuing to analyze potential
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<PAGE> 49
acquisitions of complementary businesses and assets. The Company expects to fund
any future acquisitions utilizing a portion of its availability under the
Revolving Credit Line as well as proceeds from the Note Offering; however,
depending upon the size of any future acquisition, the Company may need
additional financing to fund such acquisitions.
Future Acquisitions. As consolidation of the oilfield services industry
continues in response to increased demand for companies offering a broad range
of services, the Company intends to continue expanding its products and services
through strategic acquisitions. The Company continuously evaluates potential
acquisition candidates in the oilfield services industry, including companies
providing directional drilling, underbalanced drilling, fishing and enhanced
recovery services, as well as companies supplying specialized downhole tools and
equipment to the oil and gas industry. In connection with any future
acquisitions, the Company may be required to incur substantial indebtedness to
finance such acquisitions and may also issue equity securities or convertible
securities. The Company is reviewing several attractive acquisition
opportunities that, if consummated, would allow it to continue to expand the
breadth of scope of the products and services it offers as well as create
additional crossmarketing opportunities for internal growth.
Income Taxes. At July 31, 1997, the Company had foreign tax carryforwards
of approximately $1.9 million. These carryforwards are available to offset
future income of the Company, but will begin to expire in 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This
statement establishes new standards for computing and presenting earnings per
share requiring the presentation of "basic" and "diluted" earnings per share as
compared to "primary" and "fully diluted" earnings per share. The Company is
required to adopt SFAS No. 128 in the first quarter of calendar 1998. Earlier
adoption is not permitted and restatement of all prior period earnings per share
data is required. The Company believes that the "diluted" disclosure required
under SFAS No. 128 will not differ materially from historical "primary" earnings
per share amounts for the 1996 and 1997 periods presented.
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<PAGE> 50
BUSINESS AND PROPERTIES
GENERAL
The Company is a leading provider of specialty drilling services to the oil
and gas industry and designs, manufactures and rents proprietary downhole tools
for oil and gas drilling and workover applications worldwide. In June 1997,
Dailey acquired ADI, a leading worldwide provider of air drilling services for
underbalanced drilling applications. The Company believes the ADI Acquisition
will enable it to cross market its proprietary downhole tools and directional
drilling services to ADI's customers and positions the Company to benefit from
anticipated growth in demand for underbalanced drilling services. For the fiscal
year ended April 30, 1997 and the three months ended July 31, 1997, the Company
generated $92.6 million and $27.2 million, respectively, in pro forma revenue.
To reflect more accurately the nature and scope of the Company's current
operations and business strategy, the Company changed its name to Dailey
International Inc. effective October 7, 1997.
BUSINESS STRATEGY
The Company's strategy is to expand and diversify the range of products and
services it provides to the oil and gas industry through internal growth and
acquisitions. The Company expects to continue to effect internal growth
primarily by cross marketing its directional drilling services with its air
drilling services and rental tool operations.
In addition, as consolidation of the oil and gas services industry
continues in response to increased demand for companies offering a broad range
of services, the Company intends to continue expanding its products and services
through strategic acquisitions. The Company continuously evaluates potential
acquisition candidates in the oilfield services industry, including companies
providing directional drilling, underbalanced drilling, fishing and enhanced
recovery services, as well as companies supplying specialized downhole tools and
other equipment to the oil and gas industry. Although the Company currently has
no agreement or understanding with any specific entities, the Company is
reviewing several attractive acquisition opportunities that, if consummated,
would allow it to continue to expand the breadth and scope of the products and
services it offers as well as create additional cross-marketing opportunities
for internal growth.
THE ADI ACQUISITION
Consistent with its strategy, on June 20, 1997, Dailey acquired ADI for
$46.4 million, including the repayment of approximately $16.8 million in
indebtedness. The Company believes that the ADI Acquisition positions it in the
growing market for underbalanced drilling of oil and gas and geothermal wells.
The Company repaid debt incurred to finance the ADI Acquisition with a portion
of the proceeds from the issuance of the Outstanding Notes.
DRILLING SERVICES
Directional Drilling Services
Directional drilling services involve assisting oil and gas operators in
the controlled drilling of a wellbore to a prescribed bottomhole location.
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,
drilling horizontally through a formation characterized by multiple vertical
fractures can result in substantial reductions in drilling costs and improved
well productivity because fewer wells are required compared to a vertical
development program. Recent developments in multilateral technology, which
allows two or more wells to be drilled from the same vertical wellbore, have
further enhanced well productivity and development efficiency.
Based on published industry sources, the number of oil and gas wells
drilled in the United States using directional and horizontal technology
increased 80% from 2,110 in 1990 to 3,808 in 1996, and as a percentage
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<PAGE> 51
of total oil and gas wells drilled in the United States, wells drilled using
directional and horizontal technology increased from 7% in 1990 to 16% in 1996.
This growth has been driven primarily by the substantial cost savings,
improvements to drilling efficiency and enhancements to reservoir production
that such techniques can provide to operators. In addition, recent advances in
directional drilling techniques combined with advances in the identification and
location of oil and gas reserves (such as 3-D seismic technology) have made many
marginal or otherwise uneconomical reservoirs economically feasible to produce.
The Company expects directional and horizontal drilling to continue to represent
an increasing percentage of total wells drilled in the United States and
internationally.
Dailey began offering directional drilling services in 1984, primarily
along the Texas and Louisiana Gulf Coast, and has since expanded both its
directional drilling technical capabilities and the geographic areas in which
its services are regularly offered. In fiscal 1995, Dailey began providing its
drilling services in international markets by expanding into Venezuela.
The directional drilling services offered by the Company consist of well
planning, on-site supervisory services to maximize drilling efficiency, MWD
services and related equipment rentals, downhole motor rentals and post-well
analysis. 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 scope of
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 also believes that it is able to recruit and
retain highly-qualified directional drillers because it has a reputation in the
industry for stability and quality, offers competitive compensation and provides
a reliable, experienced support staff. As of September 30, 1997 the Company
employed 37 directional drillers, 4 of whom were located in Venezuela.
The guidance instruments used by directional drillers typically consist of
either wireline steering tools or more advanced MWD units. MWD units provide a
directional driller with extensive and advanced information to guide the
drillstring, including inclination, azimuth, tool face and temperature plus
magnetic tool face updates in steering or rotary drilling modes. MWD units also
can provide gamma ray logging information. Reliable MWD units currently are
available for third-party purchase worldwide from only a few independent
suppliers. The Company began purchasing MWD units from its current supplier and
offering such systems and services to its customers in fiscal 1994. The
Company's MWD units compete favorably with respect to reliability and
performance with MWD units developed in-house by more fully-integrated service
companies and other reliable MWD units currently available for third-party
purchase. 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. The Company manufactures and uses its own downhole
motor.
During fiscal 1995, 1996 and 1997, revenues from directional drilling
services and related products constituted 31%, 34% and 41% of Dailey's total
revenues, respectively. On a pro forma basis, such services accounted for 29%
and 35% of the Company's total revenues for fiscal 1997 and the three months
ended July 31, 1997, respectively.
Air Drilling Services
As a result of the ADI Acquisition, the Company is a worldwide leader in
providing air drilling services to the oil and gas and geothermal industries.
Air drilling, which is used in underbalanced drilling applications, involves
maintaining the pressure in a well at less than that of the surrounding
formation using air, nitrogen, mist, foam or light-weight drilling fluids as the
circulation medium instead of mud. The Company provides air drilling equipment
packages consisting of compressors, boosters, mist pumps and related equipment
along with specially trained personnel to operate the equipment. Underbalanced
drilling techniques can lead to substantial increases in rates of penetration
and drill bit life resulting in substantially less time and costs for a drilling
program, and also substantially reduce the risks of formation damage.
The use of underbalanced drilling techniques in Canada has experienced
rapid growth over the past few years and is increasing in other countries,
including the United States. According to a study sanctioned by the
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<PAGE> 52
U.S. Department of Energy, approximately 10% of all wells drilled in the United
States in 1995 were thought to be drilled underbalanced and this proportion was
expected to increase to approximately 30% in 2005. Horizontal and directional
wells frequently are drilled using underbalanced drilling technology to reduce
the risk of formation damage and improve the flow of hydrocarbons in low
pressure or depleted reservoirs. In addition, the Company believes that the
geothermal industry will be a major source of growth in demand for underbalanced
drilling services, especially in South America, Central America and the Pacific
Rim. The use of underbalanced drilling in geothermal wells often avoids the
problem of losing drilling fluids in porous geothermal formations or, in certain
cases, causing the formation to be plugged. As of September 30, 1997 the Company
was under contract for twelve geothermal jobs.
A typical package of equipment used in an air drilling job consists of two
compressors, a booster and a mist pump. Compressors are used to force air into
the borehole. Depending on the pressure and air volume requirements, additional
compressors may be needed. Boosters are used to increase the pressure of air
exiting a compressor and can increase the air pressure up to five-fold. Mist
pumps are used to mix and distribute water, soaps and other fluids in
underbalanced drilling applications. Air drilling services accounted for
approximately $23.5 million and $6.9 million, respectively, or 25% of the
Company's pro forma revenue for the fiscal year ended April 30, 1997 and the
three months ended July 31, 1997.
DOWNHOLE TOOLS
Dailey currently offers an array of technologically-advanced downhole
tools, which it selectively markets in every major oil and gas exploration and
production region in the world. Dailey began renting downhole tools in 1945 and
introduced the first drilling jar to the oil and gas industry in 1965. The
Company is currently the leading supplier of drilling jars to the rental tool
market worldwide. In addition to drilling jars, the Company rents other
proprietary downhole tools including hydraulic fishing jars, coiled tubing jars,
drilling shock absorbers, drilling thrusters and drilling slingers.
The Company's line of drilling jars and related products include mechanical
and hydraulic drilling jars and jar slingers. 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 believes that the
proprietary designs of its drilling jars deliver superior performance over
competing jars for longer periods of time in their intended operating
environments and are compatible with virtually any drilling condition a customer
may encounter.
The Company's line of downhole tools also includes a line of fishing tools,
including hydraulic fishing jars and coiled tubing jars. During the year ended
April 30, 1996, the Company introduced its double-acting, hydraulic coiled
tubing jar, which was designed and developed through the Company's research and
development program. The Company believes that this jar was the first
double-acting, hydraulic coiled tubing jar introduced for commercial operation
in the oil and gas industry.
In conjunction with its rental services, the Company also sells certain of
its downhole tools, primarily to state-owned oil companies. The Company derives
revenues from the sale of mechanical drilling jars that no longer have patent
protection and also from other tools when they are lost-in-hole by the operator.
For the
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<PAGE> 53
three fiscal years ended April 30, 1995, 1996 and 1997, revenues from the
Company's downhole tool rentals and sales constituted 63%, 57% and 59%,
respectively, of the Company's total revenues during such periods. On a pro
forma basis for fiscal 1997 and the three months ended July 31, 1997, such
products represented 42% and 38% of the Company's total revenues, respectively.
PIPELINE TESTING SERVICES
The Company is one of the largest fully-integrated pipeline testing
companies in Canada. The Company believes it is the only company operating in
Canada capable of providing pneumatic pipeline testing services, and is the
leading provider of hydrostatic testing services to major Canadian pipeline
construction companies that lack the capability to perform such testing
in-house. The Company believes that the planned addition of new pipeline
capacity in Canada over the next few years, as well as increased environmental
concerns relating to existing pipelines, should result in increased demand for
the Company's pipeline testing services. Pipeline testing services accounted for
$2.6 million and $272,000, respectively, or 3% and 1%, respectively, of the
Company's pro forma revenue for the fiscal year ended April 30, 1997 and the
three months ended July 31, 1997.
MARKETING AND DISTRIBUTION
Drilling Services
Marketing for the Company's directional drilling and air drilling services
is conducted entirely through the Company's direct sales force. The Company's
directional drillers and air drilling operators, at least one of whom is always
present during a directional or air drilling project, are usually billed to
customers at a per-day rate. The Company's MWD units and related products and
the Company's air drilling compressors, boosters mist pumps and related products
are usually billed to customers at a daily or hourly rental rate. The Company
occasionally will contract its services on a per-well basis. The Company
considers its directional drilling and air drilling services to be an integral
part of its distribution efforts for its downhole tools. The Company expects to
continue to effect internal growth primarily by cross marketing its directional
drilling services with its air drilling services and rental tool operations.
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. Domestic marketing of the
Company's downhole tools is conducted by the Company's direct sales force.
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.
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 or consigns its fishing tools to fishing service
companies or directly to well operators. 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.
Dailey traditionally has marketed its array of proprietary 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 results in higher profit margins.
Additionally, this direct interaction with the end-user assists the Company in
identifying demand for new and improved products and better enables it to design
and develop such products in a timely manner.
INTERNATIONAL OPERATIONS
Dailey's international operations (including Canada) accounted for
approximately 39%, 42% and 39% of total revenues for fiscal 1995, 1996 and 1997,
respectively. The Company estimates international operations
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<PAGE> 54
represented 55% and 53%, respectively, of the Company's total pro forma revenues
in fiscal 1997 and the three months ended July 31, 1997. As of September 30,
1997, the Company had operations in approximately 35 foreign countries. See Note
14 of notes to consolidated financial statements of Dailey contained elsewhere
in this Prospectus for additional information regarding foreign and domestic
revenues.
As of September 30, 1997, the Company utilized [17] international agents
responsible for international marketing of its downhole tools 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, the
Middle East, Southeast Asia and Latin America. Each region is further divided
into multiple and sometimes overlapping territories, generally based on
political boundaries. Regional supervisors are assigned by the Company to
oversee international operations, particularly with respect to proper
maintenance and redressing of tools and to provide sales support and technical
assistance to customers.
The Company'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 and,
as such, is subject to certain risks associated with exchange rate fluctuations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
MANUFACTURING AND MAINTENANCE
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
attempts to outsource those manufacturing processes that can be performed more
efficiently and cost effectively by outside third parties. 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 Dailey at its manufacturing plant in Conroe,
Texas. 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 Dailey's supply of such materials during fiscal 1997. Consistent
with the recent upturn in the demand for steel and other raw materials used in
the oil and gas industry, the Company has experienced 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.
Maintenance of Dailey's downhole tools is conducted in the United States at
six of Dailey'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.
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 are of primary importance. The Company relies
on a combination of patents, trade secrets, trademarks and servicemarks and
copyrights to protect its proprietary
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technologies and intellectual properties. The Company has five servicemarks that
are registered in the United States. Patents protect features of the Dailey
Hydraulic Jar, Dailey Fishing Jar, DNT Jar, R.A.M. Shock Absorber and Dailey
Drilling Motor as well as other of the Company's products. The United States
patents for the Company's products expire in years ranging from 1997 to 2011.
Although the Company does not consider its business to be wholly dependent on
any single patent or trademark, the unexpected loss of patent protection for the
Dailey Hydraulic Jar or Dailey Hydraulic Fishing Jar could have a material
adverse effect on the Company.
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. Claims for loss of oil and gas production and damage
to formations can occur in the workover process. Additionally, the Company often
is required to indemnify major customers pursuant to master service agreements.
If a serious accident were to occur where the Company's downhole tools are used
or its directional drilling services are being provided, the Company could be
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 to cover its buildings, equipment and other property as well as
worker's compensation, maritime employer, auto, crime and political risk
insurance. The Company also is insured under an umbrella liability policy. 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.
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. However, a successful liability
claim for which the Company is underinsured or uninsured could have a material
adverse effect on the Company.
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. 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 principal competitive factors affecting the Company's downhole tools
are reliability and performance, availability of appropriate tools, technical
support and price. The Company competes with manufacturers and owners of
downhole tools. The dominant competitors in downhole drilling tools are Houston
Engineers, a subsidiary of Wilson Industries, Inc., Weir-Houston, Baker Hughes,
Inc., Bowen Tools, a division of IRI International Corporation, 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 Tools 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
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the worldwide 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.
ADI's products and services are offered in highly competitive markets where
competitors are often better funded. The Company believes that the barriers to
entry into the air drilling services market are minimal and that the primary
competitive factors in this market are name recognition, expertise and pricing.
Management expects competition and customer price pressures to continue for
the foreseeable future with respect to its downhole tools and its directional
drilling and air drilling services.
EMPLOYEES
As of September 30, 1997, the Company had 523 employees, approximately 68%
of whom 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.
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. The costs
of compliance with environmental laws and regulations may 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 nonhazardous
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 a 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 1997 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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PROPERTIES
The following table summarizes the Company's significant owned and leased
properties as of September 30, 1997:
<TABLE>
<CAPTION>
LOCATION OF FACILITY PROPERTY INTEREST USES
-------------------- ----------------- ----
<S> <C> <C>
Conroe, Texas.................. Leased(1) Corporate Offices, Sales,
Manufacturing, Maintenance, R&D
Aberdeen, Scotland............. Leased Sales, Maintenance
Anchorage, Alaska.............. Owned Sales, Maintenance
Anaco, Venezuela............... Leased Sales, Maintenance
Bakersfield, California........ Leased Sales
Bogota, Colombia............... Leased Sales, Maintenance
Cabimas, Venezuela............. Leased Directional Drilling Office,
Sales, Maintenance
Corpus Christi, Texas.......... Owned Sales, Maintenance
Houma, Louisiana............... Owned Sales, Maintenance
Houston, Texas................. Owned Directional Drilling Office,
Sales, Maintenance
Lafayette, Louisiana........... Owned Directional Drilling Office,
Sales, Maintenance
Englewood, Colorado............ Leased ADI Corporate Offices
Casper, Wyoming................ Leased(2) Air Drilling Office
Casper, Wyoming................ Leased Directional Drilling Office
Nisku, Alberta, Canada......... Leased(2) Air Drilling Office
Ojeda, Venezuela............... Leased Air Drilling Office
Oklahoma City, Oklahoma........ Leased Directional Drilling Office, Sales,
Maintenance
</TABLE>
- ---------------
(1) Leased from Lawrence. See "Certain Relationships and Related Transactions".
(2) Leased from an affiliate of an officer of the Company. See "Certain
Relationships and Related Transactions."
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. Each of such matters is believed to be either covered by insurance or
not material in amount. The Company knows of no pending or threatened legal
proceedings, or judgments entered against, any director or officer of the
Company in his capacity as such.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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. Set
forth below is the name, age as of the date of this Offering Circular, and
position of each of the directors, executive officers and other significant
employees of the Company, and, with respect to each director, the year of
expiration of his current term of office.
<TABLE>
<CAPTION>
YEAR TERM
AS DIRECTOR
NAME AGE POSITION WILL EXPIRE
---- --- -------- -----------
<S> <C> <C> <C>
J. D. Lawrence.................. 52 Chairman of the Board of 1999
Directors
James F. Farr(2)................ 40 President, Chief Executive 1999
Officer and Director
William D. Sutton(1)(2)......... 43 Senior Vice President, General 2000
Counsel, Secretary and
Director
David T. Tighe(2)............... 45 Senior Vice 2000
President -- Finance, Chief
Financial Officer, Treasurer
and Director
Bernard J. Duroc-Danner(1)(3)... 44 Director 1998
Al Kite(1)(3)................... 65 Director 1998
John W. Sinders, Jr.(4) ........ 43 Advisory Director
Chaman Malhotra................. 60 President -- Air Drilling
International, Inc.
Tommy Ramsay.................... 41 President -- Canadian Air
Drilling Services, Ltd.
John E. Blacklaws............... 40 Vice President -- Production
Services
James C. Brame.................. 45 Vice President -- Business
Development/Air Drilling
International, Inc.
Dwight A. Goolsbay.............. 36 Vice President -- Eastern
Hemisphere Operations
Martin Lyons.................... 47 Vice President -- North American
Operations
Timothy Riggs................... Vice President -- Business
Development
Mike Torres..................... 45 Vice President -- Latin American
Operations
</TABLE>
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Executive Committee of the Board of Directors.
(3) Member of the Compensation Committee of the Board of Directors.
(4) Mr. Sinders became an advisory director of the Company in August 1997, to
serve until the 1998 Annual Meeting of Stockholders. Mr. Sinders is entitled
to notice of and to attend all meetings of the Board of Directors but is not
entitled to vote on any matters coming before the Board of Directors.
51
<PAGE> 59
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 have entered into
employment agreements with the Company pursuant to which they hold their current
positions. See "-- Employment Agreements".
J. D. Lawrence has been a director of the Company since 1973 and Chairman
of the Board of Directors since June 1989. He has been employed by the Company
since 1968, serving as its President from 1982 to 1989 and as a Vice President
from 1973 to 1982. Mr. Lawrence is Chairman of the Board of Directors, President
and the sole director of Lawrence.
James F. Farr has been President of the Company since December 1990, its
Chief Executive Officer since August 1991 and a director of the Company since
September 1991. As International Manager from October 1989 to December 1990, he
was responsible for all international activities, including the marketing,
distribution and sale of the Company's products and services, and developing and
maintaining the Company's relationships with its agents. From August 1988 to
October 1989, Mr. Farr served as Managing Director of Dailey International,
Inc., the Company's wholly-owned subsidiary, and as Regional Manager for Europe/
West Africa, with responsibility for the Company's facilities in the United
Kingdom as well as marketing operations in Europe/West Africa. From 1975 to
August 1988, he served the Company in various managerial, marketing and
operating capacities.
William D. Sutton has been Senior Vice President, General Counsel and
Secretary since 1984 and a director of the Company since September 1991. He has
served as the Company's Secretary and General Counsel since 1980. He also served
as a director of the Company from 1979 to 1990, and as a Vice President from
1982 to 1984. Prior to joining the Company in 1979, Mr. Sutton was an attorney
in private practice.
David T. Tighe has been Senior Vice President--Finance and Treasurer of the
Company since May 1988 and Chief Financial Officer of the Company since May
1996. 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 of Tandem Industries, Inc. from 1980 to 1982.
Bernard J. Duroc-Danner is Chief Executive Officer of EVI, Inc. In prior
years, Mr. Duroc-Danner was with Arthur D. Little Inc., a management consulting
firm in Cambridge, Massachusetts. He has held management positions with Mobil
Oil, Inc. (New York), Anheuser Busch Center for Management Science
(Philadelphia) and Lambert Freres & Co., (Paris). Mr. Duroc-Danner holds a Ph.D.
in economics from the University of Pennsylvania and an MBA in finance from The
Wharton School.
Al Kite was President of Halliburton Drilling Systems from 1993 to 1994 and
President of Eastman Christensen from 1986 to 1990. He has served as
International Manager in London and Executive Vice President of Operations for
Smith/Servco, President of Worldwide Operations at Eastman Christensen and
Senior Vice President Eastern Hemisphere for Smith International. Mr. Kite is
retired but maintains several industry interests.
John W. Sinders, Jr. has served as an Executive Vice President of Jefferies
& Company, Inc. ("Jefferies") since February 1997, and from 1993 to 1997, served
as a Managing Director of Jefferies. From 1987 to 1993, Mr. Sinders served as a
Managing Director of Howard, Weil, Labouisse, Friedrichs Incorporated ("Howard
Weil") and a member of the Board of Directors of Howard Weil from 1990 to 1993.
Prior to joining Howard Weil, he was a director with the law firm of McGlinchey,
Stafford, Mintz, Cellini & Lang, P.C. Mr. Sinders is also a member of the Board
of Directors of The Shaw Group Inc. See "Plan of Distribution."
Chaman Malhotra has been President and Chief Executive Officer of ADI since
1975. He has been employed by ADI since 1961, serving eleven years in sales and
operations. In 1972 he was appointed Executive Vice President.
52
<PAGE> 60
Tommy Ramsay has been President of Canadian Air Drilling Services, Ltd.
("CADS") since 1995. Mr. Ramsay joined CADS in 1974 where he handled various
operation functions. In 1979 he became a project manager for True Test
Pipelines, Ltd., a division of CADS, and was promoted to Assistant General
Manager in 1984.
John E. Blacklaws has been Vice President -- Production Services since the
Management Reorganization in June 1997, with responsibility for the Company's
manufacturing, engineering, domestic field repairs and management inventory.
Before the Management Reorganization, since September 1994, Mr. Blacklaws held
the title of President of Production Services and had substantially the same
responsibilities as he has now. From November 1990 to September 1994, he was
Vice President for the manufacturing and production division in Houston, Texas.
From March 1989 to November 1990, he was Manager of Manufacturing Technical
Services with quality control responsibilities at the Company's Houston facility
and in the field.
James C. Brame was named Vice President -- Business Development in July
1996 and Vice President -- ADI in the Management Reorganization. From August
1991 to June 1996, he served as Senior Marketing Analyst, Project Manager,
Director of Business Development and IT Steering Committee Chairman. Prior to
joining the Company in 1991, Mr. Brame was president and owner of a
manufacturing and distribution company from 1986 to 1991. From 1977 to 1986, Mr.
Brame held Assistant Controller and Manager of Financial Analysis and Reporting
positions with Hughes Production Tools, a division of Hughes Tool Company.
Dwight A. Goolsbay has been Vice President -- Eastern Hemisphere Operations
since the Management Reorganization and had 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.
Martin Lyons was named Vice President -- North American Operations in the
Management Reorganization. Before the Management Reorganization, Mr. Lyons had
been Senior Vice President Directional Drilling & Marketing since 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. where he held the positions of Office Manager and
Directional Drilling Supervisor.
Timothy Riggs was named Vice President -- Business Development in July
1997. Prior to such time, Mr. Riggs served in various positions of increasing
responsibility with the Company for over the past 20 years.
Mike Torres was named Vice President of Operations -- Latin America in June
1997. He previously served as Eastern Regional Manager and then Vice President
of Eastern Region. Mr. Torres began his career with Dailey in Directional Sales
in 1980. Prior to joining Dailey, Mr. Torres was employed by NL Industries and
Eastman Whipstock, Inc.
Prior to the 1996 IPO, Messrs. Lawrence, Sutton and Tighe had been
directors and/or officers of over 13 subsidiaries (other than the Company) of
Lawrence Industries, Inc., each of which engaged in activities unrelated to the
oil and gas industry. Both Mr. Sutton and Mr. Tighe have resigned from these
positions, except that Mr. Sutton remains a director and minority shareholder of
First Surety Title Company, Inc. One of these subsidiaries, Legend Outfitters,
Inc. ("Legend Outfitters"), was a sporting goods company with annual revenues of
less than $2.3 million. Legend Outfitters was operated by Mr. Lawrence's wife,
who acted as its chief executive officer and chief operating officer, and by two
other individuals who acted as Legend
53
<PAGE> 61
Outfitter's chief financial and accounting officers. Messrs. Lawrence, Sutton
and Tighe did not have significant involvement in the day-to-day operations of
Legend Outfitters. In 1993, Legend Outfitters filed for protection under Chapter
7 of the United States bankruptcy laws and was liquidated in 1995.
COMMITTEES
Pursuant to the Company's Bylaws, the Board has established standing Audit,
Executive and Compensation committees. 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
recommends to the Board the compensation to be paid to the Company's directors,
executive officers and key employees and administers 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
Prior to September 1996, compensation levels were determined by the
Company's Board of Directors, each of the members of which are officers of the
Company. Following the 1996 IPO, the Compensation Committee has determined
compensation levels and other benefits payable to the Company's executive
officers, other than compensation pursuant to employment agreements entered into
prior to the 1996 IPO.
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 pays
an annual retainer of $15,000 to each non-employee director. In addition, each
non-employee director receives $1,000 for each Board of Directors meeting
attended and $750 for each committee meeting attended. The Company also pays
reasonable out-of-pocket expenses incurred by non-employee directors to attend
Board of Directors and committee meetings. Non-employee directors also are
entitled to receive options pursuant to the 1996 Non-Employee Director Stock
Plan (the "1996 Director Plan"). Under the 1996 Director Plan, an aggregate of
100,000 shares of Class A Common Stock will be reserved for grant of options to
purchase Class A Common Stock. To date, options to acquire 10,000 shares of
Class A Common Stock at an exercise price equal to the fair market value of the
Class A Common Stock have been granted to each of Messrs. Duroc-Danner and Kite
pursuant to the 1996 Director Plan. In addition, under such plan options to
acquire 10,000 shares automatically will be granted after each annual meeting of
stockholders to each non-employee director who served as a director during the
preceding six months and who will continue to serve as a director.
Effective April 23, 1997, the Board of Directors granted to each of the
Company's non-employee directors, Messrs. Duroc-Danner and Kite, options to
purchase 10,000 shares of Class A Common Stock at an exercise price equal to the
fair market value on the date of grant.
54
<PAGE> 62
COMPENSATION OF EXECUTIVE OFFICERS
The following Summary Compensation Table sets forth information with
respect to the President and Chief Executive Officer of the Company and the
other four most-highly compensated officers of the Company for each of the
fiscal years ended April 30, 1995, 1996 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30, 1997
---------------------------------------------------------------------------
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
---------------------------------- RESTRICTED SECURITIES
OTHER STOCK UNDERLYING ALL OTHER
ANNUAL AWARDS OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION ($) SARS (#) (1)
--------------------------- ---- -------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. D. Lawrence................ 1997 $221,022 $ -- $29,202(3) -- -- $ 924
Chairman of the Board 1996 296,532(2) 73,280 * -- -- 2,326
James F. Farr................. 1997 258,958 93,240 49,131(4) 960,000 97,912 924
President and Chief 1996 248,651 55,500 * -- -- 571
Executive Officer
William D. Sutton............. 1997 223,936 75,819 36,973(5) 960,000 97,912 924
Senior Vice President, 1996 230,896 55,260 * -- -- 824
General Counsel and
Secretary
David T. Tighe................ 1997 186,852 59,940 35,675(6) 960,000 97,912 924
Senior Vice President -- 1996 148,671 54,960 21,723(7) -- -- 901
Finance, Chief Financial
Officer and Treasurer
James J. Percle............... 1997 227,611 79,452 9,692(9) 405,000 34,200 462
Former Executive Vice 1996 -- -- -- -- -- --
President and Chief
Operating
Officer(8)
</TABLE>
- ---------------
* Amounts exclude the value of perquisites and personal benefits because the
aggregate amount thereof did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for each Executive Officer.
(1) Represents payments for premiums for group term life insurance on behalf of
such individual.
(2) Effective upon the closing of the 1996 IPO, Mr. Lawrence's annual salary was
reduced to $100,000, subject to subsequent adjustment upward in the
discretion of the Compensation Committee of the Board of Directors. See
"-- Employment Agreements" below.
(3) Relates to payments for a car allowance and a charge for usage of Company
assets.
(4) Includes $26,923 related to accrued vacation cashed rather than taken during
the year and $22,208 related to a Company auto allowance.
(5) Includes $17,514 related to accrued vacation cashed rather than taken during
the year and $19,459 related to a Company auto allowance.
(6) Includes $17,308 related to accrued vacation cashed rather than taken during
the year and $18,367 related to a Company auto allowance.
(7) Includes $16,618 related to accrued vacation cashed rather than taken during
the year and $5,105 related to a Company automobile.
(8) Mr. Percle was not employed by the Company during the year ended April 30,
1996. Mr. Percle ceased to be employed by the Company effective June 23,
1997.
(9) Relates to payments for a Company automobile.
55
<PAGE> 63
The following chart summarizes information relating to options granted to
the named executive officers during the year ended April 30, 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------------ ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. D. Lawrence.............. -- -- -- -- -- --
James F. Farr............... 72,912 14.8% 8.00 8/13/06 366,831 929,623
25,000 5.1% 8.75 3/06/07 137,571 348,631
William D. Sutton........... 72,912 14.8% 8.00 8/13/06 366,831 929,623
25,000 5.1% 8.75 3/06/07 137,571 348,631
David T. Tighe.............. 72,912 14.8% 8.00 8/13/06 366,831 929,623
25,000 5.1% 8.75 3/06/07 137,571 348,631
James J. Percle(1).......... 19,199 3.9% 8.00 8/13/06 96,953 244,786
15,001 3.0% 9.00 8/13/06 84,906 209,193
</TABLE>
- ---------------
(1) Mr. Percle ceased to be employed by the Company effective June 23, 1997.
The following chart summarizes certain information relating to the value of
options held by the named executive offices at April 30, 1997.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1997 AND VALUE TABLE AT
APRIL 30, 1997
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON REALIZED APRIL 30, 1997 FY-END (1)
NAME EXERCISE ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
J. D. Lawrence............... -- -- -- --
James F. Farr................ -- -- 97,912/0 0
William D. Sutton............ -- -- 97,912/0 0
David T. Tighe............... -- -- 97,912/0 0
James J. Percle(2)........... -- -- 34,200/0 0
</TABLE>
- ---------------
(1) The exercise price for options owned by the named executive officers
exceeded the fair market value of the Class A Common Stock at April 30,
1997.
(2) Mr. Percle ceased to be employed by the Company effective June 23, 1997.
EMPLOYMENT AGREEMENTS
Each of Messrs. Lawrence, Farr, Sutton and Tighe (collectively, the
"Executive Officers") has entered into an employment agreement (collectively,
the "Executive Employment Agreements") with the Company. Each of the Executive
Employment Agreements has an initial term through December 31, 1999, except the
Executive Employment Agreement with Mr. Sutton, which has an initial term
through April 30, 1999. The Executive Employment Agreements provide for a
minimum annual salary during the term of the Executive Employment Agreements of
approximately $100,000, $280,000, $228,000 and $180,000 for Messrs. Lawrence,
Farr, Sutton and Tighe, respectively. The Executive Employment Agreements also
provide for certain automobile allowances, employee benefits, vacation and
reimbursement of expenses.
The Executive Employment Agreements may be terminated by the Company with
or without cause (as hereinafter defined) or by the Executive Officer at any
time for any reason.
56
<PAGE> 64
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 defined in the Executive Employment Agreements), the Company is
required to pay to the Executive Officer an amount equal to the greater of his
total base salary for the remainder of the employment period (as defined in the
Executive Employment Agreement) or one month of base salary for each full year
of service completed with the Company as of the date of termination (or, in the
case of Mr. Lawrence, three months of his base salary, if greater) and, with the
exception of Mr. Lawrence, (i) to pay an amount equal to the Executive Officer's
most recent annual bonus and (ii) to cause the Executive Officer to become fully
vested in any stock options and stock grants held by him. 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
and 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 and, with the exception of Mr.
Lawrence, (A) to pay to the Executive Officer an amount equal to two times his
most recent annual bonus and (B) to cause the Executive Officer to become fully
vested in any stock options and stock grants held by him.
EMPLOYEE STOCK PLANS
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 are
available for future grants. Under the 1996 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 Compensation Committee. As of the
date of this Prospectus, the Company does not have any shares available for
grant under such plan. In addition, the Company has adopted its 1997 Long-Term
Incentive Plan (the "1997 Plan"), pursuant to which incentive and non-qualified
options, restricted shares, stock appreciation rights and other
performance-based awards may be granted to key employees of the Company. The
1997 Plan initially has 720,000 shares of Class A Common Stock available for
issuance.
401(K) PLAN
The Company's domestic employees are eligible to participate in a defined
contribution retirement plan that complies with Section 401(k) of the Internal
Revenue Code (the "Code") and that was adopted by Lawrence prior to the 1996 IPO
for its employees and the employees of its subsidiaries. Pursuant to the plan,
the Company provides matching contributions up to 50% of the employee's
contribution up to 3% of the employee's compensation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL STOCKHOLDER
Prior to the 1996 IPO, Dailey had funded certain of its working capital
requirements through advances from Lawrence, which had been evidenced by a note
to Lawrence. Dailey repaid the full amount of principal of such note with $1.6
million of the net proceeds from the 1996 IPO. In addition, on June 27, 1996,
Dailey declared and paid a dividend in the form of a $10.0 million promissory
note to Dailey's sole stockholder, a subsidiary of Lawrence. On August 13, 1996,
such stockholder contributed $5.0 million of the outstanding principal amount of
such note to the capital of Dailey. The remaining $5.0 million principal plus
accrued interest was repaid utilizing a portion of the net proceeds from the
1996 IPO.
57
<PAGE> 65
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 International, Inc. During fiscal 1995, 1996 and 1997, the
Company incurred rent expense of $1,244,000, $1,306,000 and $915,000,
respectively, relating to such properties. Prior to completion of the 1996 IPO,
Dailey entered into a new lease agreement with Lawrence International, Inc.
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 Dailey and Lawrence International, Inc. based upon
a survey of rental rates prepared by an independent firm. Based upon this
survey, the Company believes that the rental rates and other terms under these
lease agreements are comparable to those that would be obtained in an
arm's-length transaction with an independent third party.
The Office Lease Agreement is 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.
The Service Center Lease Agreement is 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.
Relationship Agreement. Under the terms of a relationship agreement between
the Company and Lawrence (the "Relationship Agreement"), the Company has agreed
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 pays for such services at rates calculated to recover the
Company's reasonable costs of providing such services. The Relationship
Agreement also provides 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 commenced upon the closing of the 1996 IPO
and terminates on April 30, 1999. 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. As of
April 30, 1997, Lawrence owed the Company approximately $68,000, for products
and services rendered pursuant to the Relationship Agreement.
Tax Allocation Agreement. For taxable periods ending on or before the
closing of the 1996 IPO, the Company was included in the consolidated federal
income tax returns filed by Lawrence as the common parent for itself, its
subsidiaries and affiliated companies. 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 imposes an indemnity on
Lawrence in favor of the Company for any federal income tax relating to members
of the Lawrence consolidated group other than the Company and its subsidiaries.
Registration Rights Agreement. Pursuant to the terms of a registration
rights agreement with Lawrence (the "Lawrence Registration Rights Agreement"),
upon the request of Lawrence (or certain assignees) for a period of ten years
(beginning in 1996), the Company has agreed to register, on up to two occasions,
the sale of a minimum of 500,000 shares and up to all 5,000,000 shares of Class
B Common Stock beneficially owned by Lawrence that 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 the
Class B Common Stock on one additional occasion if Mr. Lawrence dies during the
term of the Lawrence Registration Rights Agreement and Lawrence previously has
exhausted its two demand registrations. The Company also is obligated to offer
Lawrence and certain assignees the right to include shares of the Class B Common
Stock owned by it in certain registration statements filed by the Company. The
Company is obligated to pay all expenses incidental to such registrations,
excluding fees of counsel to Lawrence, underwriters' discounts and commissions,
and transfer fees.
58
<PAGE> 66
OTHER
In January 1997, the Company loaned Mr. Farr $250,000 pursuant to a
five-year promissory note. Interest accrues at the prime rate and is payable
monthly by Mr. Farr. The note is secured by a pledge of 36,000 shares of Class A
Common Stock held by Mr. Farr.
Air Drilling Services, Inc. leases its Casper, Wyoming property from Melodi
Lane Investments, L.L.C. ("Melodi Lane"), a limited liability company in which
Mr. Malhotra is a member. The lease is for a term of ten years, expiring in June
2006, and provides for monthly rental payments of $4,250, subject to adjustment
beginning July 2001. The lease also provides Air Drilling Services, Inc. with a
right to purchase the property at its fair market value on or before May 31,
2001. Air Drilling Services, Inc. also leases certain equipment from Melodi Lane
for $7,400 per month. Such equipment lease expires in June 2001 and provides for
an option to purchase based on amortization schedule providing for a purchase
price of $0 at the end of the term.
Certain subsidiaries of ADI guarantee a loan of Mr. Malhotra to Southern
Pacific Thrift and Loan Assn., which had a principal balance of $87,987 at April
30, 1997. Such loan relates to a condominium held by Mr. Malhotra and his wife
as nominee for such subsidiaries.
A subsidiary of ADI also leases real property in Nisku, Alberta from
Malhotra Enterprises Ltd. ("Malhotra Enterprises"), a Canadian corporation in
which both Mr. Malhotra and Mr. Ramsay are shareholders. Lease payments for this
real property aggregate CDN $8,470 per month. The lease expires in December
2005. A subsidiary of ADI also leases certain equipment from Malhotra
Enterprises pursuant to a lease expiring in October 1997. This equipment lease
requires monthly payments of $21,822 and contains an option to purchase the
equipment for $20,000 plus the monthly rental for all unexpired months.
In 1986, Dailey 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 Dailey 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. In March 1994, the royalty agreements were amended to
cap royalties at 5% 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% 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% royalty
paid on net lost-in-hole revenue for the original hydraulic drilling jar patent
to the 2% provided in subsequent royalty agreements. In consideration for the
execution of the amendment to the royalty agreement, Dailey 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, Dailey arranged for the payment of this amount through a note payable. For
the years ended April 30, 1997, 1996 and 1995, the accompanying consolidated
statements of operations include royalty expense of $879,000, $843,000 and
$826,000, respectively, excluding the $250,000 related to the amended royalty
agreement. The owner of the royalty was an officer of Dailey until October 1994.
During fiscal 1996, the Company's Chairman of the Board repaid
approximately $87,000 relating to a loan made by Dailey in June 1994. Such loan
was evidenced by a promissory note in the principal amount of $75,000, accrued
interest at a rate of 8.0% and was repayable on demand. During the year ended
April 30, 1996, Dailey 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. In addition, during the
fiscal years ended April 30, 1995, 1996 and 1997, Dailey purchased office
supplies totaling $136,588, $114,041 and $24,521, respectively, from a company
owned and controlled by the Chairman's wife.
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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 Offering Circular, by (i) each director 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(1)
--------------------------------------------------------
CLASS A CLASS B PERCENT(2)
NAME AND ADDRESS OF COMMON PERCENT COMMON PERCENT VOTING
BENEFICIAL OWNER STOCK CLASS A STOCK CLASS B POWER
------------------- ------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Lawrence(3).............................. -- -- 5,000,000 100% 89%
J.D. Lawrence(3)......................... -- -- 5,000,000 100% 89%
James F. Farr............................ 147,912(4) 3.4% -- -- *
William D. Sutton........................ 169,912(4) 3.9% -- -- *
David T. Tighe........................... 169,912(4) 3.9% -- -- *
Bernard J. Duroc-Danner.................. 10,000(5) * -- -- *
Al Kite.................................. 10,000(5) * -- -- *
James J. Percle.......................... 79,200(6) 1.8% -- -- *
------- ----- --------- --- ---
All executive officers and directors as a
group (13 Persons)..................... 663,732 14.4% 5,000,000 100% 90%
</TABLE>
- ---------------
* Less than 1%.
(1) The Commission has defined beneficial ownership to include sole or shared
voting or investment power with respect to a security or the right to
acquire beneficial ownership of a security within 60 days. The number of
shares indicated are owned with sole voting and investment power unless
otherwise noted.
(2) Percent based upon both Class A Common Stock and Class B Common Stock,
combined.
(3) 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, Conroe, Texas
77305. 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.
(4) Includes presently exercisable options to purchase 97,912 shares of Class A
Common Stock.
(5) Represents options exercisable within 60 days to purchase 10,000 shares of
Class A Common Stock. Excludes options to purchase 10,000 shares of Class A
Common Stock which are not exercisable within 60 days.
(6) Includes presently exercisable options to purchase 34,200 shares of Class A
Common Stock.
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DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued under an indenture (the "Indenture") to
be dated as of August 19, 1997, among the Company, the Subsidiary Guarantors and
U.S. Trust Company of Texas, N.A., as trustee (the "Trustee"). References to the
Notes include the Exchange Notes and the Original Notes unless the context
otherwise requires. Upon the issuance of the Exchange Notes or the effectiveness
of the Exchange Offer Registration Statement, the Indenture will be subject to
and governed by the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The following summaries of certain provisions of the Indenture
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Indenture, including the
definition of certain terms contained therein and those terms that are made a
part of the Indenture by reference to the Trust Indenture Act. Copies of the
Indenture and Registration Rights Agreement have been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Capitalized terms not
otherwise defined below or elsewhere in this Prospectus have the meanings given
to them in the Indenture. The definitions of certain capitalized terms used in
the summary are set forth below under "-- Certain Definitions".
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will be unsecured senior general obligations of the
Company, will mature on August 15, 2007 (the "Maturity Date") and will be
limited in aggregate principal amount to $115,000,000. The Exchange Notes will
be issued in denominations of $1,000 and integral multiples thereof. Subject to
certain exceptions, the Exchange Notes will be initially sold to (i) Qualified
Institutional Buyers in book-entry form, registered in the name of a nominee of
the Depository Trust Company ("DTC"), the transfers of which will be effected
through records maintained by DTC and its participants, and (ii) other
Institutional Accredited Investors in registered certificated form. See "-- Book
Entry; Delivery and Form".
The Exchange Notes will accrue interest at the rate per annum shown on the
cover page of this Prospectus from August 19, 1997, or from the most recent
interest payment date to which interest has been paid or for which interest has
been duly provided. Interest in the Outstanding Notes that are tendered in
exchange for the Exchange Notes that has accrued from August 19, 1997, the date
of issuance of the Outstanding Notes, through the Exchange Date will be payable
on or before February 15, 1998. Outstanding Notes that are accepted for exchange
will cease to accrue interest on and after the date on which interest on the
Exchange Notes will begin to accrue. Accrued and unpaid interest will be payable
semi-annually on February 15 and August 15 of each year, commencing February 15,
1998. Interest will be paid to the Person in whose name the Exchange Note is
registered at the close of business on the February 1 or August 1 next preceding
such interest payment date. Interest will be computed on the basis of a 360-day
year of twelve 30-day months. The Exchange Notes will be payable both as to
principal and interest at the office or agency of the Company maintained for
such purpose within the City and State of New York and in the case of Exchange
Notes not in book-entry form, interest may be paid, at the option of the
Company, by check mailed to the holders of the Notes ("Holders") at their
respective addresses set forth in the register of Holders. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Trustee maintained for such purpose. Any Outstanding Notes
that remain outstanding after the completion of the Exchange Offer, together
with the Exchange Notes issued in connection with the Exchange Offer, will be
treated as a single class of securities under the Indenture.
RANKING
The Indebtedness evidenced by the Exchange Notes will rank pari passu in
right of payment with all other Indebtedness of the Company that is not
subordinated by its terms to other Indebtedness of the Company and senior to all
Indebtedness of the Company that by its terms is so subordinated.
The holders of secured Indebtedness of the Company (including Indebtedness
under the Company's Credit Facility, which is secured by substantially all
property, equipment, inventory, intellectual property and receivables of the
Company), will have claims with respect to the assets constituting collateral
for such
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<PAGE> 69
Indebtedness that are prior to claims of holders of the Notes. In the event of a
default on the Notes or a bankruptcy, liquidation or reorganization of the
Company, such assets will be available to satisfy obligations with respect to
the Indebtedness secured thereby before any payment therefrom could be made on
the Notes. To the extent that the value of such collateral is not sufficient to
satisfy the Indebtedness secured thereby, amounts remaining outstanding on such
Indebtedness would be entitled to share with the Notes and their claims with
respect to any other assets of the Company. At April 30, 1997, on a pro forma
basis after giving effect to the ADI Acquisition and the application of the
proceeds from the offering of the Outstanding Notes, the Notes would not have
been effectively subordinated to any secured Indebtedness (excluding letters of
credit) of the Company, other than Indebtedness of the Subsidiaries.
The Exchange Notes will be effectively subordinated to claims of creditors
and preferred stockholders of the Company's Subsidiaries (other than the Company
and any Subsidiary Guarantor) and the claims of secured creditors of the
Subsidiary Guarantors. Claims of creditors and preferred stockholders of such
subsidiaries (other than the Company and any Subsidiary Guarantor), including
trade creditors, tort claimants, secured creditors, taxing authorities and
creditors holding guarantees, will generally have priority as to assets of such
subsidiaries over the claims and equity interests of the Company and, thereby
indirectly, the holders of the Indebtedness of the Company, including the Notes.
At April 30, 1997, on a pro forma basis after giving effect to the ADI
Acquisition, the issuance of the Outstanding Notes and the application of the
net proceeds therefrom, the Notes and Subsidiary Guarantees would have been
effectively subordinated to $1.2 million of secured Indebtedness (excluding
letters of credit) of the Subsidiary Guarantors.
REDEMPTION AND REPURCHASE
Optional Redemption. The Exchange Notes will be redeemable at the option of
the Company, at any time or in part from time to time, on and after August 15,
2002 at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the twelve-month period commencing on
August 15 of the year set forth below, plus, in each case, accrued interest
thereon to the date of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002........................................................ 104.875%
2003........................................................ 103.250%
2004........................................................ 101.625%
2005 and thereafter......................................... 100.000%
</TABLE>
In the event of a redemption of less than all of the Notes, the Notes will
be selected for redemption by the Trustee in multiples of $1,000 pro rata, by
lot or by any other method that the Trustee considers fair and appropriate, and,
if the Exchange Notes are listed on any securities exchange, by a method that
complies with the requirements of such exchange. Notice of redemption will be
mailed at least 30 days but not more than 60 days before the redemption date to
each Holder of Notes to be redeemed at such Holder's registered address. On and
after the redemption date, interest will cease to accrue on Notes or portions
thereof called for redemption (unless the Company shall default in the payment
of the redemption price or accrued interest).
In addition, at any time or from time to time on or prior to August 15,
2000, the Company may redeem up to $40.25 million aggregate principal amount of
the Notes at 109 3/4% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of redemption with the Net Proceeds of a
Public Equity Offering; provided that, immediately after giving effect to such
redemption, at least $74.75 million aggregate principal amount of the Notes
remains outstanding immediately after such redemption and that such redemption
occurs within 60 days following the closing of such Public Equity Offering.
Offers to Purchase. As described below, (i) upon the occurrence of a Change
of Control, the Company will be obligated to make an offer to purchase all
outstanding Notes at a purchase price in cash equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of purchase and (ii) upon certain sales or other dispositions of assets, the
Company may be obligated to make offers to purchase Notes with a portion of the
Net Available Proceeds of such sales or other dispositions at a purchase
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<PAGE> 70
price in cash equal to 100% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of purchase. See "-- Change of
Control" and "-- Certain Covenants -- Limitation on Assets Sales".
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company shall be obligated
to make an offer to purchase all of the then outstanding Notes (a "Change of
Control Offer") and shall purchase, on a Business Day (the "Change of Control
Purchase Date"), not more than 60 nor less than 30 days following the Change of
Control, all of the then-outstanding Notes validly tendered pursuant to such
Change of Control Offer, at a purchase price (the "Change of Control Purchase
Price") in cash equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the Change of Control Purchase Date. The Change of
Control Offer is required to remain open for at least 20 Business Days and until
the close of business on the fifth Business Day prior to the Change of Control
Purchase Date.
In order to effect such Change of Control Offer, the Company shall, not
later than 30 days after the Change of Control, mail to the Trustee and to each
Holder of the Notes notice of the Change of Control Offer, which notice shall
govern the terms of the Change of Control Offer and shall state, among other
things, the procedures that Holders of the Notes must follow to accept the
Change of Control Offer.
The Company, to the extent applicable and if required by law, will comply
with Sections 13 and 14 of the Exchange Act and the provisions of Rule 14e-1 of
the Exchange Act and any other tender offer rules under the Exchange Act and any
other federal and state securities laws, rules and regulations which may then be
applicable to any offer by the Company to purchase the Notes pursuant to the
Change of Control covenant.
Should a Change of Control occur and a substantial amount of the Notes be
presented for purchase, there can be no assurance that the Company would have
sufficient financial resources to enable it to purchase such Notes. In the event
the Company is required to purchase outstanding Notes pursuant to a Change of
Control Offer, the Company expects that it would seek third-party financing to
the extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing. The Credit Facility may provide that certain change of control events
with respect to the Company would constitute an event of default thereunder and
permit the agent or lenders thereunder to terminate the commitment of the
lenders under the Credit Facility and declare all amounts outstanding thereunder
to be due and payable. Any future credit agreements or other arrangements
relating to Senior Indebtedness to which the Company or any of its Subsidiaries
becomes a party may contain similar restrictions and provisions. In the event
that a Change of Control occurs at a time when the Company is prohibited from
purchasing the Notes, the Company could seek the consent of its lenders to
purchase the Notes or could attempt to repay or refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from purchasing the Notes.
The Indenture provides that a default in the payment of the Change of
Control Purchase Price when due would constitute an Event of Default under the
Indenture.
The Change of Control provisions of the Indenture, as well as the
restrictions in the Indenture on the ability of the Company and its Subsidiaries
to incur additional Indebtedness, to grant Liens on their property, to make
Restricted Payments and to make Asset Sales, may make more difficult or
discourage a takeover of the Company, whether favored or opposed by current
management of the Company. Consummation of any such transaction in certain
circumstances may require redemption or repurchase of the Notes, and there can
be no assurance that the Company or the acquiring party will have sufficient
financial resources to effect such redemption or repurchase. Such restrictions
and the restrictions on transactions with Related Persons may, in certain
circumstances, make more difficult or discourage any leveraged buyout of the
Company or any of its Subsidiaries by the management of the Company. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover, a
recapitalization or similar restructuring.
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<PAGE> 71
One of the events that constitutes a Change of Control under the Indenture
is a sale, conveyance, transfer or lease of all or substantially all of the
assets of the Company and the Subsidiaries, taken as a whole to any Person other
than the Company or a Subsidiary Guarantor that is a Wholly-Owned Subsidiary.
The Indenture will be governed by New York law, and there is no established
quantitative definition under New York law of "substantially all" of the assets
of a corporation. Accordingly, if the Company were to engage in a transaction in
which it disposed of less than all of its assets, a question or interpretation
could arise as to whether such disposition was of "substantially all" of its
assets and whether the Company was required to make a Change of Control Offer.
The provisions of the Indenture may not afford Holders protection in the
event of a highly leveraged transaction, reorganization, restructuring, merger
or similar transaction affecting the Company that may adversely affect Holders,
if such transaction is not the type of transaction included within the
definition of Change of Control. A transaction involving the management of the
Company or its Affiliates, or a transaction involving a recapitalization of the
Company, will result in a Change of Control only if it is the type of
transaction specified in such definition.
SUBSIDIARY GUARANTEES
The Subsidiary Guarantors, which consist of all of the Company's
Subsidiaries as of the Issue Date (including ADI and certain of its
subsidiaries) other than any Exempt Foreign Subsidiary, as designated by the
Company, will unconditionally guarantee, jointly and severally, to each Holder
and the Trustee, the full and prompt performance of the Company's obligations
under the Indenture and the Notes, including the payment of principal of,
premium, if any, and interest on the Notes. In addition to the initial
Subsidiary Guarantors, the Company will cause each Person (other than an
Unrestricted Subsidiary and any Exempt Foreign Subsidiary) that shall become a
Material Subsidiary after the Issue Date to execute and deliver a supplement to
the Indenture pursuant to which such Person will guarantee the payment of the
Notes on the same terms and conditions as the Subsidiary Guarantees by the
Subsidiary Guarantors. As described below under "-- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness", no Subsidiary
that is not already a Subsidiary Guarantor shall incur any Indebtedness with
respect to Indebtedness of the Company or another Subsidiary unless such
Subsidiary becomes a guarantor of the Notes. As a result, claims of creditors
against Unrestricted Subsidiaries, Exempt Foreign Subsidiaries and Subsidiaries
that have not delivered Guarantees, including their trade creditors and tort
claimants, will effectively have priority to the property and earnings of such
Subsidiaries over claims of creditors of the Company, including Holders of
Notes.
The Exempt Foreign Subsidiaries as of the date of the offering of the
Outstanding Notes accounted for 22% of the Company's pro forma revenues for the
twelve months ended April 30, 1997. In addition, such Exempt Foreign
Subsidiaries represented approximately 8% of the Company's total assets as of
April 30, 1997, assuming consummation of the ADI Acquisition and the offering of
the Outstanding Notes and the application of the net proceeds therefrom occurred
on April 30, 1997.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities (including, but not limited to, Guarantor Senior Indebtedness of
such Subsidiary Guarantor) of such Subsidiary Guarantor and after giving effect
to any collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Subsidiary Guarantor that makes a
payment or distribution under a Subsidiary Guarantee shall be entitled to a
contribution from each other Subsidiary Guarantor in a pro rata amount based on
the Adjusted Net Assets of each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell or
otherwise dispose of all or substantially all of its properties and assets to
the Company or another Subsidiary Guarantor without limitation, except to the
extent any such transaction is subject to the "Merger, Consolidation or Sale of
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<PAGE> 72
Substantially All Assets" covenant of the Indenture. Each Subsidiary Guarantor
may consolidate with or merge into or sell or otherwise dispose of all or
substantially all of its properties and assets to a Person other than the
Company or another Subsidiary Guarantor that is a Wholly-Owned Subsidiary
(whether or not affiliated with the Subsidiary Guarantor that is a Wholly-Owned
Subsidiary), provided that (i) if the surviving Person is not the Subsidiary
Guarantor, the surviving Person agrees to assume such Subsidiary Guarantor's
Subsidiary Guarantee and all its obligations pursuant to the Indenture (except
to the extent the following paragraph would result in the release of such
Subsidiary Guarantor) and (ii) such transaction does not (a) violate any of the
covenants described below under "-- Certain Covenants" or (b) result in a
Default or Event of Default immediately thereafter that is continuing.
Upon the sale or other disposition (by merger or otherwise) of a Subsidiary
Guarantor or all or substantially all of its properties and assets pursuant to a
transaction that is otherwise in compliance with the Indenture (including as
described in the foregoing paragraph), such Subsidiary Guarantor shall be deemed
released from its Subsidiary Guarantee and the related obligations set forth in
the Indenture; provided, however, that any such termination shall occur only to
the extent that all obligations of such Subsidiary Guarantor under all of its
guarantees of, and under all of its pledges of assets or other security
interests which secure, other Indebtedness of the Company or any Subsidiary
shall also terminate or be released upon such sale or other disposition. Each
Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in
accordance with the Indenture shall be released from its Subsidiary Guarantee
and related obligations set forth in the Indenture for so long as it remains an
Unrestricted Subsidiary.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness
The Company will not, and will not permit any of the Subsidiaries to,
directly or indirectly, issue, incur, assume, guarantee, become liable,
contingently or otherwise, with respect to or otherwise become responsible for
the payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default with
respect to the Notes shall have occurred and be continuing at the time or as a
consequence at the incurrence of such Indebtedness, the Company may incur
Indebtedness and any Subsidiary may incur Indebtedness, if on the date of the
incurrence or issuance, the Company's Consolidated EBITDA Coverage Ratio would
have been greater than 2.0 to 1.0.
For purposes of determining any particular amount of Indebtedness under
this covenant, guarantees by the Company or any of the Subsidiaries of
Indebtedness of the Company or any of the Subsidiaries otherwise included in the
determination of such amount shall not also be included.
Notwithstanding anything to the contrary in this covenant, no Subsidiary
that is not already a Subsidiary Guarantor shall incur any Indebtedness with
respect to any Indebtedness of the Company or any other Subsidiary unless such
Subsidiary, the Company and the Trustee execute and deliver a supplemental
indenture evidencing such Subsidiary's Subsidiary Guarantee of the Notes, such
Subsidiary Guarantee to be a senior unsecured obligation of such Subsidiary on
the same terms as the Subsidiary Guarantees by the other Subsidiary Guarantors.
For purposes of determining any particular amount of Indebtedness incurred
under this covenant, any Indebtedness of the Company or any Subsidiary incurred
for, or related to, a Person other than another Subsidiary or the Company, as
applicable, shall be deemed to be in an amount equal to the greater of (i) the
lesser of (a) the full amount of the Indebtedness of such other Person or (b)
the fair market value of the assets and properties of the Company or such
Subsidiary, as to which the holder or holders of such Indebtedness are expressly
limiting the obligations of the Company or such Subsidiary, the value of which
assets and properties of the Company or any Subsidiary will be as determined in
good faith by the Board of Directors of the Company or such Subsidiary, as
applicable (which determinations shall be evidenced by a resolution of the Board
of Directors of the applicable Person), and (ii) the amount of the Indebtedness
of
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<PAGE> 73
such other Person as has been expressly contractually assumed or guaranteed by
the Company or such Subsidiary.
In addition, neither the Company nor any Subsidiary Guarantor may, directly
or indirectly, in any event incur any Indebtedness that by its terms (or by the
terms of any agreement governing such Indebtedness) is subordinated to any other
Indebtedness of the Company or such Subsidiary Guarantor, as the case may be,
unless such Indebtedness is also by its terms (or by the terms of any agreement
governing such Indebtedness) made expressly subordinate to the Notes or the
Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be, to the
same extent and in the same manner as such Indebtedness is subordinated pursuant
to subordination provisions that are most favorable to the holders of any other
Indebtedness of the Company or such Subsidiary Guarantor, as the case may be.
Limitation on Restricted Payments
The Company will not, and will not permit any of the Subsidiaries to,
directly or indirectly, make any Restricted Payment, if at the time of such
Restricted Payment, and on a pro forma basis after giving effect thereto:
(i) a Default or an Event of Default under the Indenture has occurred and
is continuing;
(ii) the aggregate amount expended for all Restricted Payments subsequent
to the Issue Date exceeds the sum of (without duplication):
(a) 50% of aggregate Consolidated Net Income of the Company (or if
such Consolidated Net Income is a loss, minus 100% of such loss) earned on
a cumulative basis during the period beginning on the first day of the
month containing the Issue Date and ending on the last date of the
Company's fiscal quarter immediately preceding such Restricted Payment;
plus
(b) 100% of the aggregate Net Proceeds received by the Company from
any Person other than a Subsidiary from the issuance and sale subsequent to
the Issue Date of Qualified Capital Stock (excluding (1) any Qualified
Capital Stock paid as a dividend on any Capital Stock or as interest on any
Indebtedness, (2) the issuance of Qualified Capital Stock upon the
conversion of, or in exchange for, any Qualified Capital Stock and (3) any
Qualified Capital Stock with regard to issuances and sales financed
directly or indirectly using funds borrowed from the Company or any
Subsidiary, until and to the extent such borrowing is repaid); plus
(c) to the extent not otherwise included in Consolidated Net Income,
dividends, repayments of loans or advances, or other transfers of assets,
in each case to the Company or a Subsidiary after the date of the Indenture
from any Unrestricted Subsidiary or from the redesignation of an
Unrestricted Subsidiary as a Subsidiary (valued in each case as provided in
the definition of Investment) other than amounts constituting Permitted
Unrestricted Subsidiary Investments; plus
(d) $5.0 million; and
(iii) the Company would not be able to incur $1.00 of additional
Indebtedness (excluding Permitted Indebtedness) as provided in the first
paragraph of "-- Limitation on Incurrence of Additional Indebtedness".
The foregoing provisions of this covenant will not prevent the payment of
any dividend within 60 days after the date of its declaration if the dividend
would have been permitted on the date of declaration; provided, however,
payments made in accordance with this paragraph shall be counted for purposes of
computing amounts expended pursuant to subclause (ii) in the immediately
preceding paragraph.
Limitation on Assets Sales
The Company may not, and may not permit any of its Subsidiaries to, engage
in an Asset Sale unless (i) the Company (or the Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee for an Asset Sale or series of
related Asset Sales involving assets
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<PAGE> 74
of the Company or its Subsidiaries having an aggregate value of more than $5.0
million) of the assets or Capital Stock issued or sold or otherwise disposed of
and (ii) the consideration therefor received by the Company or such Subsidiary
is in the form of cash and Cash Equivalents or Permitted Industry Investments;
provided that the amount of any liabilities (as shown on the Company's or such
Subsidiary's most recent balance sheet) of the Company or any Subsidiary (other
than contingent liabilities and liabilities that are by their terms subordinated
to the Notes or the Subsidiary Guarantees) that are assumed by the transferee of
any such assets pursuant to a customary novation agreement that releases the
Company or such Subsidiary from further liability shall be deemed to be cash for
purposes of this provision (but shall not be deemed to be "Excess Proceeds" as
defined below); and provided further, that the Company or such Subsidiary may
accept proceeds from such Asset Sale in other than cash, and Cash Equivalents or
Permitted Industry Investments or any combination of the foregoing if the
aggregate amount of all proceeds from all Asset Sales after the Issue Date that
are other than cash and Cash Equivalents or Permitted Industry Investments after
such Asset Sale, does not exceed 15% of Consolidated Net Tangible Assets at the
date of such Asset Sale.
Within 365 days after the receipt of any Net Available Proceeds from any
Asset Sale, the Company (or the Subsidiary, as the case may be) may (i) apply
all or any part of the Net Available Proceeds therefrom to repay Senior
Indebtedness of the Company or Guarantor Senior Indebtedness of a Subsidiary
Guarantor or (ii) invest all or any part of the Net Available Proceeds thereof
in Permitted Industry Investments made by the Company or a Subsidiary or, to the
extent not so applied during such 365-day period, to such investments
specifically identified during such 365-day period reasonably anticipated in
good faith by the Board of Directors of the Company to be expended within 180
days after being specifically identified (such 180-day period, the "Project
Period"). Pending the final application of any such Net Available Proceeds, the
Company may temporarily reduce borrowings under any revolving credit facility or
otherwise invest such Net Available Proceeds in any manner that is not
prohibited by the Indenture. Any Net Available Proceeds from Asset Sales
occurring on or after the Issue Date that are not applied or invested within 365
days of the receipt thereof (or if later, within 35 Business Days following an
applicable Project Period) as provided in the first sentence of this paragraph
will be deemed to constitute "Excess Proceeds". When the aggregate amount of
Excess Proceeds equals or exceeds $10.0 million, the Company will be required to
make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes that may be purchased out of such Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof, plus accrued and unpaid interest thereon to the date of purchase
in accordance with the procedures set forth in the Indenture and liquidated
damages as set forth in the Registration Rights Agreement. To the extent that
the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less
than the applicable Excess Proceeds, the Company may use any of such remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Notes surrendered by Holders thereof exceeds the amount of applicable
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon completion of such Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
The Credit Facility and any future credit agreements or other amendments
relating to other Senior Indebtedness to which the Company or any of its
Subsidiaries becomes a party may contain limitations on the ability of the
Company or any such Subsidiary to make or consummate an Asset Sales Offer. In
the event that an Asset Sales Offer occurs at a time when the Company is
prohibited from purchasing the Notes, the Company could seek the consent of its
lenders to the purchase of the Notes or could attempt to repay or refinance the
borrowings containing such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company may be prohibited from purchasing
the Notes.
The Company will not permit any Subsidiary to enter into or suffer to exist
any agreement that would place any restriction of any kind (other than pursuant
to law or regulation) on the ability of the Company to make an Asset Sale Offer
following any Asset Sale. The Company will comply with Rule 14e-1 under the
Exchange Act, and any other securities laws and regulations thereunder, if
applicable, in the event that an Asset Sale occurs and the Company is required
to make an Asset Sale Offer.
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Limitation on Liens Securing Indebtedness
The Company will not, and will not permit any of the Subsidiaries to,
create, incur, assume or suffer to exist any Liens (other than Permitted Liens)
upon any of their respective Properties securing (i) any Indebtedness of the
Company, unless the Notes are equally and ratably secured or (ii) any
Indebtedness of any Subsidiary Guarantor, unless the Notes or the Subsidiary
Guarantees are equally and ratably secured; provided that if such Indebtedness
is expressly subordinated to the Notes or the Subsidiary Guarantees, the Lien
securing such Indebtedness will be subordinated and junior to the Lien securing
the Notes or the Subsidiary Guarantees, with the same relative priority as such
subordinated Indebtedness will have with respect to the Notes or the Subsidiary
Guarantees, as the case may be.
Limitation on Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Subsidiary to, directly or
indirectly, create or suffer to exist or allow to become effective any
consensual encumbrance or restriction of any kind (i) on the ability of any of
the Subsidiaries (a) to pay dividends or make other distributions on its Capital
Stock or make payments on any Indebtedness owed to the Company or any other
Subsidiary, (b) to make loans or advances to the Company or any other Subsidiary
or (c) to transfer any of its Property to the Company or any other Subsidiary or
(ii) on the ability of such Person or any other subsidiary of such Person to
receive or retain any such (a) dividends, distributions or payments, (b) loans
or advances or (c) transfers of Property (any such restriction being referred to
herein as a "Payment Restriction"), except for such encumbrances or restrictions
existing under or by reason of (1) the Credit Facility as in effect from time to
time, (2) customary provisions restricting subletting or assignment of any lease
governing a leasehold interest of the Company or any Subsidiary, (3) any
instrument governing Indebtedness of a Person acquired by the Company or a
Subsidiary at the time of such acquisition, which encumbrance or restriction is
not applicable to any Person, other than the Person, or the Property of the
Person, so acquired, provided that such Indebtedness was not incurred in
anticipation of such acquisition, (4) with respect to clauses (i)(c) and (ii)(c)
above, Purchase Money Obligations for Property acquired in the ordinary course
of business, (5) Indebtedness existing pursuant to a written agreement in effect
on the date of the Indenture, (6) Indebtedness under the Indenture or (7)
Indebtedness incurred to refinance, refund, extend or renew Indebtedness
referred to in clause 1, 3, 4 or 5 above, provided that the Payment Restrictions
contained therein are not materially more restrictive than those provided for in
the Indebtedness being refinanced, refunded, extended or renewed.
Limitation on Transactions with Related Persons
Neither the Company nor any of the Subsidiaries will (i) sell, lease,
transfer or otherwise dispose of any of its Property to, (ii) purchase any
property from, (iii) make any Investment (other than Permitted Unrestricted
Subsidiary Investments and other Investments that do not breach the covenant
described under the caption "-- Limitation on Restricted Payments") in, or (iv)
enter into any contract or agreement with or for the benefit of, a Related
Person of the Company or any Subsidiary (other than the Company or any such
Subsidiary in which no Related Person (other than the Company or another
Wholly-Owned Subsidiary) owns, directly or indirectly, an equity interest) (a
"Related Party Transaction"), unless (a) such Related Party Transaction or
series of associated Related Party Transactions is on terms that are no less
favorable to the Company or such Subsidiary, as the case may be, than those that
could be obtained in a comparable arm's length transaction with an unrelated
third party, (b) with respect to any Related Party Transaction or series of
associated Related Party Transactions involving aggregate payments in excess of
$1.0 million, the Company delivers, within 30 days of such Related Party
Transaction or series of associated Related Party Transactions, an Officers'
Certificate to the Trustee certifying that such Related Party Transaction or
series of associated Related Party Transactions complies with the immediately
preceding clause (a), and (c) with respect to a Related Party Transaction or
series of associated Related Party Transactions involving payments of $5.0
million or more, the Company delivers, within 30 days of such Related Party
Transaction or series of associated Related Party Transactions, an Officers'
Certificate to the Trustee certifying that (1) such Related Party Transaction or
series of associated Related Party Transactions complies with clause (a) above
and (2) such Related Party Transaction or series of associated Related Party
Transactions has been approved by a majority
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of the independent directors of the Company. Notwithstanding anything to the
contrary in the foregoing, the foregoing restrictions shall not apply to (A)
Related Party Transactions that are approved by the Board of Directors of the
Company and such Subsidiary, if applicable, as in the best interests of the
Company or such Subsidiary, which transactions together with all other Related
Party Transactions in a related series involve or have an aggregate value not
exceeding $1.0 million in each fiscal year; (B) fees and compensation paid to or
agreements with officers, directors, employees or consultants of the Company or
any Subsidiary in each case that are reasonable, as determined by the Board of
Directors or senior management thereof in good faith; (C) Employee Stock
Repurchases, (D) transactions described in "Certain Relationships and Related
Transactions" and (E) Restricted Payments that are not prohibited by the
covenants described under the caption "-- Limitation on Restricted Payments".
Limitation on Conduct of Business
The Company and the Subsidiaries will be operated in a manner such that
their business activities will be in the oilfield services business and related
products and services, including, but not limited to, (i) rental of downhole
tools, general oil field equipment, petrochemical equipment and industrial and
other equipment (which may include equipment not used in the oil and gas
industry), (ii) drilling services, (iii) pipeline testing services, and (iv)
such other businesses as are reasonably necessary or desirable to facilitate the
conduct and operations of the foregoing businesses.
Reports
The Company will file on a timely basis with the Commission, to the extent
such filings are accepted by the Commission and whether or not the Company has a
class of securities registered under the Exchange Act, the annual reports,
quarterly reports and other documents that the Company would be required to file
if it were subject to Section 13 or 15 of the Exchange Act. The Company is also
required (i) to file with the Trustee (with exhibits), and provide to each
Holder of Notes or, upon request, to a prospective Holder of Notes (without
exhibits), without cost to such Holder or prospective Holder, copies of such
reports and documents within 15 days after the date on which the Company files
such reports and documents with the Commission or the date on which the Company
would be required to file such reports and documents if the Company were so
required and (ii) if filing such reports and documents with the Commission is
not accepted by the Commission or is prohibited under the Exchange Act, to
supply at its cost copies of such reports and documents (including any exhibits
thereto) to any Holder of Notes promptly upon written request.
Future Designation of Restricted and Unrestricted Subsidiaries
The foregoing covenants (including calculation of financial ratios and the
determination of limitations on the incurrence of Indebtedness and Liens) may be
affected by the designation by the Company of any existing or future Subsidiary
of the Company as an Unrestricted Subsidiary. The definition of "Unrestricted
Subsidiary" set forth under the caption "-- Certain Definitions" describes the
circumstances under which a Subsidiary of the Company may be designated as an
Unrestricted Subsidiary by the Board of Directors of the Company.
Sale-and-Leaseback Transactions
The Company will not, and will not permit any Subsidiaries to, enter into
any sale-and-leaseback transaction; provided that the Company or any Subsidiary,
as applicable, may enter into a sale-and-leaseback transaction if (i) the
Company could have (a) incurred Indebtedness in an amount equal to the
Attributable Indebtedness relating to such sale-and-leaseback transaction
pursuant to the Consolidated EBITDA Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "-- Limitation on
Incurrence of Additional Indebtedness" and (b) created a Lien to secure such
Indebtedness pursuant to the covenant described above under the caption
"-- Limitation on Liens Securing Indebtedness", (ii) the fair market value of
the consideration of such sale-and-leaseback transaction is at least equal to
the fair market value (as determined in good faith by the Board of Directors and
set forth in an Officers' Certificate delivered to the Trustee) of the Property
that is the subject of such sale-and-leaseback transaction and (iii) the
transfer
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of assets in such sale-and-leaseback transaction is permitted by, and the
Company applies the proceeds of such transaction in compliance with, the
covenant described above under the caption "-- Limitation on Asset Sales".
Issuances and Sales of Capital Stock of Wholly-Owned Subsidiaries
The Company (i) may not, and may not permit any Wholly-Owned Subsidiary to
transfer, convey, sell or otherwise dispose of any Capital Stock of any
Wholly-Owned Subsidiary to any Person (other than the Company or a Wholly-Owned
Subsidiary), unless (a) such transfer, conveyance, sale or other disposition is
of all the Capital Stock of such Wholly-Owned Subsidiary and (b) the cash Net
Available Proceeds from such transfer, conveyance, sale or other disposition are
applied in accordance with the covenant described above under the caption
"-- Limitation on Asset Sales", and (ii) may not permit any Wholly-Owned
Subsidiary of the Company to issue any of its Capital Stock or any warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, Capital Stock) to any
Person other than to the Company or a Wholly-Owned Subsidiary; except, in the
case of both clauses (i) and (ii) above, with respect to dispositions or
issuances by a Wholly-Owned Subsidiary of the Company as contemplated in clauses
(i) and (ii) of the definition of "Wholly-Owned Subsidiary".
MERGER, CONSOLIDATION OR SALE OF SUBSTANTIALLY ALL ASSETS
The Company will not consolidate with or merge with any other Person or
convey, transfer or lease all or substantially all of its Property to any
Person, unless: (i) the Company survives such merger or the Person formed by
such consolidation or into which the Company is merged or that acquires by
conveyance or transfer, or which leases, all or substantially all of the
Property of the Company is a corporation organized and existing under the laws
of the United States of America or any State thereof or the District of Columbia
and expressly assumes, by supplemental indenture, the due and punctual payment
of the principal of, and premium, if any, and interest on all the Notes and the
performance of every other covenant and obligation of the Company under the
Indenture; (ii) immediately before and after giving effect to such transaction,
no Default or Event of Default exists; (iii) immediately after giving effect to
such transaction on a pro forma basis, the Consolidated Net Worth of the Company
(or the surviving entity if the Company is not continuing) is equal to or
greater than the Consolidated Net Worth of the Company immediately before such
transaction and (iv) immediately after giving effect to such transaction on a
pro forma basis, the Company (or the surviving entity if the Company is not
continuing) would be able to incur $1.00 of additional Indebtedness (excluding
Permitted Indebtedness) under the tests described in the first paragraph of
"-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness".
Upon any such consolidation, merger, conveyance, lease or transfer in accordance
with the foregoing, the successor Person formed by such consolidation or into
which the Company is merged or to which such conveyance, lease or transfer is
made will succeed to, and be substituted for, and may exercise every right and
power of, the Company under the Indenture with the same effect as if such
successor had been named as the Company therein, and thereafter (except in the
case of a lease) the predecessor corporation will be relieved of all further
obligations and covenants under the Indenture and the Notes.
EVENTS OF DEFAULT
The following constitute Events of Default under the Indenture:
(i) default in the payment of principal of, or premium, if any, on the
Notes when due at maturity, upon repurchase, upon acceleration or otherwise,
including failure of the Company to repurchase the Notes required to be
repurchased, at the required purchase price, upon a Change of Control or an
Asset Sale Offer and failure to make, when due, any optional redemption payment;
(ii) default in the payment of any installment of interest on the Notes
when due (including any interest payable in connection with optional redemption
payments) and continuance of such default for 30 days;
(iii) default on any other Indebtedness of the Company, any Subsidiary
Guarantor or any other Subsidiary if either (a) such default results from the
failure to pay principal of, premium, if any, or interest on
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any such Indebtedness when due in excess of $5.0 million and continuance of such
default beyond any applicable cure, forbearance or notice period, or (b) as a
result of such default, the maturity of such Indebtedness has been accelerated
prior to its scheduled maturity, without such default and acceleration having
been rescinded or annulled within a period of 10 days, and the principal amount
of such Indebtedness, together with the principal amount of any other such
Indebtedness in default, or the maturity of which has been so accelerated,
aggregates $5.0 million or more;
(iv) default in the performance, or breach, of any other covenant of the
Company or any Subsidiary Guarantor in the Indenture and failure to remedy such
default within a period of 45 days after written notice thereof from the Trustee
or Holders of 25% in principal amount of the outstanding Notes;
(v) the entry by a court of one or more judgments or orders against the
Company, any Subsidiary Guarantor or any other Subsidiary in an aggregate amount
in excess of $5.0 million and which are not covered by insurance written by
third parties that has not been vacated, discharged, satisfied or stayed pending
appeal within 60 days from the entry thereof;
(vi) certain events of bankruptcy, insolvency or reorganization in respect
of the Company or any Material Subsidiary; or
(vii) a Subsidiary Guarantee by a Subsidiary Guarantor that is a Material
Subsidiary shall cease to be in full force and effect (other than a release of a
Subsidiary Guarantor by designation of such Subsidiary Guarantor as an
Unrestricted Subsidiary or as otherwise provided under the Indenture in
connection with the sale, liquidation or other transfer of such Subsidiary
Guarantor) or any Subsidiary Guarantor shall deny, disaffirm or seek to revoke
its obligations with respect thereto.
If any Event of Default (other than an Event of Default specified in clause
(vi) above) occurs and is continuing, then and in every such case the Trustee or
the Holders of not less than 25% in principal amount of the Notes then
outstanding may declare the unpaid principal of (or the Change of Control
Purchase Price if the Event of Default includes failure to pay the Change of
Control Purchase Price), and accrued and unpaid interest on, all the Notes then
outstanding to be due and payable, by a notice in writing to the Company (and to
the Trustee, if given by Holders) and upon any such declaration such principal
amount, premium, if any, and accrued and unpaid interest shall become
immediately due and payable, notwithstanding anything contained in the Indenture
or the Notes to the contrary. If an Event of Default specified in clause (vi)
above occurs, all unpaid principal of, premium, if any, and accrued interest on,
the Notes then outstanding will become due and payable, without any declaration
or other act on the part of the Trustee or any Holder.
The Holders of a majority in principal amount of Notes then outstanding, by
written notice to the Company, the Subsidiary Guarantors and the Trustee, may
rescind and annul a declaration of acceleration and its consequences if (i) the
Company or any Subsidiary Guarantor has paid or deposited with such Trustee a
sum sufficient to pay (a) all overdue installments of interest on all the Notes,
(b) the principal of, and premium, if any, on, any Notes that have become due
otherwise than by such declaration of acceleration and interest thereon at the
rate or rates prescribed therefor in the Notes, (c) to the extent that payment
of such interest is lawful, interest on the defaulted interest at the rate or
rates prescribed therefor in the Notes and (d) all money paid or advanced by the
Trustee thereunder and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; (ii) all Events of Default,
other than the non-payment of the principal of any Notes that have become due
solely by such declaration of acceleration, have been cured or waived as
provided in the Indenture; and (iii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. No such rescission will
affect any subsequent Event of Default or impair any right consequent thereon.
Except as described in the next paragraph, no Holder of any of the Notes
will have any right to institute any proceeding, judicial or otherwise, or for
the appointment of a receiver or trustee or pursue any remedy under the
Indenture, unless (i) such Holder has previously given notice to the Trustee of
a continuing Event of Default, (ii) the Holders of not less than 25% in
principal amount of the outstanding Notes have made written request to such
Trustee to institute proceedings in respect of such Event of Default in its own
name as Trustee under the Indenture, (iii) such Holder or Holders have offered
to such Trustee reasonable indemnity
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against the costs, expenses and liabilities to be incurred in compliance with
such request, (iv) such Trustee for 30 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding and
(v) no direction inconsistent with such written request has been given to such
Trustee during such 30-day period by the Holders of a majority in principal
amount of the Notes then outstanding.
The Holder of any Note will have the right, which is absolute and
unconditional, to receive payment of the principal of, premium, if any, and
interest on such Note on the stated maturity therefor and to institute suit for
the enforcement of any such payment, and such right may not be impaired without
the consent of such Holder.
The Holders of a majority in principal amount of the Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
such Trustee, provided that (i) such direction is not in conflict with any rule
of law or with the Indenture and (ii) the Trustee may take any other action
deemed proper by such Trustee that is not inconsistent with such direction.
MODIFICATIONS AND WAIVERS
The Company and the Trustee may amend the Indenture or rights thereunder
may be waived with the consent of the Subsidiary Guarantors and the Holders of
at least a majority of the principal amount of Notes then outstanding, provided
that, without the consent of each Holder of Notes affected thereby, no such
modification or waiver will be made with regard to: (i) a default in the payment
of principal, premium, if any, or interest on the Notes; (ii) a reduction of the
interest rate on or principal amount of the Notes, an extension of the maturity
schedule of the Notes or a modification of the redemption or repurchase
provisions of the Notes; (iii) subordination of the Notes in a manner that is
adverse to the Holders; (iv) a change in the currency in which the Notes are
payable; (v) a change in the percentage required by this provision; or (vi) a
change in any Holder's right to receive payment of the proceeds of, premium, if
any, and interest on the Notes and to institute suit for the enforcement of such
payment.
Notwithstanding the foregoing, without the consent of a Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture, the
Subsidiary Guarantees or the Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's obligations
to Holders of Notes in the case of a merger or consolidation, to make any change
that would provide any additional rights or benefits to the Holders of Notes or
that does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Company may at any time terminate its Obligations under the Notes and
the Indenture, and the Subsidiary Guarantors may, at such times, terminate their
corresponding obligations under the Subsidiary Guarantees and the Indenture,
with certain exceptions specified in the Indenture, by irrevocably depositing in
trust cash or obligations of the United States government and its agencies for
payment of principal of, and interest on, the Notes to redemption or maturity,
subject to the satisfaction of certain conditions.
Subject to the conditions described below, at the Company's option, either
(i) the Company and the Subsidiary Guarantors will be deemed to have been
discharged from their obligations with respect to the Notes and Subsidiary
Guarantees and the provisions of the Indenture on the 91st day after the
applicable conditions set forth below have been satisfied or (ii) the Company
and the Subsidiary Guarantors will cease to be under any obligation to comply
with certain restrictive covenants, including those described under "-- Certain
Covenants", at any time after the applicable conditions set forth below have
been satisfied: (a) the Company or any Subsidiary Guarantor has deposited or
caused to be deposited irrevocably with the Trustee as trust funds in trust,
specifically pledged as security for, and dedicated solely to, the benefit of
the Holders (1) money or (2) United States government obligations, which through
the payment of interest and principal in respect thereof in accordance with
their terms will provide (without any reinvestment of such
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interest or principal), not later than one day before the due date of any
payment, money or (3) a combination of (1) and (2), in an amount sufficient, in
the opinion (with respect to (2) and (3)) of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee at or prior to the time of such deposit, to pay and
discharge each installment of principal of, premium, if any, and interest on,
the outstanding Notes on the dates such installments are due; (b) no Default or
Event of Default has occurred or is continuing on the date of such deposit or
will occur as a result of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, any other instrument to
which the Company or a Subsidiary Guarantor or any Subsidiary is a party or by
which any of them is bound, as evidenced to the Trustee in an Officers'
Certificate delivered to the Trustee concurrently with such deposit; (c) the
Company has delivered to the Trustee an opinion of tax counsel reasonably
acceptable to the Trustee (which counsel may be an employee of the Company) to
the effect that Holders will not recognize income, gain or loss for federal
income tax purposes as a result of the Company's exercise of its option
described above and will be subject to federal income tax on the same amount and
in the same manner and at the same time as would have been the case if such
option had not been exercised; provided that in the case of the Notes being
discharged pursuant to clause (i) above, such opinion shall be based upon and
shall identify a ruling by the Internal Revenue Service or a change in law to
that effect (it being understood that (1) such opinion will also state, if
applicable, that such ruling or change in law is consistent with the conclusions
reached in such opinion and (2) the Trustee will be under no obligation to
investigate the basis or correctness of such opinion); (d) the Company has
delivered to the Trustee an opinion of counsel (which counsel may be an employee
of the Company) to the effect that the Company's exercise of its option
described above will not result in any of the Company, the Trustee or the trust
created by the Company's deposit of funds hereunder becoming or being deemed to
be an "investment company" under the Investment Company Act of 1940, as amended;
(e) the Company or any Subsidiary Guarantor has paid or duly provided for
payment of all amounts then due to the Trustee pursuant to the terms of the
Indenture; and (f) the Company has delivered to the Trustee an Officers'
Certificate and an opinion of counsel (which counsel may be an employee of the
Company), each stating that all conditions precedent provided for in the
Indenture relating to the satisfaction and discharge of the Indenture have been
complied with.
GOVERNING LAW
The Indenture provides that it will be governed by, and construed in
accordance with, the laws of the State of New York, but without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee need perform only those duties that are specifically set
forth (or incorporated by reference) in the Indenture and no others. During the
existence of an Event of Default, the Trustee will exercise such rights and
powers vested in it by the Indenture, and use the same degree of care and skill
in such exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payments of claims in
certain cases or to realize on certain property received in respect of any such
claims as security or otherwise.
BOOK ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Exchange Notes initially
will be represented by a single, permanent global certificate in definitive,
fully registered form (the "Global Note"). The Global Note will be deposited on
the Exchange Date with, or on behalf of, DTC and registered in the name of a
nominee of DTC. The Global Note will be subject to certain restrictions on
transfer set forth therein and will bear the legend regarding such restrictions
set forth under "Transfer Restrictions".
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Exchange Notes (i) originally purchased by Institutional Accredited
Investors or transferred to Institutional Accredited Investors or "foreign
purchasers" who are not Qualified Institutional Buyers or (ii) held by Qualified
Institutional Buyers who elect to take physical delivery of their certificates
instead of holding their interest through the Global Note (and which are thus
ineligible to trade through DTC) (collectively referred to herein as the
"Non-Global Purchasers") will be issued in registered certificated form
("Certificated Securities"). Upon the transfer to a Qualified Institutional
Buyer of any Certificated Security initially issued to a Non-Global Purchaser,
such Certificated Security will, unless the transferee requests otherwise or the
Global Note has previously been exchanged in whole for Certificated Securities,
be exchanged for an interest in the Global Note. For a description of the
restrictions on the transfer of Certificated Securities and any interest in the
Global Note, see "Transfer Restrictions".
The Global Note
The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Note, DTC or its custodian will credit, on its
internal system, the principal amount of Exchange Notes of the individual
beneficial interests represented by such Global Note to the respective accounts
for persons who have accounts with DTC and (ii) ownership of beneficial
interests in the Global Note will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
Ownership of beneficial interests in the Global Note will be limited to persons
who have accounts with DTC ("participants") or persons who invest through
participants. Qualified Institutional Buyers will hold their interests in the
Global Note directly through DTC, if they are participants in such system, or
indirectly through organizations which are participants in such system.
So long as DTC or its nominee is the registered owner or holder of the
Exchange Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture. No beneficial owners of an interest in any
Global Note will be able to transfer that interest except in accordance with
DTC's procedures in addition to those provided for under the Indenture.
Payments of the principal of, premium, if any, and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any paying agent of the
Company will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Global Note or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in the Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Security for any reason,
including to sell Exchange Notes to persons in states which require physical
delivery of the Certificated Securities, or to pledge such securities, such
holder must transfer its interest in the Global Note in accordance with the
normal procedures of DTC and with the procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Outstanding Notes (including the presentation of
Outstanding Notes for exchange pursuant to the Exchange Offer) only at the
direction of one or more participants to whose account the interests in the
Outstanding Global Note are credited and only in respect of such portion of the
aggregate principal amount of Outstanding Notes as to which such participant or
participants have given such direction. However, if there is an Event of
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Default under the Indenture, DTC will exchange the Global Note for Certificated
Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Initial Purchaser or the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Certificated Securities
If (i) DTC is at any time unwilling or unable to continue as a depositary
for the Global Note and a successor depositary is not appointed by the Company
within 90 days, (ii) an Event of Default has occurred and is continuing and the
registrar has received a request from DTC to issue Certificated Securities in
lieu of all or a portion of the Global Note (in which case the Company shall
deliver Certificated Securities within 30 days of such request) or (iii) the
Company determines not to have the Exchange Notes represented by the Global Note
and notifies DTC and the registrar thereof, Certificated Securities will be
issued in exchange for the Global Note.
CERTAIN DEFINITIONS
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
lesser of the amount by which (i) the fair value of the property of such
Subsidiary Guarantor exceeds the total amount of liabilities, including, without
limitation, contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under the Subsidiary Guarantee, of such Subsidiary Guarantor at such
date and (ii) the present fair saleable value of the assets of such Subsidiary
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of such Subsidiary Guarantor on its debts (after giving
effect to all other fixed and contingent liabilities incurred or assumed on such
date and after giving effect to any collection from any Subsidiary of such
Subsidiary Guarantor in respect of the obligations of such Subsidiary under the
Subsidiary Guarantee), excluding debt in respect of the Subsidiary Guarantee, as
they become absolute and matured.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person directly or indirectly,
whether through the ownership of Voting Stock, by contract or otherwise, and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Asset" means each of the assets that are owned by the Company or a
Subsidiary on the Issue Date or that are acquired by the Company or a Subsidiary
after the Issue Date.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease,
exchange or other disposition to any Person (including, without limitation, by
means of a sale-and-leaseback transaction or a merger or consolidation)
(collectively, for purposes of this definition, a "transfer "), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Subsidiary held by the Company or any other
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Subsidiary, (ii) all or substantially all of the properties and assets of any
division or line of business of the Company or any of its Subsidiaries or (iii)
any other properties or assets of the Company or any of its Subsidiaries other
than transfers of cash, Cash Equivalents, accounts receivable or properties or
assets in the ordinary course of business; provided that the sale, lease,
conveyance or other disposition of all or substantially all of the properties or
assets of the Company and its Subsidiaries, taken as a whole, will be governed
by the provisions of the Indenture described above under the caption " -- Change
of Control" and/or the provisions described above under the caption " -- Merger,
Consolidation or Sale of Substantially All Assets" and not by the provisions of
the "Limitation on Asset Sales" covenant. For the purposes of this definition,
the term "Asset Sale" also shall not include any of the following: (a) any
transfer of properties or assets to an Unrestricted Subsidiary, if such transfer
is not prohibited under the "Restricted Payments" covenant described above; (b)
any transfer of properties or assets by the Company to a Subsidiary or by a
Subsidiary to the Company or a Subsidiary (in the case of a transfer to a
Subsidiary that is not a Wholly Owned Subsidiary, dispositions shall be excluded
pursuant to clause (b) only to the extent of the Company's interest in such
Subsidiary after giving effect to such transfer); (c) sales of damaged, worn-out
or obsolete equipment or assets that, in the Company's reasonable judgment, are
either (1) no longer used or (2) no longer useful in the business of the Company
or its Subsidiaries; (d) any lease of any property entered into in the ordinary
course of business and with respect to which the Company or any Subsidiary is
the lessor, except any such lease that provides for the acquisition of such
property by the lessee during or at the end of the term thereof for an amount
that is less than the fair market value thereof at the time the right to acquire
such property is granted; or (e) any transfer that but for this clause (e) would
be an Asset Sale, if (1) the Company elects to designate such transfers as not
constituting Asset Sales and (2) after giving effect to such transfers, the
aggregate fair market value of the properties or assets transferred in such
transaction or any such series of related transactions so designated by the
Company does not exceed $5.0 million.
"Attributable Indebtedness" in respect of a sale-and-leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale-and-leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended). As used in the preceding sentence, the "net rental
payments" under any lease for any such period shall mean the sum of rental and
other payments required to be paid with respect to such period by the lessee
thereunder, excluding any amounts required to be paid by such lessee on account
of maintenance and repairs, insurance, taxes, assessments, water rates or
similar charges. In the case of any lease that is terminable by the lessee upon
payment of penalty, such net rental payment shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date to the date of each successive scheduled
principal payment of such Indebtedness multiplied by (b) the amount of such
principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means, with respect to any Person, the board of
directors of such Person or any committee of the board of directors of such
Person duly authorized to act on behalf of the board of directors of such
Person.
"Business Day" means any day on which the New York Stock Exchange is open
for trading and which is not a legal holiday.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of corporate
stock and any and all warrants, options and rights with respect thereto,
including each class of common stock and preferred stock of such Person.
"Capitalized Lease Obligation" means the discounted present value of the
rental obligations of any Person under any lease of Property, which in
accordance with GAAP, is required to be capitalized on the balance sheet of such
Person.
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"Cash Equivalents" means (a) the following kinds of investments if, in the
case of instruments referred to in clauses (i)-(iv) below, on the date of
purchase or other acquisition of any such instrument by the Company or any
Subsidiary, the remaining term to maturity is not more than one year: (i)
readily marketable obligations issued or unconditionally guaranteed as to
principal and interest by the United States of America or by any agency or
authority controlled or supervised by and acting as an instrumentality of the
United States of America; (ii) repurchase obligations for instruments of the
type described in clause (i) for which delivery of the instrument is made
against payment; (iii) obligations (including, but not limited to, demand or
time deposits, bankers' acceptances and certificates of deposit) issued by a
depository institution or trust company incorporated or doing business under the
laws of the United States of America, any state thereof or the District of
Columbia or a branch or subsidiary of any such depository institution or trust
company operating outside the United States; provided that such depository
institution or trust company has, at the time of the Company's or such
Subsidiary's investment therein or contractual commitment providing for such
investment, capital, surplus or undivided profits (as of the date of such
institution's most recently published financial statements), in excess of $100.0
million; and (iv) commercial paper issued by any Person, if such commercial
paper has, at the time of the Company's or any Subsidiary's investment therein
or contractual commitment providing for such investment, credit ratings of A-1
by S&P and P-1 by Moody's; and (b) money market mutual or similar funds having
assets in excess of $100.0 million.
"Change of Control" means (i) an event or series of events by which any
Person or other entity or group of Persons or other entities acting in concert
as a partnership or other group (a "Group of Persons") other than the Lawrence
Group or any member thereof shall, as a result of a tender or exchange offer,
open market purchases, privately negotiated purchases, merger, consolidation or
otherwise, have become the beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act) of 40% or more of the combined voting power of the then
outstanding Voting Stock of the Company, (ii) during any period of two
consecutive years, Continuing Directors cease for any reason to constitute a
majority of the Board of Directors then in office, (iii) the direct or indirect
sale, lease, exchange or other transfer of all or substantially all of the
assets of the Company and the Subsidiaries, taken as a whole to any Person or
Group of Persons other than the Company or any Subsidiary Guarantor that is a
Wholly-Owned Subsidiary, or (iv) the liquidation or dissolution of the Company.
"Commission" means the Securities and Exchange Commission.
"Company Properties" means all Properties, and equity, partnership or other
ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Company or the Subsidiaries, which business activities are not prohibited
by the terms of the Indenture.
"Consolidated EBITDA" means, with respect to any Person for any period, the
Consolidated Net Income of such Person for such period increased (to the extent
deducted in determining Consolidated Net Income) by the sum of: (i) all income
taxes of such Person and its subsidiaries paid or accrued according to GAAP for
such period (other than income taxes attributable to extraordinary, unusual or
non-recurring gains or losses), (ii) all interest expense of such Person and its
subsidiaries paid or accrued in accordance with GAAP for such period (including
amortization of original issue discount and the interest portion of deferred
payment obligations), (iii) depreciation and depletion of such Person and its
subsidiaries, (iv) amortization of such Person and its subsidiaries including,
without limitation, amortization of capitalized debt issuance costs and (v) any
other non-cash charges to the extent deducted from Consolidated Net Income.
"Consolidated EBITDA Coverage Ratio" means, with respect to any Person, the
ratio of (1) Consolidated EBITDA of such Person for the period (the "Pro Forma
Period") consisting of the most recent four full fiscal quarters for which
financial information in respect thereof is available immediately prior to the
date of the transaction giving rise to the need to calculate the Consolidated
EBITDA Coverage Ratio (the "Transaction Date") to (2) the aggregate Fixed
Charges which such Person will accrue during the fiscal quarter in which the
Transaction Date occurs and the three fiscal quarters immediately subsequent to
such fiscal quarter (the "Forward Period") on the aggregate amount of
Indebtedness outstanding on the Transaction Date, including any Indebtedness
proposed to be incurred on such date and excluding any
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Indebtedness repaid with the proceeds of such Indebtedness (as though all such
Indebtedness was incurred or repaid on the first day of the quarter in which the
Transaction Date occurred). In addition to, but without duplication of, the
foregoing, for purposes of this definition, "Consolidated EBITDA" shall be
calculated after giving effect (without duplication), on a pro forma basis for
the Pro Forma Period (but no longer), to (i) any Investment, during the period
commencing on the first day of the Pro Forma Period to and including the
Transaction Date (the "Reference Period"), in any other Person that, as a result
of such Investment, becomes a subsidiary of such Person, (ii) the acquisition,
during the Reference Period (by merger, consolidation or purchase of stock or
assets) of any business or assets, which acquisition is not prohibited by the
Indenture, including but not limited to Permitted Industry Investments, as if
such acquisition had occurred on the first day of the Reference Period, (iii)
any sales or other dispositions of assets occurring during the Reference Period,
in each case as if such incurrence, Investment, repayment, acquisition or asset
sale had occurred on the first day of the Reference Period and (iv) interest
income reasonably anticipated by the Company to be received during the Pro Forma
Period from Investments in Cash Equivalents, which Investments exist on the
Transaction Date or will exist as a result of the transaction giving rise to the
need to calculate the Consolidated EBITDA Coverage Ratio. For purposes of this
definition, "Fixed Charges" shall be calculated after giving effect (without
duplication), on a pro forma basis for the Forward Period, to any Indebtedness
incurred or repaid on or after the first day of the Forward Period and prior to
the Transaction Date. For purposes of calculating the Company's Consolidated
EBITDA Coverage Ratio, Indebtedness of a Subsidiary that is not a Wholly-Owned
Subsidiary (which Indebtedness is nonrecourse to the Company or any other
Subsidiary or any of their assets) shall be included only to the extent of the
Company's pro rata ownership interest in such Subsidiary.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or loss) of such Person and its subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP, provided
that (i) the net income of (a) any Unrestricted Subsidiary and (b) any other
Person in which such Person or any subsidiary thereof has an interest (which
interest, in the case of those Persons referred to in clause (b), does not cause
the net income of such other Person to be consolidated with the net income of
such Person in accordance with GAAP) will be included only to the extent of the
amount of dividends or distributions actually paid in cash or Cash Equivalent to
such Person or its subsidiaries that are Subsidiary Guarantors by such other
Person in such period; (ii) the net income of any subsidiary of such Person that
is subject to any Payment Restriction will be excluded to the extent of such
Payment Restriction; and (iii) (a) the net income (or loss) of any other Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition, (b) any net gain (but not loss) on the sale or other
disposition by such Person or any of its subsidiaries of assets and of the
Capital Stock of any subsidiary of such Person, (c) items which are
extraordinary, and (d) the cumulative effect of a change in accounting
principles, will each be excluded.
"Consolidated Net Tangible Assets" as of any date means with respect to any
Person the Consolidated Net Worth of such Person and its consolidated
Subsidiaries as of such date less (i) all write-ups subsequent to the date of
the Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person (other than purchase accounting
adjustments made, in connection with any acquisition of any entity that becomes
a consolidated Subsidiary of such Person after the date of the Indenture to the
book value of the assets of such entity), (ii) all investments as of such date
in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), (iii) all unamortized goodwill,
trademarks, trade names, service marks, brand names, copyrights, patents and
other intangible assets in accordance with GAAP, and (iv) unamortized debt
discount and expense and unamortized deferred charges as of such date, all of
the forgoing determined in accordance with GAAP.
"Consolidated Net Worth" as of any date means with respect to any Person
the amount by which the assets of such Person and its subsidiaries on a
consolidated basis exceed (i) the total liabilities of such Person and its
subsidiaries on a consolidated basis, plus (ii) Disqualified Capital Stock of
such Person or Disqualified Capital Stock of any subsidiary of such Person
issued to any Person other than such Person or another wholly-owned subsidiary
of such Person, in each case determined in accordance with GAAP.
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"Continuing Directors" means any member of the Board of Directors of the
Company on the Issue Date, any director elected since the date thereof in any
annual meeting of the stockholders upon the recommendation of the Board of
Directors of the Company and any other member of the Board of Directors of the
Company who will be recommended or elected to succeed a Continuing Director by a
majority of Continuing Directors who are then members of the Board of Directors
of the Company.
"Credit Facility" means one or more credit facilities without limitation as
to amount that now is or are or hereafter may be entered into among the Company
or one or more of its Subsidiaries or the Company and one or more of its
Subsidiaries, as the case may be, and the lenders parties thereto, including any
related notes, guarantees, collateral documents, and other instruments and
agreements executed in connection therewith without limitation as to amount,
which term, as of the Issue Date, initially consists of the Third Amended and
Restated Loan Agreement by and among Company, the financial institutions party
thereto and Wells Fargo Bank (Texas), National Association, as agent, and in
each case as amended, modified, supplemented, renewed, extended, refunded,
replaced, restated or refinanced from time to time in whole or part in one or
more credit agreements, loan agreements, instruments or similar agreements
without limitation as to amount, as such may be further amended, modified,
supplemented, extended, refunded, restated, replaced, renewed or refinanced from
time to time.
"Currency Agreement" means the obligations of any Person pursuant to any
foreign exchange contract, currency swap agreement or other similar agreement or
arrangement designed to protect such Person or any of its subsidiaries against
fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time
would be, an Event of Default.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person or its subsidiaries that, by its terms, by the terms of any
agreement related thereto or by the terms of any security into which,
mandatorily or at the option of the holder, it is convertible or exchangeable,
is, or upon the happening of an event or the passage of time would be, required
to be redeemed or repurchased by such Person or its subsidiaries, including at
the option of the holder, in whole or in part, or has, upon the happening of an
event or the passage of time would have, a redemption or similar payment due, in
each such case on or prior to the Maturity Date.
"Employee Stock Repurchases" means purchases by the Company of any of its
Capital Stock from officers and other employees for the purpose of enabling such
employees to pay personal income tax obligations with the proceeds; provided
that the aggregate amount of all such purchases shall not exceed $500,000 during
any fiscal year of the Company.
"Equity Interests" means Capital Stock or other equity interests and all
warrants, options or other rights to acquire Capital Stock or other equity
interests.
"Exempt Foreign Subsidiary" means (i) any Subsidiary engaged in business
permitted under the Indenture exclusively outside the United States of America,
irrespective of its jurisdiction of incorporation and (ii) any other Subsidiary
whose assets (excluding any cash and Cash Equivalents) consist exclusively of
Capital Stock or Indebtedness of one or more Subsidiaries described in clause
(i) of this definition, that, in any case, is so designated by the Company in an
Officers' Certificate delivered to the Trustee and (a) is not a guarantor of,
and has not granted any Lien to secure, the Credit Facility or any other
Indebtedness of the Company or any Subsidiary other than another Exempt Foreign
Subsidiary and (b) does not have total assets that, when aggregated with the
total assets of any other Exempt Foreign Subsidiary, exceed 25% of the Company's
consolidated total assets, as determined in accordance with GAAP, as reflected
on the Company's most recent quarterly or annual balance sheet. The Company may
revoke the designation of any Exempt Foreign Subsidiary by notice to the
Trustee.
"Fixed Charges" means, with respect to any Person, for any period, the
aggregate amount of (i) interest, whether expensed or capitalized, paid, accrued
or scheduled to be paid or accrued during such period (except to the extent
accrued in a prior period) in respect of all Indebtedness of such Person and its
consolidated subsidiaries (including (a) original issue discount on any
Indebtedness and (b) the interest portion of all deferred payment obligations,
calculated in accordance with the effective interest method, in each case to the
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extent attributable to such period) and (ii) dividend requirements on
Disqualified Capital Stock of such Person and its consolidated subsidiaries
(whether in cash or otherwise (except dividends payable in shares of Qualified
Capital Stock) (non-cash dividends being valued as determined in good faith by
the Board of Directors of such Person, as evidenced by a resolution of the Board
of Directors)) paid, accrued or scheduled to be paid or accrued during such
period (except to the extent accrued in a prior period) and excluding items
eliminated in consolidation.
For purposes of the definition of Fixed Charges, (i) interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by the Board of Directors of such Person (as evidenced by
a resolution of the Board of Directors) to be the rate of interest implicit in
such Capitalized Lease Obligation in accordance with GAAP; (ii) interest on
Indebtedness that is determined on a fluctuating basis shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest of such
Indebtedness in effect on the date Fixed Charges are being calculated, subject
to the proviso in clause (iii); (iii) interest on Indebtedness that may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate or other rate, shall be
deemed to have been based upon the rate actually chosen, or, if none, then based
upon such optional rate chosen as the Company may designate, (provided that, for
the period following the date on which the rate actually chosen ceases to be in
effect, the Company may designate an optional rate other than that actually
chosen, which optional rate shall be deemed to accrue at a fixed per annum equal
to the rate of interest on such optional rate in effect on the date Fixed
Charges are being calculated); and (iv) Fixed Charges shall be increased or
reduced by the net cost (including amortization of discount) or benefit
associated with obligations under Interest Rate Agreements attributable to such
period.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as of any date of determination.
"Guarantor Senior Indebtedness" means all Indebtedness of a Subsidiary
Guarantor (present and future) created, incurred, assumed or guaranteed by the
Subsidiary Guarantor (and all renewals, extensions, increases or refundings
thereof) (including the principal of, interest on and fees, premiums, expenses
(including costs of collection), indemnities and other amounts payable in
connection with such Indebtedness, and including any Post-Commencement Amounts),
unless the instrument governing such Indebtedness expressly provides that such
Indebtedness is not senior or superior in right of payment to the Subsidiary
Guarantee. Notwithstanding the foregoing, Guarantor Senior Indebtedness does not
include (i) any Indebtedness of the Subsidiary Guarantor to the Company or any
Subsidiary or any Unrestricted Subsidiary or (ii) any amounts payable or other
liabilities to trade creditors.
"Indebtedness" means, with respect to any Person, without duplication, any
liability, contingent or otherwise, of such Person (i) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures
or similar instruments, (iii) representing the deferred and unpaid balance of
the purchase price of any property or interest therein (other than any such
balance that represents an account payable or any other monetary obligation to a
trade creditor created, incurred, assumed or guaranteed by such Person in the
ordinary course of business of such Person in connection with obtaining goods,
materials or services and due within twelve months (or such longer period for
payment as is customarily extended by such trade creditor) of the incurrence
thereof, which account is not overdue by more than 150 days, according to the
original terms of sale, unless such account payable is being contested in good
faith or has been extended), (iv) for the payment of a Capitalized Lease
Obligation of such Person, (v) with respect to the reimbursement of any letter
of credit, banker's acceptance or similar credit transaction, (vi) with respect
to Indebtedness (as otherwise defined in this definition) of another Person
secured by a Lien on any asset of such Person, whether or not such Indebtedness
is assumed by such Person (provided that if the obligations so secured have not
been assumed in full by such Person or are not otherwise such Person's legal
liability in full, then such obligations shall be deemed to be in an amount
equal to the greater of (a) the lesser of (1) the full amount of such
obligations and (2) the fair market value of such assets, as determined in good
faith by the Board of Directors of such Person, which determination shall be
evidenced by a Board Resolution, and (b) the amount of obligations as have been
assumed by such Person or which are otherwise such Person's legal liability),
(vii) to
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the extent not otherwise included, under Currency Agreements and Interest Rate
Agreements entered into other than in the ordinary course of such Person's
business, (viii) in the case of such Person, the liquidation preference and any
mandatory redemption payment obligations in respect of Disqualified Capital
Stock, and, in the case of a subsidiary of such Person, the liquidation
preference and any mandatory redemption payment obligations in respect of
preferred stock of such subsidiary, and (ix) in respect of all Indebtedness of
others which such Person has guaranteed, endorsed with recourse (otherwise than
for collection, deposit or other similar transactions in the ordinary course of
business), agreed to purchase or repurchase or in respect of which such Person
has agreed contingently to supply or advance funds or for which such Person has
otherwise become liable; provided, however, Indebtedness arising pursuant to
clause (iii) of this definition as a result of such account payable becoming
overdue by more than 150 days shall only be deemed to be incurred at a time when
Indebtedness, other than such Indebtedness, is incurred.
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
(a) an insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization proceeding or other similar case or proceeding,
relative to such Person or to its creditors, as such, or its assets, (b) any
liquidation, dissolution, or reorganization proceeding of such Person, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy
or (c) any assignment for the benefit of creditors or any other marshaling of
assets and liabilities of such Person.
"Interest Rate Agreement" means the obligations of any Person pursuant to
any interest swap agreement, interest rate collar agreement or other similar
agreement or arrangement designed to protect such Person or any of its
subsidiaries against fluctuations in interest rates.
"Investment" means, in respect of any Person, any investment in another
Person, whether by means of a share purchase, capital contribution, loan,
advance (other than advances to employees for moving and travel expenses,
drawing accounts and similar expenditures made in the ordinary course of
business) or similar credit extension constituting Indebtedness of such other
Person and any guaranty of Indebtedness of any other Person provided that the
following shall not constitute Investments: (a) extension of trade credit or
other advances to customers on commercially reasonable terms in accordance with
normal trade practices or otherwise in the ordinary course of business, (b)
obligations under Interest Rate Agreements and Currency Agreements, but only to
the extent that the same constitute Permitted Indebtedness, (c) endorsements of
negotiable instruments and documents in the ordinary course of business, (d) an
acquisition of assets, Capital Stock or other securities by the Company or any
of its Subsidiaries for consideration consisting of Capital Stock or other
common equity securities of the Company or any of its Subsidiaries, and (e)
stock, obligations and other securities received in settlement of debts owing to
the Company or any of its Subsidiaries as a result of collection efforts or
proceedings or upon the foreclosure or enforcement of any Lien in favor of the
Company or any such Subsidiary, in each case, as to debt owing to the Company or
any such Subsidiary that arose in the ordinary course of business of the Company
or any such Subsidiary. For purposes of the "Limitation on Restricted Payments"
covenant and the definition of Permitted Unrestricted Subsidiary Investments,
(i) an "Investment" in an Unrestricted Subsidiary shall be deemed to include and
be valued at the fair market value of the net assets of any Subsidiary at the
time that such Subsidiary is designated an Unrestricted Subsidiary and (ii) any
Investment in an Unrestricted Subsidiary shall be valued at fair market value at
the time of such Investment (except, however, when such Investment consists of a
loan or advance by a Person to another Person that is of an intercompany or
similar nature between such Persons and arises pursuant to an agreement or
understanding in the ordinary course of business relating to tax sharing,
administrative or other similar arrangements, then such Investment shall be
valued at fair market value at the time that the investing Person shall have
paid monies or transferred other consideration to another Person for the benefit
of the Person with whom the agreement to make such loan or advance was made), in
each case as determined by the Board of Directors of the Company and such
Subsidiary, as applicable, in good faith.
"Issue Date" means the date on which the Outstanding Notes were originally
issued.
"Lawrence Group" means Lawrence Industries, Inc., J.D. Lawrence and any
Person related to J.D. Lawrence within the second degree of consanguinity, any
trust for the benefit of one or more such Persons, and any Person controlled
directly or indirectly by any such Person.
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"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statute or statutes) of any jurisdiction).
"Material Subsidiary" means any Subsidiary of the Company which, as of the
relevant date of determination, would be a "significant subsidiary" as defined
in Reg. sec. 230.405 promulgated pursuant to the Securities Act as in effect on
the Issue Date, assuming the Company is the "registrant" referred to in such
definition, except that the 10% amounts referred to in such definition shall be
deemed to be 5%.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Proceeds" means the aggregate cash proceeds received by the
Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash proceeds received upon the sale or other
disposition of, or payments or collections on, any non-cash consideration
received in any Asset Sale, provided that such sale or other disposition was
contemplated by the Company or its applicable Subsidiary in connection with, and
was consummated incident to, such Asset Sale, and in respect to each of the
foregoing receipts of cash proceeds only as and when received, and excluding any
other consideration until such time as such consideration is converted into, and
received by the Company or any of its Subsidiaries as, cash), net of all (i)
legal, accounting and investment banking fees and expenses, sales commissions,
relocation, transportation, handling and storage expenses, title, recording and
if applicable, release expenses and other fees and expenses incurred as a result
of such Asset Sale, (ii) taxes paid or payable as a result of such Asset Sale or
required to be accrued as a liability as a consequence thereof (after taking
into account any available and applicable tax credits or deductions and any
applicable tax sharing arrangements), (iii) amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets that were
the subject of such Asset Sale, (iv) amounts required to be paid to any Person
(other than the Company or any Subsidiary) owning a beneficial interest in the
asset or assets that were the subject of such Asset Sale, (v) amounts required
to be paid in order to obtain a necessary consent to such Asset Sale or by
applicable law, and (vi) reserves for adjustments in respect of the sale price
of such asset or assets established in accordance with GAAP.
"Net Proceeds" means (i) in the case of any sale by the Company of
Qualified Capital Stock, the aggregate net cash proceeds received by the
Company, after payment of expenses, commissions and the like incurred in
connection therewith, and (ii) in the case of any exchange, exercise, conversion
or surrender of any outstanding securities or Indebtedness of the Company for or
into shares of Qualified Capital Stock of the Company, the net book value of
such outstanding securities or Indebtedness as adjusted on the books of the
Company on the date of such exchange, exercise, conversion or surrender (plus
any additional amount required to be paid by the holder of such Indebtedness or
securities to the Company upon such exchange, exercise, conversion or surrender
and less any and all payments made to the holders of such Indebtedness or
securities, and all other expenses incurred by the Company in connection
therewith).
"Non-Recourse Indebtedness" means Indebtedness (i) as to which neither the
Company nor any of its Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a Subsidiary Guarantor
or otherwise), or (c) constitutes the lender unless otherwise permitted under
the indenture; and (ii) no default with respect to which (including any rights
that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness of the Company or any of its Subsidiaries to
declare pursuant to the express terms governing such Indebtedness a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity.
"Obligations" mean the due and punctual payment of principal of and
interest on the Notes when due, whether at maturity, by acceleration, by
redemption or otherwise, and all other monetary obligations of the
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Company under the Indenture and the Notes and the due and punctual performance
of all other obligations of the Company under the Indenture and the Notes.
"Permitted Indebtedness" means (i) Indebtedness under the Notes and any
Exchange Note issued in exchange for Notes of equal principal amount; (ii)
Indebtedness from time to time outstanding under the Credit Facility in an
aggregate principal amount at any one time outstanding not to exceed the greater
of (a) the sum of (1) 85% of accounts receivable (net of any related reserves)
of the Company and its Subsidiaries plus (2) 50% of the revenue-producing tools
and inventory of the Company and its Subsidiaries, as such amounts are
determined on a consolidated basis in accordance with GAAP and reflected on the
Company's most recent balance sheet prepared in accordance with GAAP, or (b)
$30.0 million, plus all interest and fees under such agreements and any
guarantee of any such Indebtedness; (iii) the Subsidiary Guarantees of the Notes
(and any assumption of the obligations guaranteed thereby); (iv) Permitted
Refinancing Indebtedness; (v) Indebtedness of the Company to any Wholly-Owned
Subsidiary and any Indebtedness of any Wholly-Owned Subsidiary to the Company or
to any other Wholly-Owned Subsidiary; provided, that in each case, such
Indebtedness has not been incurred in contemplation of any subsequent issuance
or transfer of any Capital Stock or any other event which would result in any
such Wholly-Owned Subsidiary ceasing to be a Wholly-Owned Subsidiary or any
other subsequent transfer of any such Indebtedness (except to the Company or a
Wholly-Owned Subsidiary), and if incurred in contemplation of any of the
foregoing events, then such Indebtedness shall be deemed to be incurred and
shall be treated as an incurrence of Indebtedness for purposes of the
"Limitation on Incurrence of Additional Indebtedness" covenant at the time the
Wholly-Owned Subsidiary in question ceased to be a Wholly-Owned Subsidiary; (vi)
Permitted Operating Obligations; (vii) other Indebtedness outstanding at any
time in an aggregate principal amount not to exceed $5.0 million; and (viii)
Indebtedness outstanding on the Issue Date. Permitted Refinancing Indebtedness
that constitutes a refinancing of amounts referred to in clauses (ii) and (vii)
shall be deemed to be incurred pursuant to and subject to the limitations in
clauses (ii) and (vii), respectively. The Company may elect at any time that
amounts of Indebtedness incurred under clauses (ii) or (vii) be deemed to be
incurred pursuant to the first paragraph of the "Limitation on Incurrence of
Additional Indebtedness" covenant (if then permitted to be so incurred), in
which event such amounts so incurred shall be deemed not to be incurred under
clause (ii) or (vii); provided, however, any such Indebtedness deemed not to be
incurred under clause (ii) shall still be treated as Indebtedness under and
governed by the Credit Facility for purposes of all other provisions of the
Indenture.
"Permitted Industry Investments" means (i) capital expenditures, including,
without limitation, acquisitions of Company Properties and interests therein;
(ii) exchanges of Company Properties for other Company Properties of at least
equivalent value as determined in good faith by the Board of Directors of the
Company; (iii) Investments by the Company or any Subsidiary in any Subsidiary
(or in any Person that becomes a Subsidiary as a result of such Investment) that
are not subject to any Payment Restriction; and (iv) Investments by the Company
or any Subsidiary in any Person of which less than 50% of the issued and
outstanding Equity Interests is owned by the Company or another Subsidiary of
the Company; provided that the aggregate of all Investments by the Company and
any Subsidiary pursuant to this clause (iv) shall at no time exceed 15% of the
Consolidated Net Tangible Assets of the Company.
"Permitted Investments" means Cash Equivalents and Permitted Industry
Investments (in each case, other than Investments in Unrestricted Subsidiaries).
"Permitted Liens" means (i) Liens for taxes, assessments and governmental
charges not yet delinquent or being contested in good faith and for such
adequate reserves have been established to the extent required by GAAP, (ii)
landlord's, carriers, warehouseman's, storage, mechanics', workmen's,
materialmen's, operator's or similar Liens arising in the ordinary course of
business, (iii) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and encumbrances
consisting of zoning restrictions, easements, licenses, restrictions on the use
of Company Properties or minor imperfections in title thereto which, in the
aggregate, are not material in amount and which do not in any case materially
detract from the Company Properties subject thereto or interfere with the
ordinary conduct of the business of the Company or the Subsidiaries, (iv) Liens
on Company Properties which arise out of operation of law, (v) judgment and
attachment Liens not giving rise to an Event of Default or Liens created by or
existing from
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any litigation or legal proceeding that are currently being contested in good
faith by appropriate proceedings and for which adequate reserves have been made,
(vi) (a) Liens upon any Property of any Person existing at the time of
acquisition thereof by the Company or any of its Subsidiaries, (b) Liens upon
any Property of a Person existing at the time such Person is merged or
consolidated with the Company or any Subsidiary or existing at the time of the
sale or transfer of any such Property of such Person to the Company or any
Subsidiary or (c) Liens upon any Property of a Person existing at the time such
Person becomes a Subsidiary; provided that in each case such Lien has not been
created in contemplation of such sale, merger, consolidation, transfer or
acquisition, and provided further that in each such case no such Lien shall
extend to or cover any Property of the Company or any Subsidiary other than the
Property being acquired and improvements thereon, (vii) Liens existing on the
Issue Date, (viii) Liens on deposits made in the ordinary course of business,
including, without limitation, pledges or deposits under worker's compensation,
unemployment insurance and other social security legislation and deposits to
secure the performance of bids, trade contracts (other than for borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a similar nature incurred in the ordinary course of
business, (ix) Liens in favor of collecting or payor banks having a right of
setoff, revocation, refund or chargeback with respect to money or instruments of
the Company or any Subsidiary on deposit with or in possession of such bank, (x)
Liens upon any Property which were created solely for the purpose of securing
Indebtedness representing, or incurred to finance, refinance or refund, the cost
(including the cost of construction) of such Property; provided that (A) no such
Lien shall extend to or cover any Property of the Company or any Subsidiary
other than the Property so acquired and improvements thereon and (B) the Lien
securing any such Indebtedness shall be created within 90 days of such
acquisition, (xi) Liens securing Indebtedness that constitutes Permitted
Indebtedness pursuant to clause (i), (ii), (iii), (iv) (but only to the extent
secured at the time of such renewal, extension, refunding or repurchase and no
such Lien shall extend to any other Property of the Company or any Subsidiary),
and (vi) of the definition of Permitted Indebtedness, (xii) any interest or
title of a lessor under any Capital Lease Obligation or operating lease, and
(xiii) Liens securing obligations under or in respect of either Currency
Agreements or Interest Rate Agreements.
"Permitted Operating Obligations" means Indebtedness of the Company or any
Subsidiary in respect of one or more standby letters of credit, bid, performance
or surety bonds, or other reimbursement obligations, issued for the account of,
or entered into by, the Company or any Subsidiary in the ordinary course of
business, or in lieu of any thereof or in addition to any thereto, guarantees
and letters of credit supporting any such obligations and Indebtedness (in each
case, other than for an obligation for borrowed money, other than borrowed money
represented by any such letter of credit, bid, performance or surety bond, or
reimbursement obligation itself, or any guarantee and letter of credit related
thereto).
"Permitted Refinancing Indebtedness" means (i) Senior Indebtedness of the
Company or any Subsidiary, the net proceeds of which are used solely to renew,
extend, refinance, refund or repurchase outstanding Notes, including the amount
of reasonable fees and expenses and premium, if any, incurred by the Company or
such Subsidiary in connection therewith or (ii) Indebtedness of the Company or
any Subsidiary, the net proceeds of which are used to renew, extend, refinance,
refund or repurchase (including, without limitation, pursuant to a Change of
Control Offer as required by the terms of the Notes) outstanding Indebtedness of
the Company or any Subsidiary, provided that (a) if the Indebtedness (including
the Notes) being renewed, extended, refinanced, refunded or repurchased is pari
passu with or subordinated in right of payment to either the Notes or the
Subsidiary Guarantees, then such Indebtedness is pari passu with or subordinated
in right of payment to, as the case may be, the Notes or the Subsidiary
Guarantees at least to the same extent as the Indebtedness being renewed,
extended, refinanced, refunded or repurchased, (b) such Indebtedness is
scheduled to mature no earlier than the Indebtedness being renewed, extended,
refinanced, refunded or repurchased and (c) such Indebtedness has an Average
Life at the time such Indebtedness is incurred that is greater than the Average
Life of the Indebtedness being renewed, extended, refinanced, refunded or
repurchased; provided, further, that such Indebtedness (to the extent that such
Indebtedness constitutes Permitted Refinancing Indebtedness) is in an aggregate
principal amount (or, if such Indebtedness is issued at a price less than the
principal amount thereof, the aggregate amount of gross proceeds therefrom is)
not in excess of the aggregate principal amount then outstanding of the
Indebtedness being renewed, extended, refinanced, refunded or repurchased (or if
the Indebtedness being renewed, extended, refinanced, refunded or
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repurchased was issued at a price less than the principal amount thereof, then
not in excess of the amount of liability in respect thereof determined in
accordance with GAAP) plus the amount of reasonable fees and expenses and
premium, if any, incurred by the Company or such Subsidiary in connection
therewith.
"Permitted Unrestricted Subsidiary Investments" means Investments in
Unrestricted Subsidiaries in a cumulative aggregate amount (in cash or the fair
market value of property other than cash, as determined in good faith by the
Board of Directors of the Company) not to exceed the sum of (i) $10.0 million
and (ii) cash or cash equivalent distributions made from any Unrestricted
Subsidiary and received, after the Issue Date, as such by the Company, provided
that any amount included in this clause (ii) shall be deducted from any amounts
referred to in clause (ii)(c) of the "Limitation on Restricted Payments"
covenant. Notwithstanding the foregoing, Permitted Unrestricted Subsidiary
Investments shall also include any Investments in Unrestricted Subsidiaries to
the extent such Investment consists of (a) Qualified Capital Stock of the
Company or (b) amounts referred to in clause (ii)(b) of the "Limitation on
Restricted Payments" covenant, which Investments shall be excluded from the sum
in the previous sentence, provided that the amount of any Investments pursuant
to clause (b) shall be deducted from amounts referred to in clause (ii)(b) of
the "Limitation on Restricted Payments" covenant.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, trust, estate, unincorporated organization or
government or any agency or political subdivision thereof.
"Post-Commencement Amounts" means all interest and fees accrued or accruing
after the commencement of any Insolvency or Liquidation Proceeding in accordance
with and at the contract rate (including, without limitation, any nonusurious
rate applicable upon default) and all premiums, expenses (including costs of
collection), indemnities and other amounts that would have accrued or been
incurred after the commencement of any Insolvency or Liquidation Proceeding in
any case as specified in any agreement or instrument creating, evidencing, or
governing any Senior Indebtedness or any Guarantor Senior Indebtedness, as the
case may be, whether or not, pursuant to applicable law or otherwise, the claim
for such interest, fees, premiums, expenses, indemnities or other amounts is
allowed and non-avoidable as a claim in such Insolvency or Liquidation
Proceeding.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indenture, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act, as amended.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including, without limitation, Capital Stock, partnership
interests and other equity or ownership interests in any other Person.
"Public Equity Offering" means an underwritten public offer and sale of
common stock (that is Qualified Capital Stock) of the Company pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-8
or otherwise relating to equity securities issuable under any employee benefit
plan of the Company).
"Purchase Money Obligations" means indebtedness evidenced by a note,
debenture, bond or other security or investment (whether or not secured by any
lien or other security interest) issued to or assumed in favor of a vendor as
all or part of the purchase price of property acquired by the Company or any
Subsidiary; provided, however, that such term shall not include any account
payable or any other indebtedness incurred, created or assumed in the ordinary
course of business in connection with the obtaining of material, products or
services.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Related Person" means (i) any Affiliate of the Company, (ii) any
individual or other Person who directly or indirectly holds 10% or more of the
combined voting power of the then outstanding Voting Stock of the Company, (iii)
any relative of any individual referred to in clauses (i), (ii) and (iv) hereof
by blood, marriage or adoption not more remote than first cousin and (iv) any
officer or director of the Company.
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"Restricted Debt Prepayment" means any purchase, redemption, defeasance
(including, but not limited to, in substance or legal defeasance) or other
acquisition or retirement for value, directly or indirectly, by the Company or a
Subsidiary, prior to the scheduled maturity or prior to any scheduled repayment
of principal or sinking fund payment, as the case may be, in respect of
Indebtedness of the Company or any Subsidiary that is subordinate in right to
the Notes or the Subsidiary Guarantees; provided, however, that any such
acquisition shall be deemed not to be a Restricted Debt Prepayment to the extent
it is made (i) in exchange for or with the proceeds from the substantially
concurrent issuance of Qualified Capital Stock or (ii) in exchange for or with
the proceeds from the substantially concurrent issuance of Indebtedness, in a
principal amount (or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon the acceleration thereof,
with an original issue price) not to exceed the lesser of (a) the principal
amount of Indebtedness being acquired in exchange therefor (or with the proceeds
therefrom) and (b) if such Indebtedness being acquired was issued at an original
issue discount, the original issue price thereof plus amortization of the
original issue discount at the time of the incurrence of the Indebtedness being
issued in exchange therefor (or the proceeds of which will finance such
acquisition), and provided further that any such Indebtedness shall have an
Average Life not less than the Average Life of the Indebtedness being acquired,
and shall contain subordination and default provisions no less favorable, in any
material respect, to holders of the Notes than those contained in such
Indebtedness being acquired.
"Restricted Payment" means any (i) Stock Payment, (ii) Investment (other
than Permitted Investments and other than Permitted Unrestricted Subsidiary
Investments) or (iii) Restricted Debt Prepayment.
"S&P" means Standard & Poor's Ratings Group and its successors.
"Senior Indebtedness" means all Indebtedness of the Company (present and
future) created, incurred, assumed or guaranteed by the Company (and all
renewals, extensions or refundings thereof) (including the principal of,
interest on and fees, premiums, expenses (including costs of collection),
indemnities and other amounts payable in connection with such Indebtedness, and
including any Post-Commencement Amounts), unless the instrument governing such
Indebtedness expressly provides that such Indebtedness is not senior or superior
in right of payment to the Notes. Notwithstanding the foregoing, Senior
Indebtedness of the Company does not include (i) any Indebtedness of the Company
to any Subsidiary or any Unrestricted Subsidiary or (ii) any amounts payable or
other liabilities to trade creditors.
"Stock Payment" means, with respect to any Person, (a) the declaration or
payment by such Person, either in cash or in property, of any dividend on
(except, in the case of the Company, dividends payable solely in Qualified
Capital Stock of the Company), or the making by such Person or any of its
subsidiaries of any other distribution in respect of, such Person's Capital
Stock or any warrants, rights or options to purchase or acquire shares of any
class of such Capital Stock (except for the issuance of Qualified Capital Stock
pursuant to the exercise thereof), or (b) the redemption, repurchase, retirement
or other acquisition for value by such Person or any of its subsidiaries,
directly or indirectly, of such Person's or any of its subsidiaries' Capital
Stock or any warrants, rights or options to purchase or acquire shares of any
class of such Capital Stock other than, in the case of the Company, through the
issuance in exchange therefor solely of Qualified Capital Stock of the Company;
provided, however, that in the case of a Subsidiary, the term "Stock Payment"
shall not include (i) any such payment with respect to its Capital Stock or
warrants, rights or options to purchase or acquire shares of any class of its
Capital Stock payable to the Company or a Wholly-Owned Subsidiary or (ii)
Employee Stock Repurchases.
A "subsidiary" of any Person means (i) a corporation a majority of whose
Voting Stock is at the time, directly or indirectly, owned by such Person, by
one or more wholly-owned subsidiaries of such Person or by such Person and one
or more wholly-owned subsidiaries of such Person, (ii) a partnership in which
such Person or a wholly-owned subsidiary of such Person is, at the date of
determination, a general or limited partner of such partnership, but only if
such Person or its wholly-owned subsidiary is entitled to receive more than
fifty percent of the assets of such partnership upon its dissolution, or (iii)
any other Person (other than a corporation or partnership) in which such Person,
a wholly-owned subsidiary of such Person or such Person and one or more
wholly-owned subsidiaries of such Person, directly or indirectly, at the date of
determination
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thereof, has (x) at least a majority ownership interest or (y) the power to
elect or direct the election of a majority of the directors or other governing
body of such Person.
"Subsidiary" means any subsidiary of the Company; provided, that an
Unrestricted Subsidiary shall not be deemed a subsidiary of the Company for
purposes of the Indenture.
"Subsidiary Guarantee" means, individually and collectively, the guarantees
given by the Subsidiary Guarantors pursuant to the Indenture.
"Subsidiary Guarantor" means (i) Dailey Energy Services, Inc., a Delaware
corporation; Dailey International Sales Corporation, a Delaware corporation;
Columbia Petroleum Services Corp., a Delaware corporation; International
Petroleum Services, Inc., a Delaware corporation; Dailey Environmental
Remediation Technologies, Inc., a Texas corporation; Dailey Worldwide Services,
Corp., a Texas corporation; Air Drilling International, Inc., a Delaware
corporation; and Air Drilling Services, Inc., a Wyoming corporation; (ii) each
of the Company's Subsidiaries that becomes a guarantor of the Notes in
compliance with the provisions of the Indenture; and (iii) each of the Company's
Subsidiaries executing a supplemental indenture in which such Subsidiary agrees
to be bound by the terms of the Indenture.
"Unrestricted Subsidiary" means (i) any subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below) and (ii) any
subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any Subsidiary (including any newly acquired or newly formed
Subsidiary or a Person becoming a Subsidiary through merger or consolidation or
Investment therein) to be an Unrestricted Subsidiary only if: (a) such
Subsidiary does not own any Capital Stock of, or own or hold any Lien on any
property of, any other Subsidiary of the Company which is not a Subsidiary of
the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary; (b)
all the Indebtedness of such Subsidiary shall at the date of designation, and
will at all times thereafter consist of Non-Recourse Indebtedness; (c) the
Company certifies that such designation complies with the "Limitation on
Restricted Payments" covenant; and (d) such Subsidiary, either alone or in the
aggregate with all other Unrestricted Subsidiaries, does not operate, directly
or indirectly, all or substantially all of the business of the Company and the
Subsidiaries. Any such designation by the Board of Directors of the Company
shall be evidenced to the Trustee by filing with the Trustee a Board Resolution
of the Board of Directors of the Company giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions. If, at any time, such Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture,
and any Indebtedness of such Subsidiary shall be deemed to be incurred as of
such date. The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Subsidiary; provided that immediately after giving effect to
such designation, the Company could incur at least $1.00 of additional
Indebtedness (excluding Permitted Indebtedness) pursuant to the first paragraph
of the "Limitation on Incurrence of Additional Indebtedness" covenant on a pro
forma basis taking into account such designation.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or only so long as no senior class of stock has voting
power by reason of any contingency) to vote in the election of members of the
board of directors or other governing body of such Person.
"Wholly-Owned Subsidiary" means any Subsidiary to the extent (i) all of the
Capital Stock or other ownership interests in such Subsidiary, other than any
directors' qualifying shares mandated by applicable law, is owned directly or
indirectly by the Company or (ii) such Subsidiary is organized in a foreign
jurisdiction and is required by the applicable laws and regulations of such
foreign jurisdiction to be partially owned by the government of such foreign
jurisdiction or individual or corporate citizens of such foreign jurisdiction in
order for such Subsidiary to transact business in such foreign jurisdiction,
provided that the Company, directly or indirectly, owns the remaining Capital
Stock or ownership interests in such Subsidiary and, by contract or otherwise,
controls the management and business of such Subsidiary and derives the economic
benefits of ownership of such Subsidiary to substantially the same extent as if
such Subsidiary were a Wholly-Owned Subsidiary.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the principal United States
federal income tax consequences of the purchase, ownership and disposition of
the Notes to initial purchasers thereof. This discussion is based on currently
existing provisions of the Code, existing, temporary and proposed Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and all
of which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion does not address the tax consequences to
subsequent purchasers of Notes and is limited to purchasers who hold the Notes
as capital assets, within the meaning of section 1221 of the Code. Moreover,
this discussion is for general information only and does not address all of the
tax consequences that may be relevant to particular initial purchasers in light
of their personal circumstances or to certain types of initial purchasers (such
as certain financial institutions, insurance companies, tax-exempt entities,
dealers in securities, persons who have hedged the risk of owning a Note and
foreign taxpayers), or the effect of any applicable state, local or foreign tax
law.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
Payment of Interest on Notes
Interest paid or payable on a Note will be taxable to a holder as ordinary
interest income, generally at the time it is received or accrued, in accordance
with such holder's regular method of accounting for United States federal income
tax purposes.
Sale, Exchange or Retirement of the Notes
Upon the sale, exchange, redemption, retirement at maturity or other
disposition of a Note, the holder generally will recognize taxable gain or loss
equal to the difference between the sum of cash plus the fair market value of
all other property received on such disposition (except to the extent such cash
or property is attributable to accrued but unpaid interest, which will be
taxable as ordinary income) and such holder's adjusted tax basis in the Note. A
holder's adjusted tax basis in a Note generally will equal the cost of the Note
to such holder, less any principal payments received by such holder.
Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if, at the time
of such disposition, the holder's holding period for the Note is more than one
year.
The exchange of an Outstanding Note by a holder for an Exchange Note should
not constitute a taxable exchange. Under certain Treasury regulations issued in
June 1996, relating to modifications and exchanges of debt instruments, any
increase in the interest rate of the Outstanding Notes resulting from an
Exchange Offer not being consummated, or a Shelf Registration Statement not
being declared effective, would not be treated as a taxable exchange, as such
change in interest rate would occur pursuant to the terms of the Outstanding
Notes.
Backup Withholding and Information Reporting
Backup withholding and information reporting requirements may apply to
certain payments of principal, premium, if any, and interest on a Note, and to
proceeds of the sale or redemption of a Note before maturity. The Company, its
agent, a broker, the Trustee or any paying agent, as the case may be, will be
required to withhold from any payment that is subject to backup withholding a
tax equal to 31% of such payment if a holder fails to furnish his taxpayer
identification number (social security or employer identification number),
certify that such number is correct, certify that such holder is not subject to
backup withholding or otherwise comply with the applicable requirements of the
backup withholding rules. Certain holders, including all corporations, are not
subject to backup withholding and reporting requirements. Any amounts withheld
under
88
<PAGE> 96
the backup withholding rules from a payment to a holder will be allowed as a
credit against such holder's United States federal income tax and may entitle
the holder to a refund, provided that the required information is furnished to
the Internal Revenue Service.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Outstanding Notes where such Outstanding Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until , 1997, all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchase or to or through brokers or dealer who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. A broker-dealer that delivers such a prospectus to purchasers in connection
with such resales will be subject to certain of the civil liability provisions
under the Securities Act and will be bound by the provisions of the Registration
Rights Agreement (including certain indemnification rights and obligations).
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay certain expenses
incident to the Exchange Offer, other than commissions or concession of any
brokers or dealers, and will indemnify the holders of the Securities (including
any broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
request the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemental Prospectus to such broker-dealer. If the Company shall give any
such notice to suspend the use of the Prospectus, it shall extend the 90-day
period referred to above by the number of days during the period from and
including the date of the giving of such notice to and including when
broker-dealers shall have received copies of the supplemented or amended
Prospectus necessary to permit resales of the Exchange Notes.
89
<PAGE> 97
LEGAL MATTERS
Certain matters related to the validity of the Exchange Notes will be
passed upon for the Company by William D. Sutton, Esq., its general counsel. Mr.
Sutton beneficially owns 169,912 shares of the Company's Class A Common Stock.
EXPERTS
The consolidated financial statements and schedule of Dailey International
Inc. at April 30, 1997 and 1996, and for each of the three years in the period
ended April 30, 1997, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as stated 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.
The consolidated financial statements of ADI as of December 31, 1996 and
1995 and for the year ended December 31, 1996, and the period from May 19, 1995
(Inception) to December 31, 1995 and the combined financial statements of Air
Drilling Services Inc., Canadian Air Drilling Services Ltd., Specialty Testing &
Consulting Ltd. and Global Air Drilling Services Ltd. as of May 18, 1995 and for
the period from January 1, 1995 through May 18, 1995, appearing in this
Prospectus and Registration Statement have been included herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
90
<PAGE> 98
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF DAILEY
INTERNATIONAL INC.:
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets as of April 30, 1997 and
1996................................................... F-3
Consolidated Statements of Operations for the years ended
April 30, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended April 30, 1997, 1996 and 1995.............. F-5
Consolidated Statements of Cash Flows for the years ended
April 30, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements................ F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF DAILEY
INTERNATIONAL INC.:
Consolidated Balance Sheets as of July 31, 1997 and April
30, 1997............................................... F-28
Consolidated Statements of Operations for the three months
ended July 31, 1997 and 1996........................... F-29
Consolidated Statements of Cash Flows for the three months
ended July 31, 1997 and 1996........................... F-30
Notes to Consolidated Financial Statements................ F-31
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF AIR DRILLING
INTERNATIONAL, INC. AND SUBSIDIARIES:
Report of Independent Accountants......................... F-41
Consolidated Balance Sheets as of December 31, 1996 and
1995................................................... F-42
Consolidated Statements of Operations for the year ended
December 31, 1996, and the period from May 19, 1995
(Inception) through December 31, 1995.................. F-43
Consolidated Statement of Changes in Stockholders' Equity
for the year ended December 31, 1996, and the period
from May 19, 1995 (Inception) through December 31,
1995................................................... F-44
Consolidated Statements of Cash Flows for the year ended
December 31, 1996, and the period from May 19, 1995
(Inception) through December 31, 1995.................. F-45
Notes to Consolidated Financial Statements................ F-46
SUPPLEMENTAL SCHEDULES OF AIR DRILLING INTERNATIONAL, INC.:
Report of Independent Accountants on Supplemental
Schedules.............................................. F-56
Consolidating Balance Sheet as of December 31, 1996....... F-57
Consolidating Balance Sheet as of December 31, 1995....... F-58
Consolidating Statement of Operations for the year ended
December 31, 1996...................................... F-59
Consolidating Statement of Operations for the period from
May 19, 1995 (Inception) through December 31, 1995..... F-60
Consolidating Statement of Cash Flows for the year ended
December 31, 1996...................................... F-61
Consolidating Statement of Cash Flows for the period from
May 19, 1995 (Inception) through December 31, 1995..... F-62
AUDITED COMBINED FINANCIAL STATEMENTS OF AIR DRILLING
SERVICES, INC., CANADIAN AIR DRILLING SERVICES LTD.,
SPECIALTY TESTING & CONSULTING LTD. AND GLOBAL AIR
DRILLING SERVICES LTD.:
Report of Independent Accountants......................... F-63
Combined Balance Sheet as of May 18, 1995................. F-64
Combined Statement of Income for the period from January
1, 1995 through May 18, 1995........................... F-65
Combined Statement of Changes in Stockholders' Equity for
the period from January 1, 1995 through May 18, 1995... F-66
Combined Statement of Cash Flows for the period from
January 1, 1995 through
May 18, 1995........................................... F-67
Notes to Combined Financial Statements.................... F-68
SUPPLEMENTAL SCHEDULES OF AIR DRILLING SERVICES, INC.,
CANADIAN AIR DRILLING SERVICES LTD., SPECIALTY TESTING &
CONSULTING LTD. AND GLOBAL AIR DRILLING SERVICES LTD.:
Report of Independent Accountants on Supplemental
Schedules.............................................. F-76
Combining Balance Sheet as of May 18, 1995................ F-77
Combining Income Statement for the period from January 1,
1995 through May 18, 1995.............................. F-78
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF AIR DRILLING
INTERNATIONAL, INC. AND SUBSIDIARIES:
Consolidated Balance Sheets as of April 30, 1997 and
December 31, 1996...................................... F-79
Consolidated Statements of Operations for the four month
periods ended April 30, 1997 and 1996.................. F-80
Consolidated Statements of Cash Flows for the four month
periods ended April 30, 1997 and 1996.................. F-81
Notes to Unaudited Consolidated Financial Statements...... F-82
</TABLE>
F-1
<PAGE> 99
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Dailey International Inc.
We have audited the accompanying consolidated balance sheets of Dailey
International Inc., as of April 30, 1997 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, 1997. 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 International Inc. at April 30, 1997 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, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
June 27, 1997
F-2
<PAGE> 100
DAILEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $15,200 $ 1,967
Accounts receivable, net.................................. 18,606 16,306
Accounts receivable from officers and affiliates.......... -- 436
Prepaid expenses.......................................... 346 422
Deferred income taxes..................................... 597 389
Other current assets...................................... 907 153
------- -------
Total current assets.............................. 35,656 19,673
Revenue-producing tools and inventory, net.................. 37,488 29,208
Property and equipment, net................................. 5,622 5,326
Deferred income taxes....................................... 1,959 1,384
Accounts receivable from officer............................ 250 --
Intangibles and other assets................................ 1,384 287
------- -------
Total assets...................................... $82,359 $55,878
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 8,324 $ 6,749
Accounts payable to affiliate............................. 442 --
Income taxes payable...................................... 3,241 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......................... 13,718 12,196
Long-term debt.............................................. 5,155 6,866
Long-term indebtedness to affiliate......................... -- 1,100
Other noncurrent liabilities................................ 159 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; 4,315,000 and 0 issued and outstanding at
April 30, 1997 and 1996, respectively; Class B, $0.01
par value; 10,000,000 shares authorized, 5,000,000
shares issued and outstanding at April 30, 1997 and
1996................................................... 93 50
Treasury stock (24,000 shares)............................ (234) --
Paid-in capital........................................... 39,972 4,559
Retained earnings......................................... 23,496 31,032
------- -------
Total stockholders' equity........................ 63,327 35,641
------- -------
Total liabilities and stockholders' equity........ $82,359 $55,878
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 101
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Rental income........................................... $ 49,497 $ 42,987 $ 36,691
Sales of products and services.......................... 16,954 15,952 12,172
--------- --------- ---------
66,451 58,939 48,863
Costs and expenses:
Cost of rentals......................................... 37,655 33,019 29,685
Cost of products and services........................... 8,890 7,927 6,889
Selling, general and administrative..................... 11,893 12,083 9,607
Non-cash compensation................................... 2,807 -- --
Research and development................................ 850 728 775
--------- --------- ---------
62,095 53,757 46,956
--------- --------- ---------
Operating income.......................................... 4,356 5,182 1,907
Other (income) expense:
Interest income......................................... (640) (104) (60)
Interest expense -- nonaffiliates....................... 671 785 841
Interest expense -- affiliate........................... 162 182 220
Foreign exchange (gain) loss............................ 19 239 (90)
Other, net.............................................. 169 39 190
--------- --------- ---------
Income before income taxes................................ 3,975 4,041 806
Provision for income taxes................................ 1,511 1,427 838
--------- --------- ---------
Net income (loss)......................................... $ 2,464 $ 2,614 $ (32)
========= ========= =========
Earnings (loss) per share................................. $ .30 $ (.01)
========= =========
Pro forma earnings per share.............................. $ .40
=========
Weighted average shares outstanding....................... 8,094,880 5,360,000
Pro forma weighted average shares outstanding............. 6,610,000
</TABLE>
See accompanying notes.
F-4
<PAGE> 102
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
PREFERRED COMMON COMMON TREASURY PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK STOCK STOCK CAPITAL EARNINGS EQUITY
--------- ------- ------- -------- ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 1, 1994 as
restated (Note 1)...... $-- $-- $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
Net income............. -- -- -- -- -- 2,464 2,464
Dividend (Note 1)...... -- -- -- -- -- (10,000) (10,000)
Net proceeds from sale
of stock............ -- 39 -- -- 27,610 -- 27,649
Capital contribution... -- -- -- -- 5,000 -- 5,000
Purchases of treasury
stock............... -- -- -- (234) -- -- (234)
Provision for stock
awards.............. -- 4 -- -- 2,803 -- 2,807
--- --- --- ----- ------- -------- --------
Balance at April 30,
1997................... $-- $43 $50 $(234) $39,972 $ 23,496 $ 63,327
=== === === ===== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 103
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................... $ 2,464 $ 2,614 $ (32)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 6,593 5,726 5,428
Deferred income taxes.................................... (783) (816) (487)
Provision for doubtful accounts receivable............... 305 256 321
(Gain) loss on sale and disposition of property and
equipment............................................. 159 6 (9)
Provision for stock awards............................... 2,807 -- --
Changes in operating assets and liabilities:
Accounts receivable -- trade.......................... (2,605) (2,498) (663)
Accounts receivable from/payable to officers and
affiliates.......................................... 628 (538) (711)
Prepaid expenses and other............................ (972) 347 (3)
Accounts payable and accrued liabilities.............. 1,575 (932) 2,458
Income taxes payable.................................. 1,492 741 (319)
-------- -------- --------
Net cash provided by operating activities.................. 11,663 4,906 5,983
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory......... (21,825) (12,173) (13,396)
Inventory transferred to cost of rentals................... 5,913 5,521 4,739
Revenue-producing tools lost in hole, abandoned, and
sold..................................................... 1,983 2,551 2,073
Additions to property and equipment........................ (660) (883) (1,619)
Proceeds from sale of property and equipment............... 126 916 473
Acquisition................................................ (1,584) -- --
-------- -------- --------
Net cash used in investing activities...................... (16,047) (4,068) (7,730)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt......................... 400 1,300 --
Payments on outstanding debt............................... (5,198) (1,967) (1,074)
Payment of promissory note................................. (5,000) -- --
Purchase of treasury stock................................. (234) -- --
Net proceeds from sale of common stock..................... 27,649 -- --
-------- -------- --------
Net cash provided by (used in) financing activities........ 17,617 (667) (1,074)
-------- -------- --------
Increase (decrease) in cash and cash equivalents........... 13,233 171 (2,821)
Cash and cash equivalents at beginning of year............. 1,967 1,796 4,617
-------- -------- --------
Cash and cash equivalents at end of year................... $ 15,200 $ 1,967 $ 1,796
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 104
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
1. ORGANIZATION AND PUBLIC OFFERING
The accompanying consolidated 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. The Company subsequently changed its name to Dailey
International Inc. Dailey International Inc. and its predecessor 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, Louisiana and the Austin Chalk formation
in Texas. The Company operates in one business segment.
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 (the "Reorganization"). The effect
of the forward triangular merger has been reflected retroactively in the
accompanying financial statements. In August 1996, the Company completed its
initial public offering of 3,910,000 shares of Class A Common Stock (the "IPO").
Dailey's Restated Certificate of Incorporation provides for three classes
of stock: Class A Common Stock, $.01 par (20,000,000 shares authorized,
4,315,000 issued and 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, none 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).
In connection with the IPO, the Company issued 3,910,000 shares of Class A
Common Stock. Net proceeds from the sale of the stock were $27.6 million. The
Company used $5.0 million of the proceeds from the IPO 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 IPO, the Company's sole stockholder contributed to the
capital of the Company $5.0 million of the outstanding principal of such note.
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 year ended
April 30, 1996, were based on 6,610,000 shares of Common Stock outstanding).
Historical earnings per share excluding the pro forma effect of the dividend was
$0.49 per share for the year ended April 30, 1996.
F-7
<PAGE> 105
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company has historically had significant transactions with Lawrence and
its affiliates which are reflected in the accompanying financial statements on
the basis established between the Company and Lawrence. See Notes 6, 7, 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
$1,476,000 in 1997 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.
F-8
<PAGE> 106
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Intangible Assets
Patents, goodwill and other intangibles are amortized over 13 to 40 years
and had a net book value of $1,384,000 and $287,000 at April 30, 1997 and 1996,
respectively. In March 1997, Dailey acquired certain business assets for $1.6
million including approximately $750,000 of goodwill.
Impairment of Long-Lived Assets
The carrying value of long-lived assets, principally revenue-producing
tools, goodwill and property and equipment, is reviewed for potential impairment
when events or changes in circumstance indicate that the carrying amount of such
assets may not be recoverable. The determination of recoverability is made based
upon the estimated undiscounted future net cash flows of the related asset.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") establishes alternative methods of
accounting and disclosure for employee stock-based compensation arrangements.
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 at the time 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. (See Note 12).
Income Taxes
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.
The Company was included in the consolidated U.S. federal income tax return
of Lawrence for taxable periods ending on the closing of the IPO. The Company
and Lawrence are jointly and severally liable with respect to taxes related to
periods prior to the IPO. The Company and its subsidiaries currently file
separate income tax returns. The accompanying consolidated financial statements
reflect the income tax provisions of the Company on a separate return basis for
all years 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 entered into by the Company and
Lawrence, the Company paid 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 Tax Allocation
Agreement applies 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.
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> 107
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is effective for financial statements issued
for periods ending after December 15, 1997. At such time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded. The
method of calculating fully diluted earnings per share will remain unchanged.
The impact of Statement 128 is expected to result in an increase in primary
earnings per share for the year ended April 30, 1997 of $.01 and no change for
the year ended April 30, 1996.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the current year presentation.
3. REVENUE-PRODUCING TOOLS AND INVENTORY
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue-producing tools..................................... $ 56,622 $ 48,024
Accumulated depreciation.................................... (32,503) (29,740)
-------- --------
24,119 18,284
Inventory:
Components, subassemblies and expendable parts............ 11,293 9,096
Rental tools and expendable parts under production........ 1,261 1,058
Raw materials............................................. 815 770
-------- --------
13,369 10,924
-------- --------
Revenue-Producing Tools and Inventory.................. $ 37,488 $ 29,208
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 1,072 $ 1,271
Buildings and improvements.................................. 5,758 5,985
Machinery and equipment..................................... 13,579 15,377
Furniture and fixtures...................................... 1,278 1,579
Other....................................................... 1,191 593
-------- --------
22,878 24,805
Accumulated depreciation.................................... (17,256) (19,479)
-------- --------
Property and Equipment................................. $ 5,622 $ 5,326
======== ========
</TABLE>
F-10
<PAGE> 108
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable...................................... $ 3,647 $ 2,601
Accrued salaries and vacation............................... 1,961 1,778
Agent commissions payable................................... 706 774
Accrued expenses and other.................................. 2,010 1,596
-------- --------
Accounts Payable and Accrued Liabilities............... $ 8,324 $ 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.
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 1997, 1996 and 1995.
During 1996 and 1995, the Company also utilized from time to time aircraft owned
by a Lawrence subsidiary. Prior to 1997, the Company did not charge Lawrence for
these administrative and management services or reimbursed Lawrence for use of
the aircraft because the effect of not recording the fair values of these
services rendered less services received was not significant. In 1997, the
Company charged Lawrence a net of $68,000 as fair value for these services.
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 1997, 1996 and 1995 totaled $203,000, $178,000 and $152,000, respectively.
7. BORROWING ARRANGEMENTS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Note payable to a bank, monthly interest payments at a fixed
rate of 7.9% (See below); monthly principal payments of
$138,889 through December 1999, with increasing principal
payments through the maturity date of December 2000....... $6,778 $8,444
Note payable to affiliates, monthly principal payments of
$55,000 plus interest at 8.0%............................. -- 1,760
Other....................................................... 88 160
------ ------
6,866 10,364
Less current portion of long-term debt...................... 1,711 2,398
------ ------
Total long-term debt.............................. $5,155 $7,966
====== ======
</TABLE>
F-11
<PAGE> 109
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. BORROWING ARRANGEMENTS -- (CONTINUED)
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.
In conjunction with the $10.0 million note payable to a bank 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% maturing in
December 2000.
Interest paid during the years ended April 30, 1997, 1996 and 1995 amounted
to $858,000, $956,000 and $1,128,000, respectively.
In December 1995, the Company entered into a $3.0 million revolving credit
facility with a bank on December 15, 1995 amended as of June 5, 1996 which
provided interest at the prime rate with an option to convert to a LIBOR-based
rate plus 2.0%. In December 1996, this revolving credit facility was extended
through December 1997. At April 30, 1997, the Company had no outstanding
borrowings. 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.
On June 20, 1997, the note payable to a bank was amended to increase the
outstanding principal balance of the term loan to $41.5 million and the
outstanding principal balance of advances made pursuant to the revolving line of
credit to $4.0 million. Principal payments on the term loan are $350,000
quarterly through July 1998, with increasing payments thereafter until maturity
on June 30, 2002, at which time the obligation of the bank to make revolving
credit advances also terminates. Interest on the term loan and revolving credit
advances is variable and will fluctuate at a variable margin over the bank's
prime rate or at a LIBOR-based rate. Both interest rates can fluctuate based on
leverage ratios. On June 23, 1997, the date of funding, the average interest
rate on revolving advances was 8.0%. Borrowings under the revolving credit
facility are limited to the lesser of $15.0 million or a loan formula based upon
the receivable level of eligible accounts receivable. The note payable to the
bank contains certain restrictive covenants and customary events of default and
conditions to the bank's obligation to make advances.
8. INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S. operations...................................... $3,858 $4,072 $1,443
Foreign operations................................... 117 (31) (637)
------ ------ ------
Income (loss) before income taxes................. $3,975 $4,041 $ 806
====== ====== ======
Income tax provision:
U.S. current......................................... $ 679 $ 941 $ 737
Foreign current...................................... 1,358 1,302 588
U.S. deferred........................................ (783) (816) (487)
State and local current.............................. 257 -- --
------ ------ ------
Income tax provision.............................. $1,511 $1,427 $ 838
====== ====== ======
</TABLE>
F-12
<PAGE> 110
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES -- (CONTINUED)
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,
----------------
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Revenue-producing tools and property and equipment........ $ 683 $ 662
------ ------
Total deferred tax liabilities.................... 683 662
Deferred tax assets:
Stock award -- salary expense............................. 399 --
Net operating loss carryforward........................... -- 1,547
Provision for doubtful accounts receivable................ 544 504
Uniform capitalization costs.............................. 1,272 1,053
Vacation and workers' compensation accruals............... 418 389
Foreign tax credit carryforward........................... 1,661 --
------ ------
Total deferred tax assets......................... 4,294 3,493
Valuation allowance for deferred tax assets................. (1,055) (1,058)
------ ------
3,239 2,435
------ ------
Net deferred tax assets..................................... $2,556 $1,773
====== ======
</TABLE>
The difference between the United States statutory rate and the Company's
effective income tax rate is reconciled as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1997 1996 1995
---- ----- -----
<S> <C> <C> <C>
United States statutory rate.............................. 34.0% 34.0% 34.0%
Increases (reductions) in tax rate resulting from:
Meals and entertainment................................. 2.7 2.2 10.7
State taxes............................................. 4.2 -- --
Dissolution of partnership.............................. -- 20.0 --
Benefit of net operating loss carryforward.............. -- (23.2) --
Foreign losses.......................................... 3.1 2.6 41.4
Other................................................... (6.0) (.3) 17.9
--- ----- -----
Effective income tax rate............................ 38.0% 35.3% 104.0%
=== ===== =====
</TABLE>
For income tax reporting at April 30, 1997 the Company has foreign tax
credit carryforwards of approximately $1,661,000, which will begin to expire in
the fiscal year ending April 30, 2000. The valuation allowance relates to
deferred tax assets established for the net operating loss, provision for
doubtful accounts receivable and foreign tax credit carryforward. No other
valuation allowances were considered necessary. The change in the valuation
allowance is due to the utilization of prior year net operating loss
carryforward and the establishment of an allowance for foreign tax credit
carryforwards. Based on the 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 and foreign withholding taxes
applicable to undistributed earnings of foreign subsidiaries that are
indefinitely reinvested in foreign operations.
Income taxes paid during 1997, 1996 and 1995 were $608,000, $538,000 and
$917,000, respectively.
F-13
<PAGE> 111
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. For the years ended April
30, 1997, 1996 and 1995, the accompanying consolidated statements of operations
include royalty expense of $879,000, $843,000 and $826,000, respectively,
excluding the $250,000 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, 1997 are as follows:
<TABLE>
<CAPTION>
THIRD PARTY LAWRENCE TOTAL
----------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
1998................................................ $ 649 $ 915 $1,564
1999................................................ 302 951 1,253
2000................................................ 236 969 1,205
2001................................................ 221 989 1,210
2002................................................ 221 -- 221
Thereafter.......................................... 520 -- 520
------ ------ ------
$2,149 $3,824 $5,973
====== ====== ======
</TABLE>
Rental expense under operating leases with third parties, inclusive of
month-to-month rentals, totaled $2,184,000, $2,436,000 and $1,700,000 in 1997,
1996 and 1995, respectively, and with Lawrence totaled $915,000, $1,306,000 and
$1,244,000 in 1997, 1996 and 1995, respectively and are included in selling
general and administrative expenses and cost of rentals.
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.
F-14
<PAGE> 112
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL
INSTRUMENTS -- (CONTINUED)
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.
Long- and short-term debt and interest rate swap: The carrying amount 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 of the Company's long-term debt approximated
the fair values at April 30, 1997 and 1996.
12. STOCK OPTIONS AND AWARDS
Prior to the IPO, 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"). The 1996 Plan and the 1996 Director Plan (the "Plans")
have 900,000 shares authorized for the granting of options or restricted stock
to management personnel and 100,000 shares authorized for the granting of
options to directors, respectively.
The Company applied Accounting Principals Board Opinion 25 ("APB25") and
related interpretations in accounting for these plans. Accordingly, no
compensation cost has been recognized in 1997 for either plan. Based on
information available at the grant date, the Company estimated a four year
expected life for all options granted during the year, volatility of .53 and
risk free interest rates ranging from 6.03% to 6.70%. The Company does not
presently anticipate issuing dividends in the future. Had compensation cost for
the Company's two stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method available under SFAS 123, the Company's net income and earnings per share
for 1997 would have been reduced to the pro forma amounts listed below. There
were no options issued in 1996 or 1995.
<TABLE>
<CAPTION>
1997
------
<S> <C> <C>
Net Income As reported $2,464
Pro forma $1,114
Earnings per share As reported $ .30
Pro forma $ .14
</TABLE>
Stock options under the Plans are for Class A Common Stock and have
exercise prices equal to fair market values at dates of grant. Options issued
under the 1996 Plan may not be exercised within six months of, nor after ten
years from, the date of grant. Options issued under the 1996 Director Plan may
not be exercised within one year of, nor after ten years from, the date of
grant. The average remaining contractual life of options outstanding is
approximately ten years. Option activity for the year ended April 30, 1997 was
as follows:
F-15
<PAGE> 113
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCK OPTIONS AND AWARDS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
----------------- ----------------
<S> <C> <C>
Outstanding at April 30, 1996........................ 0 $ 0
Granted
1996 Plan -- at fair values from $8.00 to
$10.75........................................ 513,328 8.36
1996 Director Plan -- at fair value of $8.88.... 20,000 8.88
Other -- at fair value of $6.50................. 20,000 6.50
Forfeiture
1996 Plan -- at fair value of $8.00............. (19,199) 8.00
------- ------
Outstanding at April 30, 1977........................ 534,129 $8.32
======= ======
</TABLE>
Of the 553,328 options granted, 20,000 were not granted under the Plans and
have an exercisable life between one and five years from the date of grant. Of
the 534,129 options outstanding at April 30, 1997, 374,124 were exercisable.
Immediately following the IPO, restricted stock awards totaling 360,000 of
Class A Common Stock were granted to key officers. In October 1996, a restricted
stock award of 45,000 Class A Common Stock was granted to an executive officer.
Awards do not require any payment by the executive officers and were to vest
over a three year period. Subsequently, the Board approved accelerated vesting
of the 405,000 shares of restricted stock awards which resulted in the Company
recognizing $2.8 million in non-cash compensation expense during 1997.
Restricted stock activity for the year ended April 30, 1997 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
RESTRICTED SHARES
-----------------
<S> <C>
Outstanding at April 30, 1996............................... $ 0
Granted at fair values of $8.00 and $9.00................. 405,000
Forfeiture................................................ 0
Vested.................................................... (349,803)
---------
Outstanding at April 30, 1977............................... $ 55,197
=========
</TABLE>
The costs associated with these awards are treated the same under APB25 and
SFAS123 and are expensed in the period granted. These expenses are not reflected
in the pro forma information above as they are included in the reported
balances.
13. SUBSEQUENT EVENTS
On June 20, 1997, the Company consummated the acquisition (the "ADI
Acquisition") of Air Drilling International, Inc. ("ADI"). Dailey acquired ADI
for $46.4 million, including the repayment of approximately $16.8 million in
indebtedness. As a result of the ADI Acquisition, the Company became a leading
worldwide provider of air drilling services for underbalanced drilling
applications.
In June 1997, following the ADI Acquisition, the Company implemented a cost
reduction program to flatten its corporate management structure and streamline
the Company's operations (the "Management Reorganization"). As a result of such
program, the Company expects to incur a $2.8 million restructuring charge during
the first quarter of the year ended April 30, 1998 associated primarily with
staff reductions and severance settlements and various reorganization costs. The
Company expects the Management Reorganization to result in annual savings of
approximately $1.8 million. The Company is contemplating the private placement
of $100 million of senior unsecured notes during the year ended April 30, 1998.
It is anticipated the
F-16
<PAGE> 114
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS -- (CONTINUED)
funds will be used to extinguish existing bank financing, to finance potential
acquisitions, and to expand the fleet of revenue producing tools.
14. 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
$977,000, $1,833,000 and $274,000 in 1997, 1996 and 1995, respectively.
Revenues by geographic area are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.............................................. $40,223 $34,370 $29,607
Europe................................................ 7,297 7,349 7,090
West Africa........................................... 2,559 2,059 1,446
Latin America......................................... 11,670 11,032 6,024
Middle East........................................... 1,036 563 511
Southeast Asia........................................ 3,666 3,566 4,185
------- ------- -------
Total....................................... $66,451 $58,939 $48,863
======= ======= =======
</TABLE>
Operating income by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.............................................. $ 8,833 $ 8,025 $ 3,639
Europe................................................ 2,665 2,424 2,512
West Africa........................................... 1,292 860 286
Latin America......................................... 855 1,434 812
Middle East........................................... 222 413 (15)
Southeast Asia........................................ 1,176 916 1,645
Corporate(A).......................................... (10,687) (8,890) (6,972)
------- ------- -------
Total....................................... $ 4,356 $ 5,182 $ 1,907
======= ======= =======
</TABLE>
- ---------------
(A) Corporate operating losses include general and administrative costs such as
accounting, systems, data processing, legal and other costs which support
all operations of the Company.
F-17
<PAGE> 115
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INDUSTRY SEGMENT AND DOMESTIC AND INTERNATIONAL OPERATIONS -- (CONTINUED)
Identifiable assets by geographic area are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Domestic.................................................... $39,000 $30,931
Europe...................................................... 7,992 7,617
West Africa................................................. 1,539 1,631
Latin America............................................... 9,465 7,972
Middle East................................................. 668 242
Southeast Asia.............................................. 3,157 3,620
Corporate................................................... 20,538 3,865
------- -------
Total............................................. $82,359 $55,878
======= =======
</TABLE>
15. QUARTERLY INFORMATION
Selected unaudited quarterly data are as follows:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
----------------------------------------------------------
JULY 31 OCTOBER 31 JANUARY 31 APRIL 30
--------- ------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AND COMMON STOCK PRICE)
<S> <C> <C> <C> <C>
FISCAL 1997
Operating revenues..................... $16,758 $17,155 $17,483(b) $15,057(b)
Operating income....................... 1,801 2,060 1,160(a) (665)(a)
Net income (loss)...................... 962 1,318 785(a) (601)(a)
Per share:
Net income (loss).................... 0.15 0.15 0.08 (.06)
Dividends............................ 0.00 0.00 0.00 0.00
Common stock price:
High................................. n/a 10.75 11.00 10.50
Low.................................. n/a 8.00 9.00 5.38
FISCAL 1996
Operating revenues..................... $15,479 $14,100 $14,602 $14,758
Operating income....................... 1,840 1,337 745 1,260
Net income............................. 997 640 376 601
Per share (pro forma):
Net income (loss).................... 0.15 0.10 0.06 0.09
Dividends............................ 0.00 0.00 0.00 0.00
Common stock price:
High................................. n/a n/a n/a n/a
Low.................................. n/a n/a n/a n/a
</TABLE>
- ---------------
(a) Reflects the impact of noncash compensation expense during the period of
$894,000 pretax and $572,000 after tax in the third quarter and $1.9 million
pretax and $1.3 million after tax in the fourth quarter.
(b) Reflects the utilization of additional downhole tools manufactured and
acquired with proceeds from the IPO.
Note: All financial data and per share data for quarters prior to August 14,
1996 (the effective date of the IPO) represents pro forma information as
the Company was a wholly owned subsidiary of Lawrence. As a result, no
common stock prices were available for the respective periods.
F-18
<PAGE> 116
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The $100 million senior unsecured notes which are described in Note 13 will
be unconditionally guaranteed on a joint and several basis by certain
subsidiaries of the Company. Accordingly, the following condensed consolidating
balance sheets as of April 30, 1997 and 1996 and the related condensed
consolidating statements of operations and cash flows for the year ended April
30, 1997, 1996 and 1995 have been provided. The condensed consolidating
financial statements herein are followed by notes which are an integral part of
these statements.
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $14,475 $ 320 $ 405 $ -- $15,200
Accounts receivable, net................. 13,327 1,697 3,582 -- 18,606
Other current assets..................... 1,259 41 550 -- 1,850
------- -------- ------- -------- -------
Total current assets............. 29,061 2,058 4,537 -- 35,656
Revenue-producing tools and inventory,
net...................................... 29,957 7,186 345 -- 37,488
Property and equipment, net................ 5,040 182 400 -- 5,622
Deferred income taxes...................... 1,959 -- -- -- 1,959
Investment in subsidiaries................. 22,767 -- -- (22,767) --
Intangibles and other assets............... 1,634 -- -- -- 1,634
------- -------- ------- -------- -------
Total assets..................... $90,418 $ 9,426 $ 5,282 $(22,767) $82,359
======= ======== ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities........................... $ 7,004 $ 686 $ 634 $ -- $ 8,324
Accounts payable to affiliates........... 10,895 (18,698) 8,245 -- 442
Income taxes payable..................... 2,211 194 836 -- 3,241
Current portion of long-term debt........ 1,711 -- -- -- 1,711
------- -------- ------- -------- -------
Total current liabilities........ 21,821 (17,818) 9,715 -- 13,718
Long-term debt............................. 5,155 -- -- -- 5,155
Other noncurrent liabilities............... 115 44 -- -- 159
Stockholders' equity:
Common Stock............................. 93 9 3 (12) 93
Treasury stock........................... (234) -- -- -- (234)
Paid-in capital.......................... 39,972 491 195 (686) 39,972
Retained earnings........................ 23,496 26,700 (4,631) (22,069) 23,496
------- -------- ------- -------- -------
Total stockholders' equity....... 63,327 27,200 (4,433) (22,767) 63,327
------- -------- ------- -------- -------
Total liabilities and
stockholders' equity........... $90,418 $ 9,426 $ 5,282 $(22,767) $82,359
======= ======== ======= ======== =======
</TABLE>
See accompanying notes.
F-19
<PAGE> 117
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 30, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 1,428 $ 363 $ 176 $ -- $ 1,967
Accounts receivable, net................. 11,446 2,001 2,859 -- 16,306
Accounts receivable from officers and
affiliates............................ (9,923) 14,827 (4,468) -- 436
Other current assets..................... 701 42 221 -- 964
------- ------- ------- -------- -------
Total current assets............. 3,652 17,233 (1,212) -- 19,673
Revenue-producing tools and inventory,
net...................................... 22,056 7,152 -- -- 29,208
Property and equipment, net................ 4,501 204 416 -- 5,121
Property and equipment held for sale,
net...................................... 205 -- -- -- 205
Deferred income taxes...................... 1,384 -- -- -- 1,384
Investment in subsidiaries................. 22,334 -- -- (22,334) --
Intangibles and other assets............... 286 1 -- -- 287
------- ------- ------- -------- -------
Total assets..................... $54,418 $24,590 $ (796) $(22,334) $55,878
======= ======= ======= ======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued
liabilities........................... $ 5,874 $ 632 $ 243 $ -- $ 6,749
Income taxes payable..................... 1,236 80 433 -- 1,749
Short-term debt.......................... 1,300 -- -- -- 1,300
Current portion of long-term debt........ 1,738 -- -- -- 1,738
Current portion of indebtedness to
affiliate............................. 660 -- -- -- 660
Total current liabilities........ 10,808 712 676 -- 12,196
Long-term debt............................. 6,866 -- -- -- 6,866
Long-term indebtedness to affiliate........ 1,100 -- -- -- 1,100
Other noncurrent liabilities............... 3 72 -- -- 75
Stockholders' equity:
Common Stock............................. 50 9 3 (12) 50
Treasury stock........................... -- -- -- -- --
Paid-in capital.......................... 4,559 491 195 (686) 4,559
Retained earnings........................ 31,032 23,306 (1,670) (21,636) 31,032
------- ------- ------- -------- -------
Total stockholders equity........ 35,641 23,806 (1,472) (22,334) 35,641
------- ------- ------- -------- -------
Total liabilities and
stockholders' equity........... $54,418 $24,590 $ (796) $(22,334) $55,878
======= ======= ======= ======== =======
</TABLE>
See accompanying notes.
F-20
<PAGE> 118
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income............................ $36,603 $ 6,470 $ 6,424 $ -- $49,497
Sales of products and services........... 13,385 2,188 1,397 (16) 16,954
------- ------- ------- -------- -------
49,988 8,658 7,821 (16) 66,451
Cost and expenses:
Cost of rentals.......................... 26,444 5,274 10,293 (4,356) 37,655
Cost of products and services............ 8,661 191 45 (7) 8,890
Selling, general and administrative...... 10,585 594 714 -- 11,893
Non-cash compensation.................... 2,807 -- -- -- 2,807
Research and development................. 850 -- -- -- 850
------- ------- ------- -------- -------
49,347 6,059 11,052 (4,363) 62,095
------- ------- ------- -------- -------
Operating income........................... 641 2,599 (3,231) 4,347 4,356
Other (income) expense:
Interest income.......................... (624) (16) -- -- (640)
Interest expense......................... 824 9 -- -- 833
Equity in subsidiaries, net of taxes..... (960) -- -- 960 --
Other, net............................... (2,406) (1,080) (673) 4,347 188
------- ------- ------- -------- -------
Income (loss) before income taxes.......... 3,807 3,686 (2,558) (960) 3,975
Provision for income taxes................. 816 292 403 -- 1,511
------- ------- ------- -------- -------
Net income (loss).......................... $ 2,991 $ 3,394 $(2,961) $ (960) $ 2,464
======= ======= ======= ======== =======
</TABLE>
See accompanying notes.
F-21
<PAGE> 119
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income............................ $31,391 $ 4,948 $ 6,648 $ -- $42,987
Sales of products and services........... 13,486 1,166 1,500 (200) 15,952
------- ------- ------- -------- -------
44,877 6,114 8,148 (200) 58,939
Cost and expenses:
Cost of rentals.......................... 23,787 5,699 6,506 (2,973) 33,019
Cost of products and services............ 7,504 381 89 (47) 7,927
Selling, general and administrative...... 11,193 498 432 (40) 12,083
Research and development................. 728 -- -- -- 728
------- ------- ------- -------- -------
43,212 6,578 7,027 (3,060) 53,757
------- ------- ------- -------- -------
Operating income........................... 1,665 (464) 1,121 2,860 5,182
Other (income) expense:
Interest income.......................... (89) (13) (2) -- (104)
Interest expense......................... 959 8 -- -- 967
Equity in subsidiaries, net of taxes..... (1,018) -- -- 1,018 --
Other, net............................... (2,048) (731) 197 2,860 278
------- ------- ------- -------- -------
Income (loss) before income taxes.......... 3,861 272 926 (1,018) 4,041
Provision for income taxes................. 764 404 259 -- 1,427
------- ------- ------- -------- -------
Net income (loss).......................... $ 3,097 $ (132) $ 667 $ (1,018) $ 2,614
======= ======= ======= ======== =======
</TABLE>
See accompanying notes.
F-22
<PAGE> 120
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income............................ $28,352 $ 6,178 $ 2,161 $ -- $36,691
Sales of products and services........... 11,134 1,076 332 (370) 12,172
------- ------- ------- -------- -------
39,486 7,254 2,493 (370) 48,863
Cost and expenses:
Cost of rentals.......................... 23,949 4,662 2,437 (1,363) 29,685
Cost of products and services............ 6,728 212 1 (52) 6,889
Selling, general and administrative...... 8,427 593 599 (12) 9,607
Research and development................. 776 -- (1) -- 775
------- ------- ------- -------- -------
39,880 5,467 3,036 (1,427) 46,956
------- ------- ------- -------- -------
Operating income........................... (394) 1,787 (543) 1,057 1,907
Other (income) expense:
Interest income.......................... (47) (13) -- -- (60)
Interest expense......................... (1,041) 3 17 -- 1,061
Equity in subsidiaries, net of taxes..... (3,213) -- -- 3,213 --
Other, net............................... (1,121) (361) 525 1,057 100
------- ------- ------- -------- -------
Income (loss) before income taxes.......... 2,946 2,158 (1,085) (3,213) 806
Provision for income taxes................. 505 213 120 -- 838
------- ------- ------- -------- -------
Net income (loss).......................... $ 2,441 $ 1,945 $(1,205) $ (3,213) $ (32)
======= ======= ======= ======== =======
</TABLE>
See accompanying notes.
F-23
<PAGE> 121
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................... $ 2,991 $ 3,394 $(2,961) $(960) $ 2,464
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Equity in earnings of subsidiaries....... (960) -- -- 960 --
Depreciation and amortization............ 4,926 1,545 122 -- 6,593
Deferred income taxes.................... (783) -- -- -- (783)
Provision for doubtful accounts
receivable............................ 229 40 36 -- 305
Provision for stock awards............... 2,807 -- -- -- 2,807
(Gain) loss on sale and disposition of
property and equipment................ 21 138 -- -- 159
Changes in operating assets and
liabilities:
Accounts receivable -- trade.......... (2,110) 264 (759) -- (2,605)
Accounts receivable from/payable to
affiliates.......................... 722 (3,872) 3,778 -- 628
Prepaid expenses and other............ (617) (25) (330) -- (972)
Accounts payable and accrued
liabilities......................... 1,130 48 397 -- 1,575
Income taxes payable.................. 975 114 403 -- 1,492
-------- ------- ------- ----- --------
Net cash provided by operating
activities............................... 9,331 1,646 686 -- 11,663
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory................................ (18,474) (2,099) (1,252) -- (21,825)
Inventory transferred to cost of rentals... 3,805 1,207 901 -- 5,913
Revenue-producing tools lost in hole,
abandoned, and sold...................... 2,622 (639) -- -- 1,983
Additions to property and equipment........ (547) (22) (91) -- (660)
Proceeds from sale of property and
equipment................................ 277 (136) (15) -- 126
Acquisition................................ (1,584) -- -- -- (1,584)
-------- ------- ------- ----- --------
Net cash used in investing activities...... (13,901) (1,689) (457) -- (16,047)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt......... 400 -- -- -- 400
Payments on outstanding debt............... (5,198) -- -- -- (5,198)
Payment of promissory note................. (5,000) -- -- -- (5,000)
Net proceeds from sale of common stock..... 27,649 -- -- -- 27,649
Purchase of treasury stock................. (234) -- -- -- (234)
-------- ------- ------- ----- --------
Net cash provided by financing
activities............................... 17,617 -- -- -- 17,617
-------- ------- ------- ----- --------
Increase (decrease) in cash and cash
equivalents.............................. 13,047 (43) 229 -- 13,233
Cash and cash equivalents at beginning of
period................................... 1,428 363 176 -- 1,967
-------- ------- ------- ----- --------
Cash and cash equivalents at end of
period................................... $ 14,475 $ 320 $ 405 $ -- $ 15,200
======== ======= ======= ===== ========
</TABLE>
See accompanying notes.
F-24
<PAGE> 122
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................... $ 3,097 $ (132) $ 667 $(1,018) $ 2,614
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Equity in earnings of subsidiaries........ (1,018) -- -- 1,018 --
Depreciation and amortization............. 4,324 1,344 58 -- 5,726
Deferred income taxes..................... (816) -- -- -- (816)
Provision for doubtful accounts
receivable............................. 204 52 -- -- 256
Provision for stock awards................ -- -- -- -- --
(Gain) loss on sale and disposition of
property and equipment................. 6 -- -- -- 6
Changes in operating assets and
liabilities:
Accounts receivable -- trade........... (278) (437) (1,783) -- (2,498)
Accounts receivable from/payable to
affiliates........................... (3,251) 1,644 1,069 -- (538)
Prepaid expenses and other............. 332 2 13 -- 347
Accounts payable and accrued
liabilities.......................... (1,138) 105 101 -- (932)
Income taxes payable................... 338 92 311 -- 741
------- ------- ------- ------- --------
Net cash provided by operating activities... 1,800 2,670 436 -- 4,906
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory................................. (9,267) (2,576) (330) -- (12,173)
Inventory transferred to cost of rentals.... 4,078 1,107 336 -- 5,521
Revenue-producing tools lost in hole,
abandoned, and sold....................... 3,988 (1,437) -- -- 2,551
Additions to property and equipment......... (870) 320 (333) -- (883)
Proceeds from sale of property and
equipment................................. 1,247 (307) (24) -- 916
Acquisition................................. -- -- -- -- --
------- ------- ------- ------- --------
Net cash used in investing activities....... (824) (2,893) (351) -- (4,068)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt.......... 1,300 -- -- -- 1,300
Payments on outstanding debt................ (1,967) -- -- -- (1,967)
Payment of promissory note.................. -- -- -- -- --
Net proceeds from sale of common stock...... -- -- -- -- --
Purchase of treasury stock.................. -- -- -- -- --
------- ------- ------- ------- --------
Net cash used in financing activities....... (667) -- -- -- (667)
------- ------- ------- ------- --------
Increase (decrease) in cash and cash
equivalents............................... 309 (223) 85 -- 171
Cash and cash equivalents at beginning of
period.................................... 1,119 586 91 -- 1,796
------- ------- ------- ------- --------
Cash and cash equivalents at end of
period.................................... $ 1,428 $ 363 $ 176 $ -- $ 1,967
======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-25
<PAGE> 123
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................... $ 2,441 $ 1,945 $(1,205) $(3,213) $ (32)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Equity in earnings of subsidiaries....... (3,213) -- -- 3,213 --
Depreciation and amortization............ 4,368 1,037 23 -- 5,428
Deferred income taxes.................... (487) -- -- -- (487)
Provision for doubtful accounts
receivable............................ 137 184 -- -- 321
Provision for stock awards............... -- -- -- -- --
(Gain) loss on sale and disposition of
property and equip.................... (9) -- -- -- (9)
Accounts receivable -- trade.......... (1,527) 859 5 -- (663)
Accounts receivable form/payable to
officers and affiliates............. 677 (2,492) 1,104 -- (711)
Prepaid expenses and other............ (55) 151 (99) -- (3)
Accounts payable and accrued
liabilities......................... 2,588 (242) 112 -- 2,458
Income taxes payable.................. (424) (17) 122 -- (319)
-------- ------- ------- ------- --------
Net cash provided by operating
activities............................... 4,496 1,425 62 -- 5,983
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory................................ (13,219) (130) (47) -- (13,396)
Inventory transferred to cost of rentals... 3,386 1,298 55 -- 4,739
Revenue-producing tools lost in hole,
abandoned, and sold...................... 4,459 (2,386) -- -- 2,073
Additions to property and equipment........ (1,337) (197) (85) -- (1,619)
Proceeds from sale of property and
equipment................................ 474 (6) 5 -- 473
Acquisition................................ -- -- -- -- --
-------- ------- ------- ------- --------
Net cash used in investing activities...... (6,237) (1,421) (72) -- (7,730)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt......... -- -- -- -- --
Payments on outstanding debt............... (1,074) -- -- -- (1,074)
Payment of promissory note................. -- -- -- -- --
Net proceeds from sale of common stock..... -- -- -- -- --
Purchase of treasury stock................. -- -- -- -- --
-------- ------- ------- ------- --------
Net cash used in financing activities...... (1,074) -- -- -- (1,074)
-------- ------- ------- ------- --------
Increase (decrease) in cash and cash
equivalents.............................. (2,815) 4 (10) -- (2,821)
Cash and cash equivalents at beginning of
period................................... 3,934 582 101 -- 4,617
-------- ------- ------- ------- --------
Cash and cash equivalents at end of
period................................... $ 1,119 $ 586 $ 91 $ -- $ 1,796
======== ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 124
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
A. SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding April 30, 1997 classifications.
Elimination Entries
Revenues and related Cost of Sales by individual category have been
presented net of intercompany transactions.
B. OTHER
Notes 1 through 15 should be read in conjunction with the Condensed
Consolidating Financial Statements.
F-27
<PAGE> 125
DAILEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1997 1997
-------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,754 $15,200
Accounts receivable, net.................................. 30,343 18,606
Prepaid expenses.......................................... 601 346
Deferred income taxes..................................... 597 597
Other current assets...................................... 1,711 907
-------- -------
Total current assets.............................. 35,006 35,656
Revenue-producing tools and inventory, net.................. 65,053 37,488
Property and equipment, net................................. 6,175 5,622
Deferred income taxes....................................... -- 1,959
Accounts receivable from officer............................ 250 250
Goodwill, net............................................... 22,011 825
Intangibles and other assets................................ 1,465 559
-------- -------
Total assets...................................... $129,960 $82,359
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 15,145 $ 8,324
Accounts payable to affiliates............................ 514 442
Income taxes payable...................................... 3,397 3,241
Current portion of long-term debt......................... 616 1,711
-------- -------
Total current liabilities......................... 19,672 13,718
Long-term debt.............................................. 45,656 5,155
Deferred income taxes....................................... 806 --
Other noncurrent liabilities................................ 945 159
Commitments and contingencies Stockholders' equity:
Preferred stock........................................... -- --
Common stock.............................................. 93 93
Treasury stock (144,000 shares)........................... (1,047) (234)
Paid-in capital........................................... 40,449 39,972
Retained earnings......................................... 23,386 23,496
-------- -------
Total stockholders' equity........................ 62,881 63,327
-------- -------
Total liabilities and stockholders' equity........ $129,960 $82,359
======== =======
</TABLE>
See accompanying notes.
F-28
<PAGE> 126
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Rental income............................................. $ 15,602 $ 12,121
Sales of products and services............................ 4,523 4,637
Underbalanced drilling services........................... 2,894 --
---------- ----------
23,019 16,758
Costs and expenses:
Cost of rentals........................................... 10,646 9,346
Cost of products and services............................. 3,007 2,536
Cost of underbalanced drilling services................... 1,841 --
Selling, general and administrative....................... 4,218 2,900
Reorganization costs...................................... 2,453 --
Non-cash compensation..................................... 478 --
Research and development.................................. 120 175
---------- ----------
22,763 14,957
---------- ----------
Operating income............................................ 256 1,801
Other (income) expense:
Interest income........................................... (122) (12)
Interest expense-nonaffiliates............................ 423 202
Interest expense-affiliate................................ -- 111
Foreign exchange (gain) loss.............................. 16 (7)
Other, net................................................ 128 (39)
---------- ----------
Income (loss) before income taxes........................... (189) 1,546
Income tax provision (benefit).............................. (83) 584
---------- ----------
Net income (loss)........................................... $ (106) $ 962
========== ==========
Net loss per share.......................................... $ (.01)
==========
Pro forma earnings per share................................ $ 0.15
==========
Weighted average shares outstanding......................... 9,252,046
==========
Pro forma weighted average shares outstanding............... 6,610,000
==========
</TABLE>
See accompanying notes.
F-29
<PAGE> 127
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ (106) $ 962
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 2,301 1,479
Deferred income taxes..................................... 8 123
Provision for doubtful accounts receivable................ 106 79
Gain on sale and disposition of property and equipment.... -- (3)
Provision for stock awards................................ 477 --
Changes in operating assets and liabilities:
Accounts receivable -- trade........................... (4,778) (1,083)
Accounts receivable from affiliates.................... 72 431
Prepaid expenses and other............................. (731) (494)
Accounts payable and accrued liabilities............... 2,481 2,228
Income taxes payable................................... (284) 128
-------- --------
Net cash provided by (used in) operating activities......... (454) 3,850
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory.......... (6,250) (3,947)
Inventory transferred to cost of rentals.................... 2,121 1,379
Revenue-producing tools lost in hole, abandoned, and sold... 815 826
Additions to property and equipment......................... (2,272) (596)
Proceeds from sale of property and equipment................ 931 79
Acquisition, net of cash acquired........................... (46,226) --
-------- --------
Net cash used in investing activities....................... (50,881) (2,259)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt.......................... 45,500 400
Payments on outstanding debt................................ (6,798) (605)
Cost of initial public offering............................. -- (861)
Purchase of treasury stock.................................. (813) --
-------- --------
Net cash provided by (used in) financing activities......... 37,889 (1,066)
-------- --------
Increase (decrease) in cash and cash equivalents............ (13,446) 525
Cash and cash equivalents at beginning of period............ 15,200 1,967
-------- --------
Cash and cash equivalents at end of period.................. $ 1,754 $ 2,492
======== ========
</TABLE>
See accompanying notes.
F-30
<PAGE> 128
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements 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 months ended July 31, 1997 are not necessarily
indicative of the results that may be expected for the fiscal period. Certain
reclassifications have been made to the April 30, 1997 and July 31, 1996
financial information to conform to the current period presentation.
2. ORGANIZATION AND PUBLIC OFFERING
The accompanying consolidated 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. The Company subsequently changed its name to Dailey
International Inc. Dailey International Inc. and its predecessor, Dailey
Petroleum Services Corp., are hereinafter referred to as the "Company" or
"Dailey". In August 1997, the Company changed its fiscal year end to December
31.
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, Louisiana and the Austin Chalk formation
in Texas. In June 1997, the Company acquired Air Drilling International, Inc.
("ADI" and "ADI Acquisition") and, as a result, became a leading provider
worldwide of air drilling services for underbalanced drilling applications. The
Company operates in one business segment.
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 (the "Reorganization"). The effect
of the forward triangular merger has been reflected retroactively in the
accompanying financial statements. In August 1996, the Company completed its
initial public offering of 3,910,000 shares of Class A Common Stock (the "1996
IPO").
Dailey's Restated Certificate of Incorporation provides for three classes
of stock: Class A Common Stock, $.01 par (20,000,000 shares authorized,
4,171,000 issued and 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, none 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).
F-31
<PAGE> 129
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ORGANIZATION AND PUBLIC OFFERING -- (CONTINUED)
In connection with the 1996 IPO, the Company issued 3,910,000 shares of
Class A Common Stock. Net proceeds from the sale of the stock were $27.6
million. The Company used $5.0 million of the proceeds from the 1996 IPO 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 1996 IPO, the Company's sole
stockholder contributed to the capital of the Company $5.0 million of the
principal of such note. The statements of operations for the three months ended
July 31, 1996 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 period ended July 31, 1996 were based on 6,610,000
shares of Common Stock outstanding). Historical earnings per share excluding the
pro forma effect of the dividend was $0.18 per share for the three months ended
July 31, 1996.
3. ADI ACQUISITION
On June 20, 1997, the Company purchased the stock of ADI (a provider of air
drilling services for underbalanced drilling applications) for $46.4 million,
including the repayment of approximately $16.8 million of ADI indebtedness,
financed with bank debt of $45.5 million and proceeds from the 1996 IPO. The ADI
Acquisition was accounted for under the purchase method of accounting. As a
result, the assets and liabilities of ADI were recorded at their estimated fair
market values as of the date of the ADI Acquisition. The Company recorded
goodwill of approximately $22.3 million relating to the excess of the fair
market value of ADI's assets over the purchase price paid for ADI, which will be
amortized over 20 years and result in approximately $1.1 million in amortization
expense per year. Since the goodwill associated with the ADI Acquisition will
not be amortized for tax purposes, the Company expects its effective tax rate
shown on its financial statements to increase significantly as a result of the
ADI Acquisition. The purchase price allocation was based on preliminary
estimates and may be revised at a later date.
The pro forma unaudited results of operations for the three months ended
July 31, 1997 and 1996, assuming consummation of the purchase of ADI as of May
1, 1996 utilizing interim financing of $45.5 million under the Company's bank
credit facility and reflecting extinguishment of debt of Dailey and ADI (except
for capitalized leases), are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JULY 31,
----------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $27,234 $21,905
Net income (loss)........................................... (1,747) 595
Net income (loss) per common share.......................... (0.19) 0.09
</TABLE>
The pro forma information for the three months ended July 31, 1997 and
1996, includes adjustments for additional depreciation and amortization expense
associated with the purchase price allocation using a 20 year life for goodwill
and an average life of eight years for fixed assets, increased interest expense
for the additional borrowings under the credit facility as if they were incurred
at the beginning of the period and related adjustments for income taxes. The pro
forma information is not necessarily indicative of the results of operations had
the acquisition been affected on the assumed dates or the results of operations
for any future period.
F-32
<PAGE> 130
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. REVENUE-PRODUCING TOOLS AND INVENTORY
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1997 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenue-producing tools..................................... $ 80,484 $ 56,622
Accumulated depreciation.................................... (33,836) (32,503)
-------- --------
46,648 24,119
Inventory:
Components, subassemblies and expendable parts............ 16,011 11,293
Rental tools and expendable parts under production........ 1,469 1,261
Raw materials............................................. 925 815
-------- --------
18,405 13,369
-------- --------
Revenue-Producing Tools and Inventory............. $ 65,053 $ 37,488
======== ========
</TABLE>
5. STOCK OPTIONS AND AWARDS
No stock options were granted or exercised during the three months ended
July 31, 1997.
On May 31, 1997, 180,000 shares of restricted stock awards granted during
fiscal 1997 vested at $6.625 per share and on June 23, 1997, 45,000 shares of
restricted stock awards granted during fiscal 1997 vested at $7.00 per share.
The vesting resulted in the recording of $478,000 in non-cash compensation
expense for the three months ended July 31, 1997.
6. BORROWING ARRANGEMENTS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1997 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Note payable to a bank...................................... $45,500 $6,778
Other notes payable......................................... 772 88
------- ------
46,272 6,866
Less current portion of long-term debt...................... 616 1,711
------- ------
Total long-term debt.............................. $45,656 $5,155
======= ======
</TABLE>
At July 31, 1997, the Company had a $45.5 million note payable to a bank
with scheduled maturities within the next 12 months of $1.4 million. The Company
excluded the $1.4 million from current liabilities because, on August 19, 1997,
the Company issued $115.0 million of 9.75% Senior Notes due 2007 at a discount
of 0.785%, and a portion of the proceeds was used to repay the note payable to a
bank.
7. REORGANIZATION
In June 1997, the Company implemented and completed a cost reduction
program to flatten its corporate management structure and streamline the
Company's operations (the "Management Reorganization"). As a result, the Company
incurred a $2.5 million restructuring charge during the three months ended July
31, 1997 associated primarily with staff reductions, severance settlements and
various reorganization costs.
F-33
<PAGE> 131
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The $115 million of 9.75% Senior Notes due 2007 issued on August 19, 1997
are unconditionally guaranteed on a joint and several basis by certain
subsidiaries of the Company. Accordingly, the following condensed consolidating
balance sheets as of July 31, 1997 and April 30, 1997 and the related condensed
consolidating statements of operations and cash flows for the three months ended
July 31, 1997 and 1996 have been provided. The condensed consolidating financial
statements herein are followed by notes which are an integral part of these
statements.
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 1997
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 876 $ 610 $ 268 $ -- $ 1,754
Accounts receivable, net............... 16,523 8,118 5,702 -- 30,343
Other current assets................... 1,462 762 685 -- 2,909
-------- ------- ------- -------- --------
Total current assets........... 18,861 9,490 6,655 -- 35,006
Revenue-producing tools and inventory,
net.................................... 31,772 25,689 7,592 -- 65,053
Property and equipment, net.............. 4,723 848 604 -- 6,175
Goodwill, net............................ 817 21,194 -- -- 22,011
Investment in subsidiaries............... 50,545 -- -- (50,545) --
Intangibles and other assets............. 1,308 251 156 -- 1,715
-------- ------- ------- -------- --------
Total assets................... $108,026 $57,472 $15,007 $(50,545) $129,960
======== ======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities......................... $ 9,084 $ 4,407 $ 1,654 $ -- $ 15,145
Accounts payable to affiliates......... (9,587) 2,100 8,001 -- 514
Income taxes payable................... 1,606 (79) 1,870 -- 3,397
Current portion of long-term debt...... 45 256 315 -- 616
-------- ------- ------- -------- --------
Total current liabilities...... 1,148 6,684 11,840 -- 19,672
Long-term debt........................... 45,532 124 -- -- 45,656
Deferred income taxes.................... (1,951) 877 1,880 -- 806
Other noncurrent liabilities............. 415 291 239 -- 945
Stockholders' equity:
Common Stock........................... 93 10 3 (13) 93
Treasury stock......................... (1,047) -- -- -- (1,047)
Paid-in capital........................ 40,450 23,785 3,894 (27,680) 40,449
Retained earnings...................... 23,386 25,701 (2,849) (22,852) 23,386
-------- ------- ------- -------- --------
Total stockholders' equity..... 62,882 49,496 1,048 (50,545) 62,881
-------- ------- ------- -------- --------
Total liabilities and
stockholders' equity......... $108,026 $57,472 $15,007 $(50,545) $129,960
======== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-34
<PAGE> 132
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $14,475 $ 320 $ 405 $ -- $15,200
Accounts receivable, net................ 13,327 1,697 3,582 -- 18,606
Other current assets.................... 1,259 41 550 -- 1,850
------- -------- ------- -------- -------
Total current assets............ 29,061 2,058 4,537 -- 35,656
Revenue-producing tools and inventory,
net..................................... 29,957 7,186 345 -- 37,488
Property and equipment, net............... 5,040 182 400 -- 5,622
Deferred income taxes..................... 1,959 -- -- -- 1,959
Investment in subsidiaries................ 22,767 -- -- (22,767) --
Intangibles and other assets.............. 1,634 -- -- -- 1,634
------- -------- ------- -------- -------
Total assets.................... $90,418 $ 9,426 $ 5,282 $(22,767) $82,359
======= ======== ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.......................... $ 7,004 $ 686 $ 634 $ -- $ 8,324
Accounts payable to affiliates.......... 10,895 (18,698) 8,245 -- 442
Income taxes payable.................... 2,211 194 836 -- 3,241
Current portion of long-term debt....... 1,711 -- -- -- 1,711
------- -------- ------- -------- -------
Total current liabilities....... 21,821 (17,818) 9,715 -- 13,718
Long-term debt............................ 5,155 -- -- -- 5,155
Other noncurrent liabilities.............. 115 44 -- -- 159
Stockholders' equity:
Common Stock............................ 93 9 3 (12) 93
Treasury stock.......................... (234) -- -- -- (234)
Paid-in capital......................... 39,972 491 195 (686) 39,972
Retained earnings....................... 23,496 26,700 (4,631) (22,069) 23,496
------- -------- ------- -------- -------
Total stockholders' equity...... 63,327 27,200 (4,433) (22,767) 63,327
------- -------- ------- -------- -------
Total liabilities and
stockholders' equity.......... $90,418 $ 9,426 $ 5,282 $(22,767) $82,359
======= ======== ======= ======== =======
</TABLE>
See accompanying notes.
F-35
<PAGE> 133
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income........................... $11,697 $1,797 $2,108 $ -- $15,602
Sales of products and services.......... 3,743 227 553 -- 4,523
Underbalanced drilling services......... -- 2,088 806 -- 2,894
------- ------ ------ ----- -------
15,440 4,112 3,467 -- 23,019
Costs and expenses:
Cost of rentals......................... 8,065 1,492 1,191 (102) 10,646
Cost of products and services........... 2,569 46 392 -- 3,007
Cost of underbalanced drilling.......... -- 1,157 684 -- 1,841
Selling, general and administrative..... 2,715 1,001 696 (194) 4,218
Reorganization cost..................... 2,453 -- -- -- 2,453
Non-cash compensation................... 478 -- -- -- 478
Research and development................ 120 -- -- -- 120
------- ------ ------ ----- -------
16,400 3,696 2,963 (296) 22,763
------- ------ ------ ----- -------
Operating income.......................... (960) 416 504 296 256
Other (income) expense:
Interest income......................... (115) (7) -- -- (122)
Interest expense........................ 406 12 5 -- 423
Equity in subsidiaries, net of taxes.... (814) -- -- 814 --
Other, net.............................. 108 (260) -- 296 144
------- ------ ------ ----- -------
Income (loss) before taxes................ (545) 671 499 (814) (189)
Income tax provision (benefit)............ (467) 326 58 -- (83)
------- ------ ------ ----- -------
Net income (loss)......................... $ (78) $ 345 $ 441 $(814) $ (106)
======= ====== ====== ===== =======
</TABLE>
See accompanying notes.
F-36
<PAGE> 134
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income........................... $ 8,759 $1,684 $1,678 $ -- $12,121
Sales of products and services.......... 3,393 783 477 (16) 4,637
------- ------ ------ ------- -------
12,152 2,467 2,155 (16) 16,758
Costs and expenses:
Cost of rentals......................... 6,643 1,253 2,446 (996) 9,346
Cost of products and services........... 2,395 105 43 (7) 2,536
Selling, general and administrative..... 2,669 106 125 -- 2,900
Research and development................ 175 -- -- -- 175
------- ------ ------ ------- -------
11,882 1,464 2,614 (1,003) 14,957
------- ------ ------ ------- -------
Operating income.......................... 270 1,003 (459) 987 1,801
Other (income) expense:
Interest income......................... (8) (4) -- -- (12)
Interest expense........................ 311 2 -- -- 313
Equity in subsidiaries, net of taxes.... (694) -- -- 694 --
Other, net.............................. (707) (276) (50) 987 (46)
------- ------ ------ ------- -------
Income (loss) before taxes................ 1,368 1,281 (409) (694) 1,546
Income tax provision...................... 406 69 109 -- 584
------- ------ ------ ------- -------
Net income (loss)......................... $ 962 $1,212 $ (518) $ (694) $ 962
======= ====== ====== ======= =======
</TABLE>
See accompanying notes.
F-37
<PAGE> 135
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................... $ (78) $ 345 $ 441 $(814) $ (106)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Equity in earnings of subsidiaries............ (814) -- -- 814 --
Depreciation and amortization................. 1,445 723 133 -- 2,301
Deferred income taxes......................... 8 -- -- -- 8
Provision for doubtful accounts receivable.... 84 9 13 -- 106
Provision for stock awards.................... 478 (1) -- -- 477
Changes in operating assets and liabilities:
Accounts receivable -- trade................ (3,280) (939) (559) -- (4,778)
Accounts receivable from/payable to
affiliates................................ (20,482) 20,798 (244) -- 72
Prepaid expenses and other.................. 223 (976) 22 -- (731)
Accounts payable and accrued liabilities.... 2,080 375 26 -- 2,481
Income taxes payable........................ (605) 252 69 -- (284)
-------- -------- ----- ----- --------
Net cash provided by (used in) operating
activities.................................... (20,941) 20,586 (99) -- (454)
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory..................................... (5,605) (451) (194) -- (6,250)
Inventory transferred to cost of rentals........ 1,586 279 256 -- 2,121
Revenue-producing tools lost in hole, abandoned,
and sold...................................... 980 (165) -- -- 815
Additions to property and equipment............. (767) (1,464) (41) -- (2,272)
Proceeds from sale of property and equipment.... 879 16 36 -- 931
Acquisition..................................... (27,629) (18,535) (62) -- (46,226)
-------- -------- ----- ----- --------
Net cash used in investing activities........... (30,556) (20,320) (5) -- (50,881)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt.............. 45,500 -- -- -- 45,500
Payments on outstanding debt.................... (6,789) (9) -- -- (6,798)
-------- -------- ----- ----- --------
Purchase of treasury stock...................... (813) -- -- -- (813)
-------- -------- ----- ----- --------
Net cash provided by (used in) financing
activities.................................... 37,898 (9) -- -- 37,889
-------- -------- ----- ----- --------
Increase (decrease) in cash and cash
equivalents................................... (13,599) 257 (104) -- (13,446)
Cash and cash equivalents at beginning of
period........................................ 14,475 320 405 -- 15,200
======== ======== ===== ===== ========
Cash and cash equivalents at end of period...... $ 876 $ 577 $ 301 $ -- $ 1,754
======== ======== ===== ===== ========
</TABLE>
See accompanying notes.
F-38
<PAGE> 136
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JULY 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................ $ 962 $ 1,213 $(518) $(695) $ 962
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Equity in earnings of subsidiaries............. (695) -- -- 695 --
Depreciation and amortization.................. 1,093 368 18 -- 1,479
Deferred income taxes.......................... 123 -- -- -- 123
Provision for doubtful accounts receivable..... 58 11 10 -- 79
(Gain) loss on sale and disposition of property
and equipment................................ (3) -- -- -- (3)
Changes in operating assets and liabilities:
Accounts receivable -- trade................. (120) (96) (867) -- (1,083)
Accounts receivable from/payable to
affiliates................................. 786 (1,291) 936 -- 431
Prepaid expenses and other................... (138) (157) (199) -- (494)
Accounts payable and accrued liabilities..... 1,635 166 427 -- 2,228
Income taxes payable......................... 11 8 109 -- 128
------- ------- ----- ----- -------
Net cash provided by (used in) operating
activities..................................... 3,712 222 (84) -- 3,850
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory...................................... (3,764) (13) (170) -- (3,947)
Inventory transferred to cost of rentals......... 1,104 111 164 -- 1,379
Revenue-producing tools lost in hole, abandoned,
and sold....................................... 679 147 -- -- 826
Additions to property and equipment.............. (578) (4) (14) -- (596)
Proceeds from sale of property and equipment... 3 -- 76 -- 79
------- ------- ----- ----- -------
Net cash provided by (used in) investing
activities..................................... (2,556) 241 56 -- (2,259)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt............... 400 -- -- -- 400
Payments on outstanding debt..................... (605) -- -- -- (605)
Cost of initial public offering.................. (861) -- -- -- (861)
------- ------- ----- ----- -------
Net cash used in financing activities............ (1,066) -- -- -- (1,066)
------- ------- ----- ----- -------
Increase (decrease) in cash and cash
equivalents.................................... 90 463 (28) -- 525
Cash and cash equivalents at beginning of
period......................................... 1,428 363 176 -- 1,967
------- ------- ----- ----- -------
Cash and cash equivalents at end of period....... $ 1,518 $ 826 $ 148 $ -- $ 2,492
======= ======= ===== ===== =======
</TABLE>
See accompanying notes.
F-39
<PAGE> 137
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
A. SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding July 31, 1997 classifications.
Elimination Entries
Revenues and related Cost of Sales by individual category have been
presented net of intercompany transactions.
B. OTHER
Notes 1 through 7 should be read in conjunction with the Condensed
Consolidating Financial Statements.
F-40
<PAGE> 138
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Air Drilling International, Inc.:
We have audited the accompanying consolidated balance sheets of Air
Drilling International, Inc. (the "Company") and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and the
period from May 19, 1995 (Inception) to December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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
Air Drilling International, Inc. as of December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1996 and the period from May 19, 1995 (Inception) to December 31,
1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
April 2, 1997
F-41
<PAGE> 139
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 294,719 $ --
Certificate of deposit.................................... -- 112,500
Accounts receivable, net of allowance for doubtful
accounts of $215,000 and $250,145, respectively........ 4,825,319 3,778,088
Income tax refund receivable.............................. 279,802 176,251
Other current assets...................................... 93,678 149,915
----------- -----------
Total current assets................................. 5,493,518 4,216,754
----------- -----------
Property and equipment, net................................. 17,503,492 16,683,031
Materials and supplies inventory............................ 4,654,826 2,482,670
Deposits and other.......................................... 252,417 220,602
Debt issuance costs, net of accumulated amortization of
$4,184 and $185,226, respectively......................... 148,900 990,365
----------- -----------
Total noncurrent assets.............................. 22,559,635 20,376,668
----------- -----------
Total assets...................................... $28,053,153 $24,593,422
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,446,100 $ 1,509,855
Notes payable, current maturities......................... 913,046 1,317,589
Accrued expenses.......................................... 2,178,246 1,636,106
Capital lease obligations................................. 548,097 199,202
Income taxes payable...................................... 340,289 225,926
----------- -----------
Total current liabilities......................... 7,425,778 4,888,678
----------- -----------
Capital lease obligations................................... 503,933 199,110
Notes payable, net of current maturities.................... 13,707,752 11,837,941
Less debt discount.......................................... -- (505,498)
Deferred income taxes....................................... 2,780,978 3,609,077
----------- -----------
Total noncurrent liabilities...................... 16,992,663 15,140,630
----------- -----------
Total liabilities................................. 24,418,441 20,029,308
----------- -----------
Commitments (Note 5)
Stockholders' equity:
Common stock, $.01 par value, 165,000 shares authorized;
100,000 shares issued and outstanding.................. 1,000 1,000
Paid-in capital........................................... 4,708,189 4,708,189
Put warrants.............................................. 113,898 490,625
Cumulative foreign currency translation adjustments....... (8,156) --
Accumulated deficit....................................... (1,180,219) (635,700)
----------- -----------
Total stockholders' equity........................ 3,634,712 4,564,114
----------- -----------
Total liabilities and stockholders' equity........ $28,053,153 $24,593,422
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE> 140
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
MAY 19, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net sales................................................... $21,819,889 $ 9,411,118
Cost of sales............................................... 12,080,953 4,504,440
----------- -----------
Gross profit......................................... 9,738,936 4,906,678
----------- -----------
Operating expenses:
Depreciation and amortization............................. 2,009,626 1,055,258
Foreign taxes............................................. 259,819 251,166
Salaries.................................................. 1,587,161 875,536
Other selling, general and administrative expenses........ 3,312,728 1,863,341
----------- -----------
Total operating expenses............................. 7,169,334 4,045,301
----------- -----------
Operating income..................................... 2,569,602 861,377
----------- -----------
Other income (expense):
Interest expense.......................................... (2,035,015) (1,122,568)
Amortization expense...................................... (422,885) (279,728)
Gain (loss) on disposition of assets...................... (48,093) 25,285
Foreign currency exchange loss............................ (8,823) --
Other, net................................................ (108,575) (40,320)
----------- -----------
Total other income (expense)......................... (2,623,391) (1,417,331)
Loss from continuing operations before income taxes......... (53,789) (555,954)
Income tax provision (benefit).............................. (50,904) 189,121
----------- -----------
Loss from continuing operations before extraordinary item... (2,885) (745,075)
----------- -----------
Extraordinary item:
Loss on early extinguishment of debt, net of income tax
benefit of $398,741.................................... 918,361 --
----------- -----------
Net loss.................................................... $ (921,246) $ (745,075)
=========== ===========
Net loss per share:
Extraordinary item........................................ $ (9.18) $ --
=========== ===========
Net loss.................................................. $ (9.21) $ (7.45)
=========== ===========
Weighted average shares outstanding....................... 100,000 100,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE> 141
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
MAY 19, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
---------------- PAID-IN PUT TRANSLATION ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS ADJUSTMENTS DEFICIT TOTAL
------- ------ ---------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuances on May 19, 1995....... 100,000 $1,000 $4,708,189 $600,000 $ -- $ -- $5,309,189
Change in put warrant
valuation..................... -- -- -- (109,375) -- 109,375 --
Net loss........................ -- -- -- -- -- (745,075) (745,075)
------- ------ ---------- -------- ------- ----------- ----------
Balance at December 31, 1995.... 100,000 1,000 4,708,189 490,625 -- (635,700) 4,564,114
Change in put warrant
valuation..................... -- -- -- (376,727) -- 376,727 --
Foreign currency translation.... -- -- -- -- (8,156) -- (8,156)
Net loss........................ -- -- -- -- -- (921,246) (921,246)
------- ------ ---------- -------- ------- ----------- ----------
Balance at December 31, 1996.... 100,000 $1,000 $4,708,189 $113,898 $(8,156) $(1,180,219) $3,634,712
======= ====== ========== ======== ======= =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE> 142
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
MAY 19, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (921,246) $ (745,075)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization.......................... 2,432,511 1,334,986
(Gain) loss on sale of fixed assets.................... 48,093 (25,285)
Deferred taxes......................................... (471,146) 335,106
Extraordinary loss, net of tax benefit................. 918,361 --
Other.................................................. (35,145) --
Changes in operating assets and liabilities:
(Increase) decrease in certificate of deposit.......... 112,500 (28,500)
(Increase) decrease in accounts receivable............. (1,012,086) 288,133
(Increase) decrease in income tax refund receivable.... (103,551) 22,579
(Increase) decrease in other current assets............ 56,237 (64,986)
Increase in deposits and other......................... (31,815) (74,995)
Increase (decrease) in accounts payable................ 1,601,601 (135,222)
Increase (decrease) in accrued expenses................ 542,140 437,920
Increase (decrease) in income taxes payable............ 114,363 (443,896)
Deferred income taxes.................................. (151,623) --
---------- ----------
Net cash provided by operating activities............ 3,099,194 900,765
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,430,489) (1,670,868)
Proceeds on sale of fixed assets.......................... 402,492 25,285
Purchases of materials and supplies inventory............. (2,172,156) (1,195,037)
---------- ----------
Net cash used in investing activities................ (4,200,153) (2,840,620)
---------- ----------
Cash flows from financing activities:
Net borrowings under Revolving Note....................... 1,408,092 691,944
Principal payments on term loan and capital leases........ (1,261,517) (573,550)
Proceeds from loans....................................... 1,070,380 574,465
Cash overdraft............................................ 334,644 --
Debt issuance costs....................................... (153,084) --
---------- ----------
Net cash provided by financing activities.............. 1,398,515 692,859
---------- ----------
Effect of exchange rate on cash............................. (2,837) --
Increase (decrease) in cash................................. 294,719 (1,246,996)
Cash, beginning of period................................... -- 1,246,996
---------- ----------
Cash, end of period......................................... $ 294,719 $ --
========== ==========
Supplemental cash flow information:
Interest paid............................................. $2,022,756 $ 822,042
========== ==========
Income taxes paid......................................... $ 256,623 $ 471,951
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE> 143
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
Air Drilling International, Inc. ("ADI") and its wholly owned subsidiaries: Air
Drilling Services, Inc., which includes Air Drilling Services de Venezuela, C.A.
("ADS"), Air Drilling Services France (SARL) ("ADS France"), Canadian Air
Drilling Services Ltd. ("CADS") and Specialty Testing & Consulting Ltd.
("Specialty"), collectively (the "Company"). ADS is located in the United
States. CADS and Specialty are located in Canada. All intercompany balances have
been eliminated.
Effective May 19, 1995, ADI acquired ADS, CADS and Specialty. ADI is 85%
owned by Wind River Associates LLC ("Wind River") and 15% by prior management.
Wind River paid $10,500,000 to acquire the 85% interest. The acquisition was
accounted for using the purchase method of accounting. The purchase price was
allocated based on the relative fair market value of the acquired assets and
assumed liabilities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General:
ADI's principal business is to provide air drilling services and rental of
related equipment to companies in the oil and gas industry on a domestic and
international basis.
Use of Estimates in the Preparation of Financial Statements:
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.
Property and Equipment:
Property and equipment are stated at cost. Maintenance and repair costs are
expensed as incurred; renewals and betterments are capitalized. Depreciation is
provided for at rates based upon estimated useful service, on a straight-line
and accelerated basis ranging from 5 to 10 years. Upon sale or retirement, the
asset cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations.
Materials and Supplies Inventory:
Inventories consist of operating materials and supplies used to support the
machinery and equipment. Due to the nature of ADI's operations, the length of
various contracts and the international location of several jobs, inventories
are classified as long term assets because these materials and supplies may be
used over a period longer than one year. Inventories are carried at cost.
Income Taxes:
ADS files a consolidated tax return with ADI in the United States. CADS and
Specialty file separate tax returns in Canada. Income taxes are calculated
pursuant to Statement of Financial Accounting Standards No. 109, Accounting For
Income Taxes. Under this method, income taxes are recorded for future events at
tax rates in effect when the balances are expected to be paid. The Company
intends on indefinitely reinvesting its earnings in CADS and Specialty.
F-46
<PAGE> 144
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition:
ADI recognizes revenue as services are performed; potential contract losses
are recorded in the period known.
Loss Per Share:
Loss per share is calculated by taking the net loss divided by the weighted
average common shares outstanding. The common stock warrant is not included
since it would be anitidilutive.
In 1997, FASB Statement No. 128 Earnings Per Share was issued. The Company
believes the implementation of this statement will have an immaterial impact on
earnings per share.
Foreign Currency Translation:
Canadian and French assets and liabilities are translated into U.S. dollars
using the exchange rate in effect at year end. Canadian and French revenues and
expenses are translated using average exchange rates for each period.
Adjustments resulting from these translations are accumulated in a separate
component of stockholders' equity. Foreign currency transaction gains or losses,
which primarily represent exchange gains or losses resulting from the
denomination of current intercompany balances into U.S. dollars, are included in
determining net income for the period.
Cash and Cash Equivalents:
ADI considers cash on hand, deposits in bank and certificates of deposit
with original maturities of less than three months to be cash equivalents.
Under the terms of a service agreement, ADS was obligated to maintain a
$112,500 letter of credit. The funds in this restricted account served as a
guarantee of completion and are included in a certificate of deposit on the
consolidated balance sheet. This amount was released in 1996.
Debt Issuance Costs:
Debt issuance costs are being amortized over the term of the related
indebtedness using the effective interest method.
Debt Discount:
The debt discount is being amortized over the term of the related
indebtedness using the effective interest method.
Supplemental Cash Flow Disclosures:
During fiscal year 1996, the Company had noncash capital lease property and
equipment additions of $904,433.
F-47
<PAGE> 145
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Machinery and equipment.......................... $19,901,213 $17,153,189
Transportation equipment......................... 222,679 222,679
Office furniture and equipment................... 445,540 363,477
----------- -----------
20,569,432 17,739,345
Less accumulated depreciation.................... 3,065,940 1,056,314
----------- -----------
$17,503,492 $16,683,031
=========== ===========
</TABLE>
Included in the above is machinery and equipment under capital leases as of
December 31, 1996 and 1995, which had an initial cost of $1,584,726 and
$680,293, respectively, and accumulated amortization of $144,269 and $43,241,
respectively.
4. NOTES PAYABLE:
The Company had notes payable at December 31, 1996 and 1995 that consisted
of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
$5,000,000 Revolving Line of Credit Agreement (the
"Revolving Note"). The Revolving Note matures in May
2000 and is collateralized by all accounts receivable,
inventory and equipment of ADS and the guarantees of
CADS and Specialty. Interest rate at the bank's prime
rate plus 2.0% (prime is 8.25% and 8.5% at December 31,
1996 and 1995, respectively). The weighted average
interest rate for the year ended December 31, 1996 was
10.68%................................................. $ 2,612,736 $ 1,204,644
"A" and "B" Senior Term Notes ("Term Notes"), initial
principal of $11,000,000. The Term Notes mature May
2000 and are collateralized by all accounts receivable,
inventory and equipment of ADS and guarantees of CADS
and Specialty. The interest rate on Term Note A is 12%
and the interest rate on Term Note B is 13.5%.......... 9,607,142 10,535,714
Mortgage payable, interest rate of 6.99%, monthly payment
of $916 including principal and interest, maturity date
of December 2008, collateralized by residential rental
property, note obtained by a stockholder of ADI........ 89,536 90,707
Subordinated promissory note to prior management
("Subordinated Note") with an initial principal balance
of $750,000. The Subordinated Note is payable in
installments beginning on the fourth anniversary.
Interest rate is 13.5%................................. 750,000 750,000
Unsecured demand notes payable to certain stockholders of
Wind River and ADI bearing interest at 13.5%........... 1,375,831 305,451
F-48
</TABLE>
<PAGE> 146
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Note payable to a financial institution in 36 equal
installments of $8,567 including principal and
interest. Interest rate is 9.1% and note is
collateralized by certain equipment in Canada.......... 185,553 269,014
----------- -----------
14,620,798.. 13,155,530
Less current portion of long-term debt................... (913,046) (1,317,589)
----------- -----------
Notes payable, net of current maturities................. $13,707,752 $11,837,941
</TABLE>
The Company's notes payable maturities are as follows:
<TABLE>
<S> <C>
1997..................................... $ 913,046
1998..................................... 1,078,941
1999..................................... 1,238,779
2000..................................... 1,348,253
2001..................................... 9,680,494
Thereafter............................... 361,285
-----------
$14,620,798
===========
</TABLE>
On December 31, 1996, the Company entered into a new debt agreement to
replace its existing Revolving Line and Term Notes. The new agreement provides
for a Reducing Term Note of $8.5 million, subordinated debt of $4.0 million and
the issuance of preferred stock for $1.5 million. The debt was funded on January
2, 1997 and the old Revolving Line and Term Notes were paid off. Because the
Company had a binding contract to repay the old debt at December 31, 1996, all
costs associated with the old debt have been charged to operations during 1996.
In addition, the classification of debt between current and long-term at
December 31, 1996 has been based on the terms of the new debt. In connection
with the refinancing, ADI issued detachable warrants for up to 35% of the
Company, initially valued by management at $1.15 million. Under the new
agreement, the Company was in violation of the covenant to deliver financial
statements within 90 days of year end and received a waiver for this violation.
F-49
<PAGE> 147
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following pro forma balance sheet (unaudited) as of December 31, 1996
presents the balance sheet as if the funding had occurred on December 31, 1996
and the proceeds were used to pay off the existing debt:
<TABLE>
<S> <C>
Cash........................................................ $ 1,212,443
Other current assets........................................ 5,198,799
-----------
Total current assets........................................ 6,411,242
-----------
Other assets................................................ 22,959,635
-----------
Total assets................................................ $29,370,877
===========
Current portion of notes payable............................ $ 913,046
Other current liabilities................................... 6,007,926
-----------
Total current liabilities................................... 6,920,972
-----------
Notes payable, net of current maturities.................... 13,992,874
Less debt discount.......................................... (1,150,000)
Other noncurrent liabilities................................ 3,436,217
-----------
Total noncurrent liabilities................................ 16,279,091
-----------
Total liabilities........................................... 23,200,063
-----------
Common stock................................................ 1,000
Preferred stock............................................. 1,500,000
Paid-in capital............................................. 4,708,189
Put warrants................................................ 1,150,000
Cumulative foreign currency translation adjustments......... (8,156)
Accumulated deficit......................................... (1,180,219)
-----------
Total stockholders' equity.................................. 6,170,814
-----------
Total liabilities and stockholders' equity.................. $29,370,877
===========
</TABLE>
The Revolving Note and Term Note agreements require that, among other
items, certain financial covenants be met, including tangible net worth,
operating and net cash flow, debt coverage, operating profit and collateral
coverage ratio. The loan agreements also restrict the payment of dividends. The
Revolving Note and Term Note agreements contain a provision that if there is any
material adverse change in the Company's financial condition, the lender has the
right to declare the Company in default.
The fair value of the long-term debt as of December 31, 1996 and 1995 was
determined using valuation techniques that are considered management's best
estimate based on the current market. The carrying amount of the debt
approximated market value as of December 31, 1996. The carrying amount of the
debt exceeded the market value by approximately $221,000 as of December 31,
1995.
F-50
<PAGE> 148
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASES:
Operating Leases:
The Company is committed under noncancelable, short-term operating leases
involving offices, facilities, transportation and office equipment. The Company
has lease agreements for $125,500 per year through June 2001 with companies
owned by the Company's stockholders. Minimum annual rent payments on the leases
that exceed one year are as follows:
<TABLE>
<S> <C>
1997..................................... $377,000
1998..................................... 264,000
1999..................................... 200,000
2000..................................... 142,000
2001..................................... 43,000
----------
$1,026,000
==========
</TABLE>
Total rent expense for the year ended December 31, 1996 and the period from
May 19, 1995 (inception) to December 31, 1995 was approximately $1,345,000 and
$250,000, respectively.
Capital Leases:
The Company is the lessee of certain equipment under capital leases
expiring in various years through 2001. The Company has the following lease
agreements with companies owned by the Company's shareholders: $7,400 per month
through 2001 and $14,500 per month through 1997. Future minimum lease payments
required under these capital leases in calendar years are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 635,717
1998........................................................ 264,676
1999........................................................ 191,125
2000........................................................ 88,800
2001........................................................ 44,427
----------
Total minimum lease payments................................ 1,224,745
Less amount representing interest........................... 172,715
----------
Present value of minimum lease payments..................... 1,052,030
Less current portion........................................ 548,097
----------
$ 503,933
==========
</TABLE>
The leases provide for terms of renewal as well as purchase options.
6. FOREIGN TAXES ON REVENUES:
ADS and CADS do business in certain foreign countries as well as the United
States and Canada. ADS has elected to pay tax on gross revenues in most cases.
The amount expensed for the year ended December 31, 1996 and the period from May
19, 1995 (inception) to December 31, 1995 was $259,819 and $251,166,
respectively.
F-51
<PAGE> 149
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
Income (loss) from continuing operations before income taxes for the year
ended December 31, 1996 and the period from May 19, 1995 (inception) to December
31, 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
U.S............................................... $(739,158) $(695,446)
Foreign........................................... 685,369 139,492
--------- ---------
Total............................................. $ (53,789) $(555,954)
========= =========
</TABLE>
U.S. and foreign income taxes for the year ended December 31, 1996 and the
period from May 19, 1995 (inception) to December 31, 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Current -- foreign.................................. $ 420,242 $(145,985)
Deferred -- U.S..................................... (524,973) 320,163
Use of net operating loss
carryforwards -- foreign.......................... 90,146 --
Deferred -- foreign................................. (36,319) 14,944
--------- ---------
Total income tax provision (benefit)................ $ (50,904) $ 189,121
========= =========
</TABLE>
At December 31, 1996, ADI had for U.S. federal income tax purposes, net
operating loss carryforwards of approximately $94,000 and $1,535,000 expiring in
2010 and 2011, respectively, AMT credits with no expiration, and foreign tax
credit carryforwards of $394,207 that expire as follows:
<TABLE>
<S> <C>
1998...................................... $ 45,000
1999...................................... 191,000
2000...................................... 158,207
--------
$394,207
========
</TABLE>
F-52
<PAGE> 150
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax assets and liabilities as of
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Noncurrent:
Allowance for doubtful accounts (U.S.)........ $ 73,100 $ --
Net operating loss carryforwards (U.S.)....... 554,006 36,158
Net operating loss carryforwards (foreign).... 16,551 106,697
AMT credits (U.S.)............................ 9,432 14,060
Foreign tax credits (U.S.).................... 394,207 510,902
Materials and supplies inventory (U.S.)....... -- 20,719
Foreign currency translation.................. 21,331 --
Valuation allowance (U.S.).................... -- (510,902)
---------- ----------
Total deferred tax assets.......................... 1,068,627 177,634
---------- ----------
Deferred tax liabilities:
Noncurrent:
Property and equipment (U.S.)................. 1,927,310 1,730,010
Property and equipment (foreign).............. 1,922,295 2,056,701
---------- ----------
Total deferred tax liabilities..................... 3,849,605 3,786,711
---------- ----------
Net deferred tax liability......................... $2,780,978 $3,609,077
========== ==========
</TABLE>
The net change in the valuation allowance for deferred tax assets for the
period from May 19, 1995 (inception) to December 31, 1995 was an increase of
$510,902. During 1996, management determined that it was more likely than not
that this amount would be realized and reversed the entire valuation allowance.
The effective rate differs from the federal statutory rates as a result of
the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Expected income tax (benefit) at statutory rate..... $ (18,288) $(189,024)
Foreign income taxes................................ 474,069 78,058
Effect of valuation allowance....................... (510,902) 510,902
Foreign tax credits................................. (104,913) (125,824)
Change in estimates................................. 76,658 (38,200)
Other............................................... 32,472 (46,791)
--------- ---------
Income tax expense (benefit)........................ $ (50,904) $ 189,121
========= =========
</TABLE>
In connection with the acquisition of the equity interest, the sellers
agreed to indemnify the purchasers, Wind River, for any tax (net of any benefit)
that arises prior to the May 19, 1995 acquisition date.
8. DEFINED CONTRIBUTION PLAN:
All ADS employees are eligible to participate in a defined contribution
plan (401k) whereby employees can make voluntary contributions for a portion of
their compensation. The Company matches a discretionary percentage of the
employees' contributions. For the year ended December 31, 1996 and the period
from May 19, 1995 (inception) to December 31, 1995, ADS contributed
approximately $13,300 and $8,000, respectively.
F-53
<PAGE> 151
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY:
In connection with the acquisition of ADS, CADS and Specialty, ADI issued
debt with detachable warrants to purchase 25,000 shares of ADI common stock at
any time at the stated par value at $.01 per share, representing 20% of the
common stock of ADI, after dilution for these new shares.
The holder of the warrants has the ability to put the warrants back to ADI
for an agreed-upon price based upon the fair market value of the Company after
three years. Additionally, after five years, ADI can call the warrants and pay
the holder an agreed-upon price based upon the fair market value of the Company.
At the inception of ADI's operations, the Company recorded the long-term
debt at the face value, less the fair market value of $600,000 of the warrants.
Changes in valuation of the warrants are amortized to accumulated deficit over
the remaining term of the warrants. Management has estimated the fair market
value of the put warrants as of December 31, 1996 and 1995 to be $113,898 and
$75,000, respectively. The $113,898 was paid by the Company on January 2, 1997
and, as noted in Note 4, the Company issued new detachable warrants to purchase
up to 35% of the Company.
As of December 31, 1996, ADS had authorized 660,000 shares of preferred
stock and no shares were outstanding.
10. CONTRACTS:
Specialty is a party to a contract with Global Air Drilling Services, Inc.
("Global") in which Global uses Specialty's equipment and in return receives 98%
of Global's before-tax profits. Specialty may terminate the contract at any
time. For the year ended December 31, 1996 and the period from May 19, 1995
(inception) to December 31, 1995, Specialty collected $87,000 and $353,000,
respectively, from Global.
11. CONCENTRATION OF CREDIT RISK:
Certain locations where ADI operates may have unstable political and
economic environments. The Company has purchased foreign credit insurance
(subject to a $200,000 deductible on all receivables at December 31, 1996) on
those receivables due from companies operating in foreign countries. Foreign
receivables not insured at December 31, 1996 and 1995 were $215,000 and
$367,000, respectively. At various times throughout the year, the Company
maintains cash and certificate of deposit balances in excess of the federally
insured limit.
F-54
<PAGE> 152
AIR DRILLING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. GEOGRAPHIC SEGMENTS:
The Company conducts foreign operations in Canada, France and Venezuela.
Summarized financial information which is included in the statements of
operations is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Operating revenues from unaffiliated services:
United States.................................. $10,741,991 $ 4,201,863
Canada......................................... 6,962,182 3,623,544
France......................................... 2,695,000 1,585,711
Venezuela...................................... 1,420,716 --
----------- -----------
Total....................................... $21,819,889 $ 9,411,118
=========== ===========
Depreciation and amortization:
United States.................................. $ 1,156,909 $ 555,841
Canada......................................... 839,717 499,417
France......................................... 13,000 --
Venezuela...................................... -- --
----------- -----------
Total....................................... $ 2,009,626 $ 1,055,258
=========== ===========
Operating income (loss):
United States.................................. $ 980,790 $ 676,797
Canada......................................... 881,096 (77,198)
France......................................... 277,000 261,778
Venezuela...................................... 430,716 --
----------- -----------
Total....................................... $ 2,569,602 $ 861,377
=========== ===========
Identifiable assets:
United States.................................. $18,942,334 $15,500,055
Canada......................................... 8,130,851 8,460,724
France......................................... 785,000 632,643
Venezuela...................................... 194,968 --
----------- -----------
Total....................................... $28,053,153 $24,593,422
=========== ===========
</TABLE>
F-55
<PAGE> 153
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES
To the Shareholders of
Air Drilling International, Inc.:
Our audit was conducted for the purpose of forming an opinion on the basic
consolidated financial statements of Air Drilling International, Inc. taken as a
whole. The supplemental schedules on pages F-57 through F-62 are presented for
the purposes of additional analysis and are not a required part of the basic
consolidated financial statements. Such information has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, is fairly stated, in all material respects, in
relation to the basic consolidated financial statements taken as a whole.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
April 2, 1997
F-56
<PAGE> 154
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADS CONSOLIDATED
ADI ADS FRANCE CADS SPECIALTY ELIMINATIONS ADI
--------- ----------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................ $ -- $ 190,743 $ 31,000 $ 51,232 $ 21,744 $ -- $ 294,719
Certificate of deposit...... -- -- -- -- -- -- --
Accounts receivable......... -- 3,727,308 428,000 843,192 41,819 -- 5,040,319
Allowance for doubtful
accounts................. -- (215,000) -- -- -- -- (215,000)
Income tax refund
receivable............... -- 279,802 -- -- -- -- 279,802
Intercompany accounts
receivable/(payable)..... -- 315,518 284,000 (380,269) (219,249) -- --
Other current assets........ -- 27,870 -- 53,715 12,093 -- 93,678
--------- ----------- -------- ---------- ---------- ----------- -----------
Total current assets... -- 4,326,241 743,000 567,870 (143,593) -- 5,493,518
--------- ----------- -------- ---------- ---------- ----------- -----------
Property and equipment, net... -- 10,181,719 14,000 5,836,963 1,470,810 -- 17,503,492
Materials and supplies
inventory................... -- 4,392,606 -- 262,220 -- -- 4,654,826
Deposits and other............ -- 87,836 28,000 72,577 64,004 -- 252,417
Note
receivable -- Specialty..... -- 765,262 -- -- -- (765,262) --
Note receivable -- CADS....... -- 610,951 -- -- -- (610,951) --
Debt issuance costs........... -- 148,900 -- -- -- -- 148,900
--------- ----------- -------- ---------- ---------- ----------- -----------
Total noncurrent
assets.............. -- 16,187,274 42,000 6,171,760 1,534,814 (1,376,213) 22,559,635
--------- ----------- -------- ---------- ---------- ----------- -----------
Total assets........ $ -- $20,513,515 $785,000 $6,739,630 $1,391,221 $(1,376,213) $28,053,153
========= =========== ======== ========== ========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............ $ -- $ 2,568,598 $141,000 $ 670,386 $ 66,116 $ -- $ 3,446,100
Notes payable, current
maturities............... -- 819,820 -- 90,913 2,313 -- 913,046
Accrued expenses............ -- 1,970,704 3,000 -- 204,542 -- 2,178,246
Capital lease obligations... -- 175,338 -- 221,453 151,306 -- 548,097
Income taxes payable........ -- 188,189 60,000 36,460 55,640 -- 340,289
--------- ----------- -------- ---------- ---------- ----------- -----------
Total current
liabilities......... -- 5,722,649 204,000 1,019,212 479,917 -- 7,425,778
--------- ----------- -------- ---------- ---------- ----------- -----------
Capital lease obligations..... -- 485,997 -- 17,936 -- -- 503,933
Notes payable -- ADS.......... -- -- -- 610,951 765,262 (1,376,213) --
Notes payable, net of current
maturities.................. -- 13,556,319 -- 128,843 22,590 -- 13,707,752
Less debt discount............ -- -- -- -- -- -- --
Deferred income taxes......... (204,000) 1,097,135 -- 1,485,047 402,796 -- 2,780,978
--------- ----------- -------- ---------- ---------- ----------- -----------
Total noncurrent
liabilities......... (204,000) 15,139,451 -- 2,242,777 1,190,648 (1,376,213) 16,992,663
--------- ----------- -------- ---------- ---------- ----------- -----------
Total liabilities...... (204,000) 20,862,100 204,000 3,261,989 1,670,565 (1,376,213) 24,418,441
--------- ----------- -------- ---------- ---------- ----------- -----------
Stockholders' equity:
Common stock................ (1,001) 1 -- 1,000 1,000 -- 1,000
Paid-in capital............. 1,001 1,008,272 197,953 3,742,116 (241,153) -- 4,708,189
Put warrants................ 113,898 -- -- -- -- -- 113,898
Cumulative foreign currency
translation
adjustments.............. -- -- 18,107 (27,989) 1,726 -- (8,156)
Retained earnings/
(accumulated deficit).... 90,102 (1,356,858) 364,940 (237,486) (40,917) -- (1,180,219)
--------- ----------- -------- ---------- ---------- ----------- -----------
Total equity........... 204,000 (348,585) 581,000 3,477,641 (279,344) -- 3,634,712
--------- ----------- -------- ---------- ---------- ----------- -----------
Total liabilities
and stockholders'
equity............ $ -- $20,513,515 $785,000 $6,739,630 $1,391,221 $(1,376,213) $28,053,153
========= =========== ======== ========== ========== =========== ===========
</TABLE>
F-57
<PAGE> 155
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADS CONSOLIDATED
ADI ADS FRANCE CADS SPECIALTY ELIMINATIONS ADI
--------- ----------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash......................... $ -- $ (58,585) $ 50,668 $ (8,327) $ 16,244 $ -- $ --
Certificate of deposit....... -- 112,500 -- -- -- -- 112,500
Accounts receivable.......... -- 2,315,245 722,184 911,791 79,013 -- 4,028,233
Allowance for doubtful
accounts.................. -- (235,000) -- (15,145) -- -- (250,145)
Income tax refund
receivable................ -- 118,595 -- 57,656 -- -- 176,251
Intercompany accounts
receivable/(payable)...... -- 1,141,071 (162,848) (787,820) (190,403) -- --
Other current assets......... -- 94,758 22,301 23,503 9,353 -- 149,915
--------- ----------- -------- ---------- ---------- ----------- -----------
Total current assets.... -- 3,488,584 632,305 181,658 (85,793) -- 4,216,754
--------- ----------- -------- ---------- ---------- ----------- -----------
Property and equipment, net.... -- 8,909,703 -- 6,313,519 1,459,809 -- 16,683,031
Materials and supplies
inventory.................... -- 2,231,488 -- 251,182 -- -- 2,482,670
Deposits and other............. -- 77,936 338 77,820 64,508 -- 220,602
Note receivable -- Specialty... -- 1,043,254 -- -- -- (1,043,254) --
Note receivable -- CADS........ -- 610,951 -- -- -- (610,951) --
Debt issuance costs............ -- 792,344 -- 73,262 124,759 -- 990,365
--------- ----------- -------- ---------- ---------- ----------- -----------
Total noncurrent
assets......................... -- 13,665,676 338 6,715,783 1,649,076 (1,654,205) 20,376,668
--------- ----------- -------- ---------- ---------- ----------- -----------
Total assets......... $ -- $17,154,260 $632,643 $6,897,441 $1,563,283 $(1,654,205) $24,593,422
========= =========== ======== ========== ========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............. $ -- $ 1,026,321 $127,794 $ 319,312 $ 36,428 $ -- $ 1,509,855
Notes payable, current
maturities................ -- 1,234,288 -- 83,036 265.00 -- 1,317,589
Accrued expenses............. -- 1,291,125 35,453 237,122 72,406 -- 1,636,106
Capital lease obligations.... -- -- -- 199,202 -- -- 199,202
Income taxes payable......... -- 53,853 112,503 (84,550) 144,120 -- 225,926
--------- ----------- -------- ---------- ---------- ----------- -----------
Total current
liabilities.......... -- 3,605,587 275,750 754,122 253,219 -- 4,888,678
--------- ----------- -------- ---------- ---------- ----------- -----------
Capital lease obligations...... -- -- -- 199,110 -- -- 199,110
Notes payable -- ADS........... -- -- -- 610,951 1,043,254 (1,654,205) --
Notes payable, net of current
maturities................... -- 11,593,334 -- 217,779 26,828 -- 11,837,941
Less debt discount............. (505,498) -- -- -- -- -- (505,498)
Deferred income taxes.......... (32,131) 1,691,204 -- 1,525,110 424,894 -- 3,609,077
--------- ----------- -------- ---------- ---------- ----------- -----------
Total noncurrent
liabilities.......... (537,629) 13,284,538 -- 2,552,950 1,494,976 (1,654,205) 15,140,630
--------- ----------- -------- ---------- ---------- ----------- -----------
Total liabilities....... (537,629) 16,890,125 275,750 3,307,072 1,748,195 (1,654,205) 20,029,308
--------- ----------- -------- ---------- ---------- ----------- -----------
Stockholders' equity:
Common stock................. (1,001) 1 -- 1,000 1,000 -- 1,000
Paid-in capital.............. 1,001 1,008,272 197,953 3,742,116 (241,153) -- 4,708,189
Put warrants................. 490,625 -- -- -- -- -- 490,625
Retained
earnings/(accumulated
deficit).................. 47,004 (744,138) 158,940 (152,747) 55,241 -- (635,700)
--------- ----------- -------- ---------- ---------- ----------- -----------
Total equity............ 537,629 264,135 356,893 3,590,369 (184,912) -- 4,564,114
--------- ----------- -------- ---------- ---------- ----------- -----------
Total liabilities and
stockholders'
equity............. $ -- $17,154,260 $632,643 $6,897,441 $1,563,283 $(1,654,205) $24,593,422
========= =========== ======== ========== ========== =========== ===========
</TABLE>
F-58
<PAGE> 156
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADS CONSOLIDATED
ADI ADS FRANCE CADS SPECIALTY ELIMINATIONS ADI
--------- ----------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $ -- $14,026,068 $3,685,000 $5,383,327 $1,578,855 $(2,853,361) $21,819,889
Cost of sales............. -- 8,047,812 2,972,000 3,058,704 855,798 (2,853,361) 12,080,953
--------- ----------- ---------- ---------- ---------- ----------- -----------
Gross profit....... -- 5,978,256 713,000 2,324,623 723,057 -- 9,738,936
--------- ----------- ---------- ---------- ---------- ----------- -----------
Operating expenses:
Depreciation and
amortization......... -- 1,156,909 13,000 668,256 171,461 -- 2,009,626
Foreign taxes........... -- 259,819 -- -- -- -- 259,819
Salaries................ -- 860,728 -- 527,946 198,487 -- 1,587,161
Other selling, general
and administrative
expenses............. -- 2,289,294 423,000 555,462 44,972 -- 3,312,728
--------- ----------- ---------- ---------- ---------- ----------- -----------
Total operating
expenses........ -- 4,566,750 436,000 1,751,664 414,920 -- 7,169,334
--------- ----------- ---------- ---------- ---------- ----------- -----------
Operating income... -- 1,411,506 277,000 572,959 308,137 -- 2,569,602
--------- ----------- ---------- ---------- ---------- ----------- -----------
Other income (expense):
Intercompany............ -- 606,452 -- (361,489) (244,963) -- --
Interest expense,
lending
institutions......... -- (1,966,662) -- (66,003) (2,350) -- (2,035,015)
Amortization expense.... (142,491) (227,670) -- (20,978) (31,746) -- (422,885)
Gain (loss) on
disposition of
assets............... -- (50,293) -- -- 2,200 -- (48,093)
Foreign currency
exchange gain
(loss)............... -- -- 44,000 (17,909) (34,914) -- (8,823)
Other, net.............. -- (120,000) 6,000 4,374 1,051 -- (108,575)
--------- ----------- ---------- ---------- ---------- ----------- -----------
Total other income
(expense)....... (142,491) (1,758,173) 50,000 (462,005) (310,722) -- (2,623,391)
--------- ----------- ---------- ---------- ---------- ----------- -----------
Income (loss) from
continuing operations
before income
taxes.............. (142,491) (346,667) 327,000 110,954 (2,585) -- (53,789)
Income tax provision
(benefit)............... (48,447) (268,389) 121,000 143,787 1,145 -- (50,904)
--------- ----------- ---------- ---------- ---------- ----------- -----------
Loss from continuing
operations before
extraordinary item... (94,044) (78,278) 206,000 (32,833) (3,730) -- (2,885)
--------- ----------- ---------- ---------- ---------- ----------- -----------
Extraordinary item:
Loss on early
extinguishment of debt,
net of tax benefit...... 239,585 534,442 -- 51,906 92,428 -- 918,361
--------- ----------- ---------- ---------- ---------- ----------- -----------
Net income (loss)......... $(333,629) $ (612,720) $ 206,000 $ (84,739) $ (96,158) $ -- $ (921,246)
========= =========== ========== ========== ========== =========== ===========
</TABLE>
F-59
<PAGE> 157
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 19, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADS CONSOLIDATED
ADI ADS FRANCE CADS SPECIALTY ELIMINATIONS ADI
-------- ----------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $ -- $ 5,084,037 $1,585,711 $2,547,080 $1,076,464 $ (882,174) $ 9,411,118
Cost of sales.............. -- 2,093,748 1,136,266 1,570,575 586,025 (882,174) 4,504,440
-------- ----------- ---------- ---------- ---------- ----------- -----------
Gross profit............. -- 2,990,289 449,445 976,505 490,439 -- 4,906,678
-------- ----------- ---------- ---------- ---------- ----------- -----------
Operating expenses:
Depreciation and
amortization.......... -- 555,841 -- 408,337 91,080 -- 1,055,258
Foreign taxes............ -- 190,641 -- 60,525 -- -- 251,166
Salaries................. -- 449,510 27,408 311,477 87,141 -- 875,536
Other selling, general
and administrative
expenses.............. -- 1,117,500 160,259 464,779 120,803 -- 1,863,341
-------- ----------- ---------- ---------- ---------- ----------- -----------
Total operating
expenses......... -- 2,313,492 187,667 1,245,118 299,024 -- 4,045,301
-------- ----------- ---------- ---------- ---------- ----------- -----------
Operating income
(loss)........... -- 676,797 261,778 (268,613) 191,415 -- 861,377
-------- ----------- ---------- ---------- ---------- ----------- -----------
Other income (expense):
Interest expense......... -- (1,064,046) -- (51,274) (7,248) -- (1,122,568)
Amortization expense..... (94,502) (148,129) -- (13,732) (23,365) -- (279,728)
Gain on disposition of
assets................ -- -- -- 14,177 11,108 -- 25,285
Other, net............... -- (65,566) 9,749 11,539 3,958 -- (40,320)
-------- ----------- ---------- ---------- ---------- ----------- -----------
Total other income
(expense)........... (94,502) (1,277,741) 9,749 (39,290) (15,547) -- (1,417,331)
-------- ----------- ---------- ---------- ---------- ----------- -----------
Income (loss) before income
taxes.................... (94,502) (600,944) 271,527 (307,903) 175,868 -- (555,954)
Income tax provision
(benefit)................ (32,131) 143,194 112,587 (155,156) 120,627 -- 189,121
-------- ----------- ---------- ---------- ---------- ----------- -----------
Net income (loss).......... $(62,371) $ (744,138) $ 158,940 $ (152,747) $ 55,241 $ -- $ (745,075)
======== =========== ========== ========== ========== =========== ===========
</TABLE>
F-60
<PAGE> 158
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADS CONSOLIDATED
ADI ADS FRANCE CADS SPECIALTY ADI
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ (333,629) $ (612,720) $ 206,000 $ (84,739) $ (96,158) $ (921,246)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 142,491 1,384,579 13,000 689,234 203,207 2,432,511
(Gain) loss on sale of fixed assets........ -- 50,293 -- -- (2,200) 48,093
Deferred taxes............................. (48,447) (476,526) -- 107,169 (53,342) (471,146)
-- (20,000) -- (15,145) -- (35,145)
239,585 534,442 -- 51,906 92,428 918,361
Changes in operating assets and
liabilities:
Decrease in certificate of deposit......... -- 112,500 -- -- -- 112,500
(Increase) decrease in accounts
receivable............................... -- (1,412,063) 294,184 68,599 37,194 (1,012,086)
(Increase) decrease in income tax refund
receivable............................... -- (161,207) -- 57,656 -- (103,551)
(Increase) decrease in other current
assets................................... -- 66,888 22,301 (30,212) (2,740) 56,237
Increase in deposits and other............. -- (9,900) (27,662) 5,243 504 (31,815)
(Increase) decrease in accounts payable.... -- 1,207,633 13,206 351,074 29,688 1,601,601
Increase/decrease in intercompany
payable/receivable....................... -- 825,553 (446,848) (407,551) 28,846 --
Increase in accrued expenses............... -- 679,579 (32,453) (237,122) 132,136 542,140
Decrease in income taxes payable........... -- 134,336 (52,503) 121,010 (88,480) 114,363
Deferred income taxes........................ -- (35,636) -- (147,232) 31,245 (151,623)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities.......................... -- 2,267,751 (10,775) 529,890 312,328 3,099,194
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment........ -- (2,201,993) (6,000) (219,253) (3,243) (2,430,489)
Proceeds on sale of fixed assets........... -- 400,292 -- -- 2,200 402,492
Purchase of materials and supplies
inventory................................ -- (2,161,118) -- (11,038) -- (2,172,156)
Net cash used in investing
activities.......................... -- (3,962,819) (6,000) (230,291) (1,043) (4,200,153)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net borrowings under Revolving Note........ -- 1,408,092 -- -- -- 1,408,092
Principal payments on term loan, capital
leases and mortgage...................... -- (993,628) -- (239,982) (27,907) (1,261,517)
Proceeds from loans........................ 1,070,380 -- -- -- 1,070,380
Cash overdraft............................. -- 334,644 -- -- -- 334,644
Intercompany loan.......................... -- 277,992 -- -- (277,992) --
Debt issuance costs........................ -- (153,084) -- -- -- (153,084)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities.......................... -- 1,944,396 -- (239,982) (305,899) 1,398,515
----------- ----------- ----------- ----------- ----------- -----------
Effect of exchange rate on cash.............. -- -- (2,893) (58) 114 (2,837)
Increase (decrease) in cash.................. -- 249,328 (19,668) 59,559 5,500 294,719
Cash, beginning of period.................... -- (58,585) 50,668 (8,327) 16,244 --
----------- ----------- ----------- ----------- ----------- -----------
Cash, end of period.......................... $ -- $ 190,743 $ 31,000 $ 51,232 $ 21,744 $ 294,719
=========== =========== =========== =========== =========== ===========
</TABLE>
F-61
<PAGE> 159
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 19, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADS CONSOLIDATED
ADI ADS FRANCE CADS SPECIALTY ADI
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ (62,371) $ (744,138) $ 158,940 $ (152,747) $ 55,241 $ (745,075)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 94,502 703,970 -- 422,069 114,445 1,334,986
Gain on sale of fixed assets............. -- (14,177) (11,108) (25,285)
Deferred taxes........................... (32,131) 373,356 -- 17,374 (23,493) 335,106
Changes in operating assets and
liabilities:
Increase in certificate of deposit....... -- (28,500) -- -- -- (28,500)
(Increase) decrease in accounts
receivable............................. -- 637,437 (436,405) 20,091 67,010 288,133
(Increase) decrease in income tax refund
receivable............................. -- 80,235 -- (57,656) -- 22,579
Increase in other current assets......... -- 26,367 (101,901) 5,062 5,486 (64,986)
Increase in deposits and other........... -- (300) 48,606 (68,754) (54,547) (74,995)
Decrease in accounts payable............. -- 638,143 (46,751) (380,585) (346,029) (135,222)
Increase/decrease in intercompany
payable/receivable..................... -- (1,141,071) 162,848 787,820 190,403 --
Increase in accrued expenses............. -- 445,488 43,590 34,989 (86,147) 437,920
Decrease in income taxes payable......... -- (179,911) 83,380 (412,312) 64,947 (443,896)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities.......................... -- 811,076 (87,693) 201,174 (23,792) 900,765
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment........ -- (1,297,815) -- (290,108) (82,945) (1,670,868)
Proceeds on sale of fixed assets........... -- -- -- 14,177 11,108 25,285
Purchase of materials and supplies
inventory................................ -- (1,047,666) -- (148,427) 1,056 (1,195,037)
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities.......................... -- (2,345,481) -- (424,358) (70,781) (2,840,620)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net borrowings under Revolving Note........ -- 691,944 -- -- -- 691,944
Principal payments on term loan, capital
leases and mortgage...................... -- (464,980) -- (108,092) (478) (573,550)
Proceeds from loans........................ -- 305,451 -- 269,014 -- 574,465
Intercompany loan.......................... -- 855,420 -- (413,580) (441,840) --
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities.......................... -- 1,387,836 -- (252,658) (442,318) 692,859
----------- ----------- ----------- ----------- ----------- -----------
Decrease in cash............................. -- (146,570) (87,693) (475,842) (536,891) (1,246,996)
Cash, beginning of period.................... -- 87,985 138,361 467,515 553,135 1,246,996
----------- ----------- ----------- ----------- ----------- -----------
Cash, end of period.......................... $ -- $ (58,585) $ 50,668 $ (8,327) $ 16,244 $ --
=========== =========== =========== =========== =========== ===========
</TABLE>
F-62
<PAGE> 160
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Air Drilling Services, Inc.
Canadian Air Drilling Services Ltd.,
Specialty Testing & Consulting Ltd. and
Global Air Drilling Services Ltd.:
We have audited the accompanying combined balance sheet of Air Drilling
Services, Inc., Canadian Air Drilling Services Ltd., Specialty Testing &
Consulting Ltd. and Global Air Drilling Services Ltd. as of May 18, 1995, and
the related combined statements of income, stockholders' equity and cash flows
for the period from January 1, 1995 through May 18, 1995. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Canadian Air Drilling
Services Ltd. as of May 18, 1995 or for the period from January 1, 1995 through
May 18, 1995. Those statements reflect total assets of $5,775,350 as of May 18,
1995, and total revenues of $2,798,517 for the period from January 1, 1995
through May 18, 1995. Those financial statements were audited and reported on
separately by other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the combined financial statements referred to above present fairly, in all
material respects, the combined financial position of Air Drilling Services,
Inc., Canadian Air Drilling Services Ltd., Specialty Testing & Consulting Ltd.
and Global Air Drilling Services Ltd. as of May 18, 1995, and the combined
results of their operations and their cash flows for the period from January 1,
1995 through May 18, 1995, in conformity with generally accepted accounting
principles in the United States.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
July 25, 1995
F-63
<PAGE> 161
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
COMBINED BALANCE SHEET
AS OF MAY 18, 1995
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 1,955,202
Certificate of deposit.................................... 84,000
Accounts receivable, net of allowance for doubtful
accounts of $36,816.................................... 4,213,987
Income tax refund receivable.............................. 198,830
Materials and supplies inventory, at cost................. 658,507
Other current assets...................................... 84,929
-----------
Total current assets.............................. 7,195,455
-----------
Property and equipment, net, at cost........................ 8,271,563
Materials and supplies inventory, at cost................... 1,086,700
Deposits and other.......................................... 175,491
-----------
Total assets...................................... $16,729,209
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,607,290
Demand loans.............................................. 773,879
Notes payable, current maturities......................... 2,213,260
Payroll and sales taxes payable........................... 127,321
Accrued expenses.......................................... 436,960
Income taxes payable...................................... 463,790
Foreign income taxes payable.............................. 121,871
-----------
Total current liabilities......................... 5,744,371
-----------
Deferred income taxes....................................... 408,269
Notes payable, net of current maturities.................... 1,334,088
-----------
Total liabilities................................. 7,486,728
-----------
Commitments and contingencies (Notes 5 and 10)
Stockholders' equity:
Share capital............................................. 394,213
Additional paid-in capital................................ 84,301
Cumulative foreign currency translation adjustments....... (191,481)
Retained earnings......................................... 8,955,448
-----------
Total stockholders' equity........................ 9,242,481
-----------
Total liabilities and stockholders' equity........ $16,729,209
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-64
<PAGE> 162
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
COMBINED STATEMENT OF INCOME
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH MAY 18, 1995
<TABLE>
<S> <C>
Net sales................................................... $7,718,774
Cost of sales............................................... 4,218,554
----------
Gross profit.............................................. 3,500,220
----------
Operating expenses:
Depreciation.............................................. 566,185
Foreign taxes............................................. 107,997
Salaries, wages and bonuses............................... 396,220
Other selling, general and administrative expenses........ 1,497,620
----------
Total operating expenses.......................... 2,568,022
----------
Operating income.................................. 932,198
----------
Other income (expense):
Interest income........................................... 13,978
Interest expense.......................................... (161,905)
Gain on disposition of assets............................. 38,570
Other..................................................... (54,894)
----------
Total other expenses.............................. (164,251)
----------
Income before income taxes.................................. 767,947
Income tax provision........................................ 227,484
----------
Net income.................................................. $ 540,463
==========
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
F-65
<PAGE> 163
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH MAY 18, 1995
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
SHARE PAID-IN RETAINED TRANSLATION
CAPITAL CAPITAL EARNINGS ADJUSTMENTS TOTAL
-------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995........... $372,876 $84,301 $8,414,985 $(294,553) $8,577,609
Foreign currency translation
adjustment......................... 21,265 -- -- 103,072 124,337
Issuance of 7,500 Class D shares
(with stated capital of $5,230) and
10,000 Class A shares (with stated
capital of $72) of Specialty
Testing & Consulting in exchange
for all issued and outstanding
Class C shares (with stated capital
of $5,230)......................... 72 -- -- -- 72
Net income........................... -- -- 540,463 -- 540,463
-------- ------- ---------- --------- ----------
Balance at May 18, 1995.............. $394,213 $84,301 $8,955,448 $(191,481) $9,242,481
======== ======= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
F-66
<PAGE> 164
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH MAY 18, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 540,463
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 566,185
Gain on sale of fixed assets........................... (38,570)
Deferred taxes......................................... (63,937)
Decrease in accounts receivable........................ 431,183
Increase in income tax refund receivable............... (28,211)
Decrease in other current assets....................... 110,373
Decrease in deposits and other......................... 43,713
Increase in accounts payable........................... 136,090
Increase in payroll and sales taxes payable............ 95,396
Decrease in accrued expenses........................... (80,115)
Gain on disposition of investment...................... (1,418)
Change in accrued bonuses payable...................... (649,621)
Increase in foreign income taxes payable............... 85,015
Decrease in income taxes payable....................... (19,981)
----------
Net cash provided by operating activities......... 1,126,565
----------
Cash flows from investing activities:
Purchases of property and equipment....................... (672,581)
Proceeds on sale of fixed assets.......................... 213,229
Increase in inventory..................................... (57,711)
Disposition of investment................................. 99,508
----------
Net cash used in investing activities............. (417,555)
----------
Cash flows from financing activities:
Proceeds from loans....................................... 875,151
Principal payments on loans and leases.................... (713,905)
Issuance of common shares................................. 72
----------
Net cash provided by financing activities......... 161,318
----------
Increase in cash............................................ 870,328
Effect of exchange rate on cash............................. 53,651
----------
Change in cash after adjustment............................. 923,979
Cash, beginning of year..................................... 1,031,223
----------
Cash, end of year........................................... $1,955,202
==========
Supplemental cash flow information:
Interest paid............................................. $ 161,954
Income taxes paid......................................... $ 361,537
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-67
<PAGE> 165
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The combined financial statements include the assets, liabilities,
shareholders' equity, revenues and expenses of Air Drilling Services, Inc.
("ADS"), Canadian Air Drilling Services Ltd. ("CADS") and Specialty Testing &
Consulting Ltd. and Global Air Drilling Services Ltd. ("Specialty/Global")
(collectively the "Companies"). They have been prepared as a result of the
common ownership of the above companies. The Companies' year end is December 31.
All material intercompany balances have been eliminated in combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General:
The Companies' principal business is to provide air drilling services and
rental of related equipment to oil and gas industry companies on an
international basis.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Maintenance and repair
costs are expensed as incurred; renewals and betterments are capitalized.
Depreciation is provided for at rates based upon estimated useful service lives,
on a straight-line and accelerated basis ranging from 5 to 20 years.
Inventory:
Inventories consist of operating materials and supplies used to support the
machinery and equipment.
Income Taxes:
ADS files a consolidated tax return with its parent in the United States.
CADS and Specialty/Global file separate tax returns in Canada. Income taxes are
calculated pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting For Income Taxes."
Revenue Recognition:
The Companies' recognize revenue as services are performed; potential
losses are recorded in the period known.
Foreign Currency Translation:
The functional currency for CADS and Specialty/Global is the Canadian
dollar. The functional currency for ADS is the U.S. dollar. The CADS and
Specialty/Global financial statements have been translated to U.S. dollars using
the current rate method. Revenues and expenses are translated into the
functional currency using the exchange rate in effect at the date of the
transaction. Monetary items in the combined balance sheet are translated at the
exchange rates in effect at the end of the year. The foreign currency
translation adjustment is recorded as a part of stockholders' equity.
Cash and Cash Equivalents:
The Companies consider cash on hand, deposits in bank and certificates of
deposit with original maturities of less than three months to be cash
equivalents.
F-68
<PAGE> 166
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of a service agreement, ADS is obligated to a maintain a
$84,000 letter of credit. The funds in this restricted account serve as a
guarantee of completion and are included in certificate of deposit on the
combined balance sheet.
Reclassification:
The presentation of certain prior period information has been reclassified
to conform to the current year presentation format.
3. PROPERTY AND EQUIPMENT:
Property and equipment at May 18, 1995 is summarized as follows:
<TABLE>
<S> <C>
Machinery and equipment..................................... $12,377,291
Plant facilities/land and buildings......................... 372,401
Automobiles................................................. 182,023
Office furniture and equipment.............................. 88,489
-----------
13,020,204
Less accumulated depreciation............................... (4,748,641)
-----------
$ 8,271,563
===========
</TABLE>
4. NOTES PAYABLE:
The Companies have notes payable to unrelated parties at May 18, 1995 that
consisted of the following:
<TABLE>
<S> <C>
ADS:
Revolving Line of Credit Agreement (the "Revolving Loan"),
borrowing base of $1,750,000. The Revolving Loan matures
in August 1995 and is collateralized by all accounts
receivable, inventory and equipment of ADS and the
guarantees of Pugh-Malhotra Holdings, Inc. ("PMH") and two
officers of ADS. Interest rate at the bank's prime rate
plus 1.25% (10.25% at May 18, 1995)....................... $ 1,653,941
Equipment Loan Agreement (the "Equipment Loan"), borrowing
base of $2,111,448. The Equipment Loan matures August 1997
and is collateralized by all accounts receivable,
inventory and equipment of ADS and guarantees of PMH and
two officers of ADS. Interest rate is the bank's prime
rate plus 1% (10% at May 18, 1995)........................ 1,278,425
Mortgage payable (the "mortgage"), interest rate of 6.99%,
monthly payment of $305 including principal and interest,
maturity date of December 2008, collateralized by
residential rental property, note obtained by officer and
stockholder of ADS........................................ 32,206
SPECIALTY/GLOBAL:
Mortgage payable (the "mortgage"), $303 monthly including
interest at 6.99%, due December 2008, collateralized by
residential rental property, note obtained by stockholder
of Specialty/Global....................................... 27,571
Term bank loan, payable $3,083 monthly in Canadian dollars,
plus interest at bank prime rate plus 1.25% (9.25% at May
18, 1995), due September 1995, collateralized by accounts
receivable and equipment.................................. 8,473
</TABLE>
F-69
<PAGE> 167
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Term bank loan, payable $2,892 monthly in Canadian dollars,
plus interest at bank prime rate plus 1.25% (10.25% at May
18, 1995), due September 1995, collateralized by accounts
receivable and equipment.................................. 8,527
Specialty/Global carries a First Bank Operating Account
("FBOA") with the Bank of Montreal to a maximum of
$150,000 Canadian. The interest rate is Bank of Montreal
prime plus 0.5%. There are no amounts outstanding at May
18, 1995.................................................. --
CADS:
Bank of Montreal revolving loan, due upon demand payable in
monthly installments of $55,275 plus interest calculated
at prime plus 1.25%....................................... $ 773,879
Ingersoll Rand equipment loan payable (the "Ingersoll Rand
Loan") in monthly installments of principal and interest
of $18,847, interest calculated at 10.75%................. 504,971
Mortgage payable (the "mortgage") on U.S. condo, payable in
monthly installments of principal and interest of $305,
interest calculated at 6.99%.............................. 33,234
CADS carries a First Bank Operating Account ("FBOA") with
the Bank of Montreal to a maximum of $300,000 Canadian.
The interest rate is Bank of Montreal prime plus 1.25%.
There were no amounts outstanding at May 18, 1995......... --
-----------
4,321,227
Less:
Demand bank loans......................................... (773,879)
Current portion of long-term debt......................... (2,213,260)
-----------
Total long-term notes payable..................... $ 1,334,088
===========
</TABLE>
On May 19, 1995, all notes payable except the mortgage payable and
Ingersoll Rand Loan were paid off in full.
5. LEASES:
Operating Leases:
ADS and CADS are committed under noncancelable, short-term operating leases
involving its offices, facilities, transportation and office equipment. Certain
leases contain escalation and renewal clauses. The minimum annual rent payments
on the leases that exceed one year are as follows:
<TABLE>
<CAPTION>
ADS CADS TOTAL
-------- -------- --------
<S> <C> <C> <C>
1995............................................... $ 92,157 $ 48,911 $141,068
1996............................................... 146,811 53,094 199,905
1997............................................... 140,967 29,784 170,751
1998............................................... 122,544 25,338 147,882
1999............................................... 122,544 18,606 141,150
-------- -------- --------
$625,023 $175,733 $800,756
======== ======== ========
</TABLE>
Rent expense under operating leases was $71,542 for 1995.
F-70
<PAGE> 168
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Capital Leases:
CADS is the lessee of certain equipment under capital leases expiring in
various years through 1998. Included in equipment is $680,269 of assets under
capital leases and related accumulated depreciation of $39,706 at May 18, 1995.
Future minimum lease payments required under these capital leases are as
follows:
<TABLE>
<S> <C>
1995........................................................ $ 132,034
1996........................................................ 226,344
1997........................................................ 207,634
1998........................................................ 6,890
---------
Total minimum lease payments................................ 572,902
Less amount representing interest........................... (67,931)
---------
Present value of minimum lease payments..................... 504,971
Less current portion........................................ (163,285)
---------
$ 341,686
=========
</TABLE>
6. FOREIGN TAXES:
ADS and CADS do business in certain foreign countries as well as the United
States and Canada. ADS has the option to pay a 10%-12% tax on gross revenues or
to pay normal corporate tax rates on net taxable income in the respective
countries. ADS has elected to pay the 10%-12% foreign tax on gross revenues in
the respective countries which totaled $107,997 for the period from January 1,
1995 through May 18, 1995. CADS does business in Venezuela. Included as part of
foreign tax expense is approximately $122,230 of Venezuelan foreign taxes.
7. INCOME TAXES:
Income before income taxes for the period from January 1, 1995 to May 18,
1995 was as follows:
<TABLE>
<S> <C>
U.S......................................................... $ 57,113
Foreign..................................................... 710,834
--------
Total....................................................... $767,947
========
</TABLE>
F-71
<PAGE> 169
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<S> <C>
Current income taxes:
U.S....................................................... $ 354
Canada.................................................... 271,392
France.................................................... 19,675
--------
291,421
--------
Deferred income taxes:
U.S....................................................... (59,254)
Canada.................................................... (4,683)
France.................................................... --
--------
(63,937)
--------
Total income tax provision........................ $227,484
========
</TABLE>
At May 18, 1995, ADS had for U.S. federal income tax purposes, $5,626 of
AMT tax credits with no expiration and foreign tax credit carryforwards of
$197,028 that expire as follows:
<TABLE>
<S> <C>
1998........................................................ $120,205
1999........................................................ 76,823
--------
$197,028
========
</TABLE>
The components of the net deferred tax assets and liabilities as of May 18,
1995 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Noncurrent:
AMT credits (U.S.)..................................... $ 5,626
Foreign tax credits (U.S.)............................. 197,028
--------
Total deferred tax assets................................... 202,654
--------
Deferred tax liabilities:
Noncurrent:
Property and equipment (U.S.).......................... 441,640
Property and equipment (foreign)....................... 169,283
--------
Total deferred tax liabilities.............................. 610,923
--------
Net deferred tax liability.................................. $408,269
========
</TABLE>
The combined effective income tax rate differs from the United States
federal statutory rate for the following reasons:
<TABLE>
<S> <C>
Expected income tax provision............................... $261,102
Foreign income taxes........................................ 44,700
Foreign tax credits......................................... (76,823)
Other....................................................... (1,495)
--------
$227,484
========
</TABLE>
F-72
<PAGE> 170
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY:
Stockholders' equity consists of the following at May 18, 1995:
<TABLE>
<S> <C>
ADS:
Authorized:
50,000 common shares with a $1.00 par value.
Issued and outstanding:
35,500 common shares................................... $ 35,500
Additional paid-in capital............................. 84,301
---------
ADS share capital................................. 119,801
---------
CADS:
Authorized:
Unlimited number of Class "A" voting common shares
without par value.
Unlimited number of Class "B" nonvoting common shares
without par value.
Unlimited number of Class "C" nonvoting preferred
shares without par value.
Unlimited number of Class "D" nonparticipating common
shares without par value.
Issued and Outstanding:
10,000 Class "A" common shares......................... $ 7,395
890 Class "C" preferred shares......................... 655,930
1,000,000 Class "D" common shares...................... 1
---------
CADS share capital................................ 663,326
---------
Specialty Testing & Consulting Ltd.:
Authorized:
100,000 Class A common, voting shares without par
value.
100,000 Class B common, nonvoting shares without par
value.
100,000 Class C common, voting shares without par
value.
Unlimited number of Class D preferred, noncumulative,
voting shares, redemption price set at time of
issuance.
Issued and Outstanding:
10,000 Class A shares.................................. $ 72
7,500 Class C shares................................... 5,230
Global Air Drilling Services Ltd:
Authorized:
Unlimited number of Class A common, voting shares.
Unlimited number of Class B common, voting shares.
Unlimited number of Class C common, nonvoting shares.
Issued and outstanding:
1,000 Class A shares................................... $ 85
---------
Specialty/Global share capital.................... 5,387
---------
Less elimination of ADS investment in CADS................ (310,000)
---------
Total combined share capital...................... $ 478,514
=========
</TABLE>
F-73
<PAGE> 171
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. CONCENTRATION OF CREDIT RISK:
Approximately 76% of ADS' revenue is from international operations. Some of
these locations may have unstable political and economic environments. At
May 18, 1995, approximately $1,700,000 of accounts receivable was due from
companies operating in foreign countries.
Approximately 11% of CADS' revenue is from international operations. At May
18, 1995, approximately $83,300 of accounts receivable was due from
companies operating in foreign countries.
Specialty/Global did not generate any revenue from international operations
during the period from January 1, 1995 through May 18, 1995.
10. CADS CONTINGENT LIABILITIES:
In prior years, investment tax credits of $147,000 were claimed as a
reduction of federal taxes payable for Canadian tax purposes. This amount is
potentially repayable in the event that the related equipment has not been
used "primarily in Canada." The equipment had previously been used in
Venezuela; however, the majority of it is currently being used in Canada.
While the location of its future use is intended to be in Canada, it is
possible this may not transpire. The actual use test used by Revenue Canada
will be a matter of fact. The amount of any repayment that may result is
undeterminable at this time. Any potential repayment will likely be recorded
as a charge to the income statement in the period in which it is paid.
11. GEOGRAPHIC SEGMENTS
The Companies conduct foreign operations in Canada and France. Summarized
financial information which is included in the combined statement of income
is as follows:
<TABLE>
<S> <C>
Operating revenues from unaffiliated services:
United States............................................. $ 2,924,036
Canada.................................................... 4,171,747
France.................................................... 622,991
-----------
Total............................................. $ 7,718,774
===========
Depreciation:
United States............................................. $ 367,923
Canada.................................................... 192,661
France.................................................... 5,601
-----------
Total............................................. $ 566,185
===========
Operating income:
United States............................................. $ 51,436
Canada.................................................... 841,412
France.................................................... 39,350
-----------
Total............................................. $ 932,198
===========
Identifiable assets:
United States............................................. $ 9,107,860
Canada.................................................... 7,148,714
France.................................................... 472,635
-----------
Total............................................. $16,729,209
===========
</TABLE>
F-74
<PAGE> 172
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENT:
Effective May 19, 1995, the shareholders of the Companies sold their
ownership interests to a newly formed company, Air Drilling International,
Inc. ("ADII") and acquired a 16% ownership interest in ADII.
F-75
<PAGE> 173
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES
To the Shareholders of Air Drilling Services, Inc.
Canadian Air Drilling Services Ltd.,
Specialty Testing & Consulting Ltd. and
Global Air Drilling Services Ltd.:
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules on pages F-77
and F-78 are presented for the purposes of additional analysis and are not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, are fairly stated, in all material respects, in
relation to the basic financial statements taken as whole.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
July 25, 1995
F-76
<PAGE> 174
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
COMBINING BALANCE SHEET
AS OF MAY 18, 1995
ASSETS
<TABLE>
<CAPTION>
SPECIALTY/ COMBINED
ADS CADS GLOBAL ELIMINATIONS TOTAL
----------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash............................. $ 130,476 $1,241,394 $ 583,332 $ -- $ 1,955,202
Certificate of deposit........... 84,000 -- -- -- 84,000
Accounts receivable, net......... 3,136,214 931,882 226,121 (80,230) 4,213,987
Income tax refund receivable..... 198,830 -- -- -- 198,830
Materials and supplies inventory,
at cost....................... 535,240 123,267 -- -- 658,507
Other current assets............. 41,525 28,565 14,839 -- 84,929
----------- ---------- ---------- ----------- -----------
Total current assets..... 4,126,285 2,325,108 824,292 (80,230) 7,195,455
----------- ---------- ---------- ----------- -----------
Property and equipment, net, at
cost............................. 4,272,103 3,424,446 575,014 -- 8,271,563
Materials and supplies inventory,
at
cost............................. 1,086,700 -- -- -- 1,086,700
Investments, affiliated company.... 1,431,370 -- -- (1,431,370) --
Deposits and other................. 139,237 25,796 10,458 -- 175,491
----------- ---------- ---------- ----------- -----------
Total assets............. $11,055,695 $5,775,350 $1,409,764 $(1,511,600) $16,729,209
=========== ========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................. $ 562,723 $ 699,897 $ 424,900 $ (80,230) $ 1,607,290
Demand loans..................... -- 773,879 -- -- 773,879
Notes payable, current
maturities.................... 2,028,509 166,285 18,466 -- 2,213,260
Payroll and sales taxes
payable....................... 22,533 -- 104,788 -- 127,321
Accrued expenses................. 436,960 -- -- -- 436,960
Income taxes payable............. -- 383,454 80,336 -- 463,790
Foreign income taxes payable..... 121,871 -- -- -- 121,871
----------- ---------- ---------- ----------- -----------
Total current
liabilities............ 3,172,596 2,023,515 628,490 (80,230) 5,744,371
----------- ---------- ---------- ----------- -----------
Deferred income taxes.............. 238,986 169,283 -- -- 408,269
Notes payable, net of current
maturities....................... 936,063 371,920 26,105 -- 1,334,088
----------- ---------- ---------- ----------- -----------
Total liabilities........ 4,347,645 2,564,718 654,595 (80,230) 7,486,728
----------- ---------- ---------- ----------- -----------
Stockholders' equity:
Share capital.................... 119,801 663,326 5,387 (310,000) 478,514
Cumulative foreign currency
translation adjustments....... -- (61,331) (130,150) -- (191,481)
Retained earnings................ 6,588,249 2,608,637 879,932 (1,121,370) 8,955,448
----------- ---------- ---------- ----------- -----------
6,708,050 3,210,632 755,169 (1,431,370) 9,242,481
----------- ---------- ---------- ----------- -----------
Total liabilities and
stockholders' equity... $11,055,695 $5,775,350 $1,409,764 $(1,511,600) $16,729,209
=========== ========== ========== =========== ===========
</TABLE>
F-77
<PAGE> 175
AIR DRILLING SERVICES, INC., CANADIAN AIR DRILLING
SERVICES LTD., SPECIALTY TESTING & CONSULTING LTD.
AND GLOBAL AIR DRILLING SERVICES LTD.
COMBINING INCOME STATEMENT
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH MAY 18, 1995
<TABLE>
<CAPTION>
SPECIALTY/ COMBINED
ADS CADS GLOBAL ELIMINATIONS TOTAL
---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales............................ $3,642,881 $2,798,517 $1,422,930 $(145,554) $7,718,774
Cost of sales........................ 1,878,714 1,495,146 990,248 (145,554) 4,218,554
---------- ---------- ---------- --------- ----------
Gross profit....................... 1,764,167 1,303,371 432,682 -- 3,500,220
---------- ---------- ---------- --------- ----------
Operating expenses:
Depreciation....................... 373,524 153,231 39,430 -- 566,185
Foreign taxes...................... 107,997 -- -- -- 107,997
Salaries, wages and bonuses........ 360,410 -- 35,810 -- 396,220
Other selling, general and
administrative expenses......... 735,596 671,168 90,856 -- 1,497,620
---------- ---------- ---------- --------- ----------
Total operating expenses... 1,577,527 824,399 166,096 -- 2,568,022
---------- ---------- ---------- --------- ----------
Operating income........... 186,640 478,972 266,586 -- 932,198
---------- ---------- ---------- --------- ----------
Other income (expense):
Interest income.................... 809 9,755 3,414 -- 13,978
Interest expense................... (102,265) (55,745) (3,895) -- (161,905)
Equity in earnings of affiliate.... 110,997 -- -- (110,997)
Gain on disposition of assets...... -- 38,570 -- -- 38,570
Other, net......................... (28,071) (14,279) (12,544) -- (54,894)
---------- ---------- ---------- --------- ----------
Total other income
(expense)................ (18,530) (21,699) (13,025) (110,997) (164,251)
---------- ---------- ---------- --------- ----------
Income before income taxes........... 168,110 457,273 253,561 (110,997) 767,947
Income tax provision (benefit)....... (39,225) 179,781 86,928 -- 227,484
---------- ---------- ---------- --------- ----------
Net income................. $ 207,335 $ 277,492 $ 166,633 $(110,997) $ 540,463
========== ========== ========== ========= ==========
</TABLE>
F-78
<PAGE> 176
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1997 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ (318) $ 295
Accounts receivable, net of allowance for doubtful
accounts of $215,000................................... 7,924 4,825
Income tax refund receivable.............................. 253 280
Other current assets...................................... 375 94
------- -------
Total current assets................................. 8,234 5,494
------- -------
Property and equipment, net................................. 18,101 17,503
Materials and supplies inventory............................ 5,234 4,654
Deposits and other.......................................... 448 252
Debt issuance costs, net of accumulated amortization........ 530 149
------- -------
Total noncurrent assets.............................. 24,313 22,559
------- -------
Total assets...................................... $32,547 $28,053
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,031 $ 3,446
Notes payable, current maturities......................... 1,019 913
Accrued expenses.......................................... 1,286 2,178
Capital lease obligations................................. 490 548
Income taxes payable...................................... 1,475 340
------- -------
Total current liabilities......................... 6,301 7,425
------- -------
Capital lease obligations................................... 573 504
Notes payable, net of current maturities.................... 16,367 13,708
Less debt discount.......................................... (1,087) --
Deferred income taxes....................................... 2,781 2,781
------- -------
Total noncurrent liabilities...................... 18,634 16,993
------- -------
Total liabilities................................. 24,935 24,418
------- -------
Commitments
Stockholders' equity:
Common stock, $.01 par value, 165,000 shares authorized;
100,000 shares issued and outstanding.................. 1 1
Paid-in-capital........................................... 4,708 4,708
Put warrants.............................................. 1,150 114
Preferred Common Stock.................................... 1,553 --
Cumulative foreign currency translation adjustment........ -- (8)
Accumulated deficit....................................... 200 (1,180)
------- -------
Total stockholders' equity........................ 7,612 3,635
------- -------
Total liabilities and stockholders' equity........ $32,547 $28,053
======= =======
</TABLE>
See accompanying notes.
F-79
<PAGE> 177
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOUR MONTH PERIODS ENDED APRIL 30, 1997 AND APRIL 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED FOUR MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................. $11,227 $6,906
Cost of sales............................................. 5,512 3,521
------- -------
Gross profit....................................... 5,715 3,385
------- -------
Operating expenses:
Depreciation and amortization........................... 808 597
Foreign taxes........................................... 180 117
Other selling, general and administrative expenses...... 1,821 1,472
------- -------
Total operating expenses........................... 2,809 2,186
------- -------
Operating income................................... 2,906 1,199
------- -------
Other income (expense):
Interest expense........................................ (754) (753)
Gain (loss) on disposition of assets.................... 439 (8)
Foreign currency exchange loss.......................... (6)
Other, net.............................................. (77) (22)
------- -------
Total other income (expense)....................... (398) (783)
------- -------
Income before income taxes................................ 2,508 416
Income tax provision...................................... 1,128 359
------- -------
Net income................................................ $ 1,380 $ 57
======= =======
</TABLE>
See accompanying notes.
F-80
<PAGE> 178
AIR DRILLING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOUR MONTH PERIODS ENDED APRIL 30, 1997 AND APRIL 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED FOUR MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,380 $ 57
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 911 742
(Gain) loss on sale of assets.......................... (439) 8
Other.................................................. 6 (15)
Changes in operating assets and liabilities:
Increase in accounts receivable........................ (3,099) (1,422)
Decrease in income tax refund receivable............... 27 --
Increase in other current assets....................... (281) (239)
Increase in deposits and other......................... (196) (68)
Decrease in accounts payable........................... (1,415) (388)
Decrease in accrued expenses........................... (892) (394)
Increase in income taxes payable....................... 1,135 358
-------- -------
Net cash used in operating activities................ (2,863) (1,361)
-------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (1,602) (823)
Proceeds on sale of assets................................ 583 153
Purchase of materials and supplies inventory.............. (579) (276)
-------- -------
Net cash used in investing activities................ (1,598) (946)
-------- -------
Cash flows from financing activities:
Net borrowings under Revolving Note....................... 440 1,950
Principal payments on term loan and capital leases........ (10,393) (415)
Proceeds from loans and leases............................ 12,669 837
Proceeds from preferred stock issuance.................... 1,553 --
Debt issuance cost........................................ (421) --
-------- -------
Net cash provided by financing activities............ 3,848 2,372
-------- -------
Increase(decrease) in cash.................................. (613) 65
Cash, beginning of period................................... 295 --
-------- -------
Cash, end of period......................................... $ (318) $ 65
======== =======
</TABLE>
See accompanying notes.
F-81
<PAGE> 179
AIR DRILLING INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements include the
accounts of Air Drilling International, Inc. ("ADI") and its wholly owned
subsidiaries: Air Drilling Services, Inc., which includes Air Drilling Services
de Venezuela, C.A. ("ADS"), Air Drilling Services France (SARL) ("ADS France"),
Canadian Air Drilling Services Ltd. ("CADS") and Specialty Testing & Consulting
Ltd. ("Specialty"), collectively (the "Company"). ADS is located in the United
States. CADS and Specialty are located in Canada. All intercompany balances have
been eliminated. The financial statements have been prepared in accordance with
United States generally accepted accounting principles for interim financial
information. 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
four month period ended April 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
2. NOTES PAYABLE:
On December 31, 1996, the Company entered into a new debt agreement to
replace its existing Revolving Line and Term Notes. The new agreement provides
for a Reducing Term Note of $8.5 million, subordinated debt of $4.0 million and
the issuance of preferred stock for $1.5 million. The debt was funded on January
2, 1997 and the old Revolving Line and Term Notes were paid off. Because the
Company had a binding contract to repay the old debt at December 31, 1996, all
costs associated with the old debt were charged to operations during 1996. In
addition, the classification of debt between current and long-term at December
31, 1996 was based on the terms of the new debt. In connection with the
refinancing, ADI issued detachable warrants for up to 35% of the Company,
initially valued by management of $1.15 million.
The Company had notes payable at April 30, 1997 and December 31, 1996 that
consisted of the following:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
$5.0 million Revolving Line of Credit Agreement, maturing in
May 2000.................................................. $ -- $ 2,613
"A" and "B" Senior Term notes, initial principal of $11.0
million, maturing May 2000................................ -- 9,607
Mortgage payable, maturing December 2008.................... 88 90
Subordinated promissory note to prior management............ 750 750
Unsecured demand notes payable to certain stockholders of
Wind River
and ADI................................................... 1,376 1,376
Note payable to a financial institution in 36 installments
of $8,567 including principal and interest................ -- 186
$8.5 million Reducing Term Note............................. 8,120 --
$4.0 million Subordinated Note to Warrant Holder............ 4,000 --
$5.0 million Revolving Line of Credit....................... 3,052 --
------- -------
17,386 14,621
------- -------
Less current portion of long-term debt...................... (1,019) (913)
------- -------
Notes payable, net of current maturities.................... $16,367 $13,708
======= =======
</TABLE>
3. SUBSEQUENT EVENT:
On June 20, 1997, the Company completed the sale of its stock to Dailey
Petroleum Services Corp. for $46.4 million, including the repayment of
approximately $16.8 million in indebtedness.
F-82
<PAGE> 180
NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME AND ANY SALE MADE HEREUNDER DOES NOT IMPLY THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. iii
Disclosure Regarding Forward-Looking
Statements........................... iv
Prospectus Summary..................... 1
Risk Factors........................... 12
The Exchange Offer..................... 19
The Company............................ 27
Use of Proceeds........................ 27
Capitalization......................... 29
Unaudited Pro Forma Combined Financial
Statements........................... 30
Selected Consolidated Financial Data... 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 36
Business and Properties................ 43
Management............................. 51
Certain Relationships and Related
Transactions......................... 57
Security Ownership of Management and
Principal Stockholder................ 60
Description of the Exchange Notes...... 61
Certain United States Federal Tax
Considerations....................... 88
Plan of Distribution................... 89
Legal Matters.......................... 90
Experts................................ 90
Index to Financial Statements.......... F-1
</TABLE>
$115,000,000
[DAILEY LOGO]
9 3/4% SENIOR NOTES
DUE 2007, SERIES B
PROSPECTUS
October , 1997
<PAGE> 181
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 Company's Restated
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 quorum does not exist or if the disinterested directors
so direct, or (iii) by the stockholders. The Bylaws provided 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 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).
Section 145 of the General Corporation Law of the State of Delaware also
allows the Company to purchase and maintain insurance on behalf of any person
who is or was an officer or director of the Company against liability asserted
against or incurred by him in any such capacity, whether or not the Company
would have the authority to indemnify such officer or director against such
liability under the provisions of Section 145. The Company has purchased and
maintains a directors' and officers' liability policy for such purposes.
The Company's Bylaws provided 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 wold 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.
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.
II-1
<PAGE> 182
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*3.1 -- Restated Certificate of Incorporation.
*3.2 -- Restated Bylaws of the Company.
*****3.3 -- Amendment to Restated Certificate of Incorporation dated
October 7, 1997.
*4.1 -- Form of Class A Common Stock Certificate.
4.2 -- See Exhibits 3.1, 3.2 and 3.3 for provisions of the
Restated Certificate of Incorporation and Restated Bylaws
of the Company defining the rights of the holders of
Class A Common Stock.
***4.3 -- Indenture Dated August 19, 1997, by and between the
Company, the Subsidiary Guarantors and the U.S. Trust
Company of Texas, N.A. relating to the Company's 9.75%
Senior Notes Due 2007.
***4.4 -- Form of Note for the Company's Senior Notes Due 2007
(included in Exhibit A to Exhibit 4.1).
***4.5 -- Registration Rights Agreement dated August 19, 1997
relating to the Outstanding Notes.
4.6 -- See Exhibits 10.1 through 10.16 for additional
instruments defining the rights of holders of long-term
debt of the Company and its Subsidiaries.
*****5.1 -- Opinion of William D. Sutton.
*10.1 -- Relationship Agreement by and between the Company and
Lawrence Industries, Inc.
*10.2 -- Office Lease Agreement by and between the Company as
lessee and Lawrence International, Inc. as lessor.
*10.3 -- Registration Rights Agreement by and between the Company
and Lawrence Industries, Inc.
+*10.4 -- Dailey Petroleum Services Corp. 1996 Key Employee Stock
Plan.
+*10.5 -- Dailey Petroleum Services Corp. 1996 Non-Employee
Director Stock Option Plan.
*10.6 -- Tax Allocation Agreement by and between the Company and
Lawrence Industries, Inc.
*10.7 -- Form of Indemnification Agreement between the Company and
its directors.
*10.8 -- Form of Indemnification Agreement between the Company and
its executive officers.
**10.9 -- Stock Purchase and Sale Agreement dated May 8, 1997 (the
"Stock Purchase Agreement"), by and among the Company,
ADI, the Shareholders of ADI, and the Preferred
Shareholders of Air Drilling Services, Inc.
**10.10 -- First Amendment to Stock Purchase Agreement dated May 30,
1997, by and among the Company, ADI, the Shareholders of
ADI, and the Preferred Shareholders of Air Drilling
Services, Inc.
**10.11 -- Escrow Agreement dated June 20, 1997, by and among the
Company, the Shareholders and Warrantholders of ADI (the
"Shareholders"), and U.S. Trust Company of Texas, N.A.
(the "Escrow Agent").
</TABLE>
II-2
<PAGE> 183
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
**10.12 -- Third Amended and Restated Loan Agreement dated June 20,
1997 (the "Loan Agreement"), by and between the Company,
the financial institutions from time to time a party
thereto, and Wells Fargo Bank (Texas), National
Association, as Agent.
**10.13 -- Third Amended and Restated Commercial Security Agreement
dated June 20, 1997, between Wells Fargo Bank (Texas),
National Association, as Agent, the Banks from time to
time a party to the Loan Agreement and the Company.
**10.14 -- Form of Guaranty Agreement dated June 20, 1997 between
Wells Fargo Bank (Texas), National Association, as Agent,
the Banks from time to time a party to the Loan Agreement
and each of the following subsidiaries of the Company:
Dailey International, Inc., Dailey Petroleum Sales Corp.,
International Petroleum Sales Corp., Columbia Petroleum
Services Corp., Dailey Worldwide Oil Tools, Corp., Dailey
Environmental Remediation and Technologies, Inc., Air
Drilling International, Inc., Air Drilling Services,
Inc., Canadian Air Drilling Services Ltd., and Specialty
Testing and Consultants Ltd.
**10.15 -- Form of Security Pledge Agreement dated June 20, 1997,
between Wells Fargo Bank (Texas), National Association,
as Agent, the Banks from time to time a party to the Loan
Agreement and each of the following: the Company; Air
Drilling International, Inc., and Air Drilling Services,
Inc.
**10.16 -- Form of Subsidiary Commercial Security Agreement dated
June 20, 1997, between Wells Fargo Bank (Texas) National
Association, as Agent, the Banks from time to time a
party to the Loan Agreement and each of the following
subsidiaries of the Company: Dailey International, Inc.,
Dailey Petroleum Sales Corp., International Petroleum
Sales Corp., Columbia Petroleum Services Corp., Dailey
Worldwide Oil Tools, Corp., Dailey Environmental
Remediation and Technologies, Inc., Air Drilling
International, Inc., Air Drilling Services, Inc.,
Canadian Air Drilling Services Ltd., and Specialty
Testing and Consultants Ltd.
****10.17 -- Grant of Lease dated May 18, 1995, as amended on June 15,
1996, between Canadian Air Drilling Services, Ltd. and
Malhotra Enterprises, Ltd. for real property located at
Nisku Industrial Park, AB.
****10.18 -- Industrial Lease Agreement dated 3 July 1996 between Air
Drilling Services, Inc. and Melodi Lane Investments, LLC
for property located at 2122 Melodi Lane, Casper,
Wyoming, as amended on June 20, 1997.
****10.19 -- Master Equipment Lease Agreement dated July 3, 1996,
between Melodi Lane Investments, L.L.C., as lessor, and
Air Drilling Services, Inc. as lessee.
****10.20 -- Obligation of Air Drilling Services, Inc., Canadian Air
Drilling Services Ltd., and Specialty Testing &
Consulting Ltd., under a certain Agreement dated February
1, 1993, to share equally in the payment of a certain
Promissory Note dated December 6, 1993 and issued by
Chaman Malhotra and Aruna Malhotra to Southern Pacific
Thrift and Loan Assn.
+****10.21 -- Employment Agreement between the Company and James F.
Farr dated November 27, 1996.
+****10.22 -- Employment Agreement between the Company and William D.
Sutton dated November 27, 1996.
+****10.23 -- Employment Agreement between the Company and David T.
Tighe dated November 27, 1996.
+****10.24 -- Employment Agreement between the Company and Chaman
Malhotra dated June 20, 1997.
</TABLE>
II-3
<PAGE> 184
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+****10.25 -- Employment Agreement between the Company and Tommy Ramsay
dated June 20, 1997.
+****10.26 -- Employment Agreement between the Company and J.D.
Lawrence dated November 27, 1996.
10.27 -- $250,000 Promissory Note dated January 16, 1997, from
James F. Farr in favor of the Company (incorporated by
reference to the Company's Quarterly Report on Form 10-Q
for the three months ended January 31, 1997).
10.28 -- Security Agreement dated January 16, 1997, between the
Company and James F. Farr (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the three
months ended January 31, 1997).
+****10.29 -- Stock Option Agreement between the Company and Al Kite
dated April 23, 1997.
+****10.30 -- Stock Option Agreement between the Company and Bernard
Duroc-Danner dated April 23, 1997.
10.31 -- Form of Management Employment Agreement with John E.
Blacklaws (incorporated by reference from the Company's
Registration Statement on Form S-1 (file No. 333-0593)
+****10.32 -- First Amendment to Employment Agreement with John E.
Blacklaws dated February 17, 1997.
+****10.33 -- Executive Employment Agreement dated July 18, 1997 with
Dwight Goolsbay.
+****10.34 -- Executive Employment Agreement dated July 18, 1997 with
Martin Lyons.
+****10.35 -- Management Employment Agreement dated July 18, 1997 with
Chet Brame.
+****10.36 -- Executive Employment Agreement dated July 18, 1997.
+****10.37 -- Equipment Lease Agreement dated November 1, 1996, as
amended, between Malhotra Enterprises and Specialty
Testing & Consulting, Ltd.
+*****10.38 -- 1997 Long-Term Incentive Plan.
*****12.1 -- Calculation of earnings to fixed charges.
****21.1 -- List of Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
*****23.3 -- Consent of William D. Sutton (included in Exhibit 5.1).
*****25.1 -- Statement regarding eligibility of trustee.
***27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
</TABLE>
- ---------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 333-04593)
** Incorporated by reference from the Company's current Report on Form 8-K
dated June 20, 1997
*** Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the three months ended July 31, 1997
****Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended April 30, 1997
***** To be filed by amendment.
+ Management Contract
II-4
<PAGE> 185
(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 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of Form S-4 within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above, or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with 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 policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 186
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James F. Farr and William D. Sutton, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre-and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 16th day of October, 1997.
DAILEY INTERNATIONAL INC.
By: /s/ JAMES F. FARR
----------------------------------
James F. Farr
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. D. LAWRENCE Chairman of the Board and October 16, 1997
- ----------------------------------------------------- Director
J. D. Lawrence
/s/ JAMES F. FARR President and Chief Executive October 16, 1997
- ----------------------------------------------------- Officer and Director
James F. Farr (Principal Executive
Officer)
/s/ WILLIAM D. SUTTON Senior Vice President, General October 16, 1997
- ----------------------------------------------------- Counsel, Corporate Secretary
William D. Sutton and Director
/s/ DAVID T. TIGHE Senior Vice President, Chief October 16, 1997
- ----------------------------------------------------- Financial Officer and
David T. Tighe Director (Principal
Financial and Accounting
Officer)
/s/ BERNARD J. DUROC-DANNER Director October 16, 1997
- -----------------------------------------------------
Bernard J. Duroc-Danner
/s/ AL KITE Director October 16, 1997
- -----------------------------------------------------
Al Kite
</TABLE>
II-6
<PAGE> 187
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James F. Farr and William D. Sutton, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre-and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 16th day of October, 1997.
DAILEY ENERGY SERVICES, INC.
By: /s/ JAMES F. FARR
----------------------------------
James F. Farr
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 16th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM G. BARCLAY Director October 16, 1997
- -----------------------------------------------------
William G. Barclay
/s/ ALEC DELLAGUAGLIA Director October 16, 1997
- -----------------------------------------------------
Alec Dellaguaglia
/s/ JAMES F. FARR President and Director October 16, 1997
- ----------------------------------------------------- (Principal Executive
James F. Farr Officer)
/s/ DAVID T. TIGHE Vice President (Principal October 16, 1997
- ----------------------------------------------------- Financial and Accounting
David T. Tighe Officer)
</TABLE>
II-7
<PAGE> 188
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James F. Farr and William D. Sutton, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre-and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 16th day of October, 1997.
DAILEY INTERNATIONAL SALES
CORPORATION
By: /s/ JAMES F. FARR
----------------------------------
James F. Farr
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 16th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. D. LAWRENCE Sole Director October 16, 1997
- -----------------------------------------------------
J. D. Lawrence
/s/ JAMES F. FARR President (Principal Executive October 16, 1997
- ----------------------------------------------------- Officer)
James F. Farr
/s/ DAVID T. TIGHE Vice President (Principal October 16, 1997
- ----------------------------------------------------- Financial and Accounting
David T. Tighe Officer)
</TABLE>
II-8
<PAGE> 189
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James F. Farr and William D. Sutton, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre-and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 16th day of October, 1997.
COLUMBIA PETROLEUM SERVICES
CORPORATION
By: /s/ JAMES F. FARR
----------------------------------
James F. Farr
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 16th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES F. FARR President and Sole Director October 16, 1997
- ----------------------------------------------------- (Principal Executive
James F. Farr Officer)
/s/ DAVID T. TIGHE Vice President (Chief October 16, 1997
- ----------------------------------------------------- Financial and Accounting
David T. Tighe Officer)
</TABLE>
II-9
<PAGE> 190
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James F. Farr and William D. Sutton, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre-and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 16th day of October, 1997.
INTERNATIONAL PETROLEUM
SERVICES, INC.
By: /s/ JAMES F. FARR
----------------------------------
James F. Farr
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 16th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. D. LAWRENCE Sole Director October 16, 1997
- -----------------------------------------------------
J. D. Lawrence
/s/ JAMES F. FARR President (Principal Executive October 16, 1997
- ----------------------------------------------------- Officer)
James F. Farr
/s/ DAVID T. TIGHE Vice President (Principal October 16, 1997
- ----------------------------------------------------- Accounting Officer)
David T. Tighe
</TABLE>
II-10
<PAGE> 191
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James F. Farr and William D. Sutton, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre-and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 16th day of October, 1997.
DAILEY ENVIRONMENTAL
REMEDIATION TECHNOLOGIES, INC.
By: /s/ JAMES F. FARR
----------------------------------
James F. Farr
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 16th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J.D. LAWRENCE Sole Director October 16, 1997
- -----------------------------------------------------
J.D. Lawrence
/s/ JAMES F. FARR President (Principal Executive October 16, 1997
- ----------------------------------------------------- Officer)
James F. Farr
/s/ DAVID T. TIGHE Treasurer (Principal Financial October 16, 1997
- ----------------------------------------------------- and Accounting Officer)
David T. Tighe
</TABLE>
II-11
<PAGE> 192
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James F. Farr and William D. Sutton, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre-and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 16th day of October, 1997.
DAILEY WORLDWIDE SERVICES, CORP.
By: /s/ JAMES F. FARR
----------------------------------
James F. Farr
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 16th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM D. SUTTON Vice President, Secretary and October 16, 1997
- ----------------------------------------------------- Sole Director
William D. Sutton
/s/ JAMES F. FARR President (Principal Executive October 16, 1997
- ----------------------------------------------------- Officer)
James F. Farr
/s/ DAVID T. TIGHE Treasurer (Principal Financial October 16, 1997
- ----------------------------------------------------- and Accounting Officer)
David T. Tighe
</TABLE>
II-12
<PAGE> 193
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James F. Farr and William D. Sutton, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre-and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 16th day of October, 1997.
AIR DRILLING INTERNATIONAL, INC.
By: /s/ CHAMAN MALHOTRA
----------------------------------
Chaman Malhotra
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 16th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES F. FARR Director October 16, 1997
- -----------------------------------------------------
James F. Farr
/s/ WILLIAM D. SUTTON Director October 16, 1997
- -----------------------------------------------------
William D. Sutton
/s/ DAVID T. TIGHE Director October 16, 1997
- -----------------------------------------------------
David T. Tighe
/s/ JAMES C. BRAME Vice President and Director October 16, 1997
- ----------------------------------------------------- (Principal Financial and
James C. Brame Accounting Officer)
/s/ CHAMAN MALHOTRA Chairman of the Board, October 16, 1997
- ----------------------------------------------------- President and Director
Chaman Malhotra (Principal Executive
Officer)
/s/ TOMMY D. RAMSAY Director October 16, 1997
- -----------------------------------------------------
Tommy D. Ramsay
</TABLE>
II-13
<PAGE> 194
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James F. Farr and William D. Sutton, and each of
them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre-and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 16th day of October, 1997.
AIR DRILLING SERVICES, INC.
By: /s/ CHAMAN MALHOTRA
----------------------------------
Chaman Malhotra
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 16th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES F. FARR Director October 16, 1997
- -----------------------------------------------------
James F. Farr
/s/ JAMES C. BRAME Vice President, Treasurer and October 16, 1997
- ----------------------------------------------------- Director (Principal
James C. Brame Financial and Accounting
Officer)
/s/ CHAMAN MALHOTRA Chairman of the Board, October 16, 1997
- ----------------------------------------------------- President and Director
Chaman Malhotra (Principal Executive
Officer)
/s/ TOMMY D. RAMSAY Director October 16, 1997
- -----------------------------------------------------
Tommy D. Ramsay
</TABLE>
II-14
<PAGE> 195
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
To the Board of Directors and Stockholders
of Dailey International Inc.
We have audited the consolidated financial statements of Dailey
International Inc., as of April 30, 1997 and 1996, and for each of the three
years in the period ended April 30, 1997, and have issued our report thereon
dated June 27, 1997 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 21(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, 1997
S-1
<PAGE> 196
DAILEY INTERNATIONAL INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal year ended April 30,
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
========== ======== == ========= ==========
Fiscal year ended April 30,
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
========== ======== == ========= ==========
Fiscal year ended April 30,
1997....................... Allowance for Bad Debt $1,325,000 $305,000 0 $(154,000) $1,476,000
========== ======== == ========= ==========
Inventory Reserve $ 804,000 0 0 $(242,000) $ 562,000
========== ======== == ========= ==========
</TABLE>
S-2
<PAGE> 197
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*3.1 -- Restated Certificate of Incorporation.
*3.2 -- Restated Bylaws of the Company.
*****3.3 -- Amendment to Restated Certificate of Incorporation dated
October 7, 1997.
*4.1 -- Form of Class A Common Stock Certificate.
4.2 -- See Exhibits 3.1, 3.2 and 3.3 for provisions of the
Restated Certificate of Incorporation and Restated Bylaws
of the Company defining the rights of the holders of
Class A Common Stock.
***4.3 -- Indenture Dated August 19, 1997, by and between the
Company, the Subsidiary Guarantors and the U.S. Trust
Company of Texas, N.A. relating to the Company's 9.75%
Senior Notes Due 2007.
***4.4 -- Form of Note for the Company's Senior Notes Due 2007
(included in Exhibit A to Exhibit 4.1).
***4.5 -- Registration Rights Agreement dated August 19, 1997
relating to the Outstanding Notes.
4.6 -- See Exhibits 10.1 through 10.16 for additional
instruments defining the rights of holders of long-term
debt of the Company and its Subsidiaries.
*****5.1 -- Opinion of William D. Sutton.
*10.1 -- Relationship Agreement by and between the Company and
Lawrence Industries, Inc.
*10.2 -- Office Lease Agreement by and between the Company as
lessee and Lawrence International, Inc. as lessor.
*10.3 -- Registration Rights Agreement by and between the Company
and Lawrence Industries, Inc.
+*10.4 -- Dailey Petroleum Services Corp. 1996 Key Employee Stock
Plan.
+*10.5 -- Dailey Petroleum Services Corp. 1996 Non-Employee
Director Stock Option Plan.
*10.6 -- Tax Allocation Agreement by and between the Company and
Lawrence Industries, Inc.
*10.7 -- Form of Indemnification Agreement between the Company and
its directors.
*10.8 -- Form of Indemnification Agreement between the Company and
its executive officers.
**10.9 -- Stock Purchase and Sale Agreement dated May 8, 1997 (the
"Stock Purchase Agreement"), by and among the Company,
ADI, the Shareholders of ADI, and the Preferred
Shareholders of Air Drilling Services, Inc.
**10.10 -- First Amendment to Stock Purchase Agreement dated May 30,
1997, by and among the Company, ADI, the Shareholders of
ADI, and the Preferred Shareholders of Air Drilling
Services, Inc.
**10.11 -- Escrow Agreement dated June 20, 1997, by and among the
Company, the Shareholders and Warrantholders of ADI (the
"Shareholders"), and U.S. Trust Company of Texas, N.A.
(the "Escrow Agent").
</TABLE>
<PAGE> 198
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
**10.12 -- Third Amended and Restated Loan Agreement dated June 20,
1997 (the "Loan Agreement"), by and between the Company,
the financial institutions from time to time a party
thereto, and Wells Fargo Bank (Texas), National
Association, as Agent.
**10.13 -- Third Amended and Restated Commercial Security Agreement
dated June 20, 1997, between Wells Fargo Bank (Texas),
National Association, as Agent, the Banks from time to
time a party to the Loan Agreement and the Company.
**10.14 -- Form of Guaranty Agreement dated June 20, 1997 between
Wells Fargo Bank (Texas), National Association, as Agent,
the Banks from time to time a party to the Loan Agreement
and each of the following subsidiaries of the Company:
Dailey International, Inc., Dailey Petroleum Sales Corp.,
International Petroleum Sales Corp., Columbia Petroleum
Services Corp., Dailey Worldwide Oil Tools, Corp., Dailey
Environmental Remediation and Technologies, Inc., Air
Drilling International, Inc., Air Drilling Services,
Inc., Canadian Air Drilling Services Ltd., and Specialty
Testing and Consultants Ltd.
**10.15 -- Form of Security Pledge Agreement dated June 20, 1997,
between Wells Fargo Bank (Texas), National Association,
as Agent, the Banks from time to time a party to the Loan
Agreement and each of the following: the Company; Air
Drilling International, Inc., and Air Drilling Services,
Inc.
**10.16 -- Form of Subsidiary Commercial Security Agreement dated
June 20, 1997, between Wells Fargo Bank (Texas) National
Association, as Agent, the Banks from time to time a
party to the Loan Agreement and each of the following
subsidiaries of the Company: Dailey International, Inc.,
Dailey Petroleum Sales Corp., International Petroleum
Sales Corp., Columbia Petroleum Services Corp., Dailey
Worldwide Oil Tools, Corp., Dailey Environmental
Remediation and Technologies, Inc., Air Drilling
International, Inc., Air Drilling Services, Inc.,
Canadian Air Drilling Services Ltd., and Specialty
Testing and Consultants Ltd.
****10.17 -- Grant of Lease dated May 18, 1995, as amended on June 15,
1996, between Canadian Air Drilling Services, Ltd. and
Malhotra Enterprises, Ltd. for real property located at
Nisku Industrial Park, AB.
****10.18 -- Industrial Lease Agreement dated 3 July 1996 between Air
Drilling Services, Inc. and Melodi Lane Investments, LLC
for property located at 2122 Melodi Lane, Casper,
Wyoming, as amended on June 20, 1997.
****10.19 -- Master Equipment Lease Agreement dated July 3, 1996,
between Melodi Lane Investments, L.L.C., as lessor, and
Air Drilling Services, Inc. as lessee.
****10.20 -- Obligation of Air Drilling Services, Inc., Canadian Air
Drilling Services Ltd., and Specialty Testing &
Consulting Ltd., under a certain Agreement dated February
1, 1993, to share equally in the payment of a certain
Promissory Note dated December 6, 1993 and issued by
Chaman Malhotra and Aruna Malhotra to Southern Pacific
Thrift and Loan Assn.
+****10.21 -- Employment Agreement between the Company and James F.
Farr dated November 27, 1996.
+****10.22 -- Employment Agreement between the Company and William D.
Sutton dated November 27, 1996.
+****10.23 -- Employment Agreement between the Company and David T.
Tighe dated November 27, 1996.
+****10.24 -- Employment Agreement between the Company and Chaman
Malhotra dated June 20, 1997.
</TABLE>
<PAGE> 199
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+****10.25 -- Employment Agreement between the Company and Tommy Ramsay
dated June 20, 1997.
+****10.26 -- Employment Agreement between the Company and J.D.
Lawrence dated November 27, 1996.
10.27 -- $250,000 Promissory Note dated January 16, 1997, from
James F. Farr in favor of the Company (incorporated by
reference to the Company's Quarterly Report on Form 10-Q
for the three months ended January 31, 1997).
10.28 -- Security Agreement dated January 16, 1997, between the
Company and James F. Farr (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the three
months ended January 31, 1997).
+****10.29 -- Stock Option Agreement between the Company and Al Kite
dated April 23, 1997.
+****10.30 -- Stock Option Agreement between the Company and Bernard
Duroc-Danner dated April 23, 1997.
10.31 -- Form of Management Employment Agreement with John E.
Blacklaws (incorporated by reference from the Company's
Registration Statement on Form S-1 (file No. 333-0593)
+****10.32 -- First Amendment to Employment Agreement with John E.
Blacklaws dated February 17, 1997.
+****10.33 -- Executive Employment Agreement dated July 18, 1997 with
Dwight Goolsbay.
+****10.34 -- Executive Employment Agreement dated July 18, 1997 with
Martin Lyons.
+****10.35 -- Management Employment Agreement dated July 18, 1997 with
Chet Brame.
+****10.36 -- Executive Employment Agreement dated July 18, 1997.
+****10.37 -- Equipment Lease Agreement dated November 1, 1996, as
amended, between Malhotra Enterprises and Specialty
Testing & Consulting, Ltd.
+*****10.38 -- 1997 Long-Term Incentive Plan.
*****12.1 -- Calculation of earnings to fixed charges.
****21.1 -- List of Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Coopers & Lybrand L.L.P.
*****23.3 -- Consent of William D. Sutton (included in Exhibit 5.1).
*****25.1 -- Statement regarding eligibility of trustee.
***27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
</TABLE>
- ---------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 333-04593)
** Incorporated by reference from the Company's current Report on Form 8-K
dated June 20, 1997
*** Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the three months ended July 31, 1997
**** Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended April 30, 1997
***** To be filed by amendment.
+ Management Contract
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated June 27, 1997, in the Registration Statement on Form
S-4 and related Prospectus of Dailey International Inc. for the registration of
$115,000,000 of 9 3/4% Senior Notes due 2007, Series B.
/s/ ERNST & YOUNG LLP
------------------------------
Ernst & Young LLP
Houston, Texas
October 16, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Dailey
International Inc. on Form S-4 of our reports dated April 2, 1997, on our
audits of the consolidated financial statements and supplemental schedules of
Air Drilling International, Inc. and subsidiaries as of December 31, 1996 and
1995 and for the year ended December 31, 1996 and for the period from May 19,
1995 (Inception) to December 31, 1995, and of our reports dated July 25, 1995,
on our audits of the combined financial statements and supplemental schedules
of Air Drilling Services, Inc., Canadian Air Drilling Services Ltd., Specialty
Testing & Consulting Ltd. and Global Air Drilling Services Ltd. as of May 18,
1995 and for the period from January 1, 1995 through May 18, 1995. We also
consent to the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Denver, Colorado
October 17, 1997
<PAGE> 1
LETTER OF TRANSMITTAL
DAILEY INTERNATIONAL INC.
OFFER TO EXCHANGE ITS
9 3/4% SERIES B SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
9 3/4% SERIES A SENIOR NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER NOTE)
PURSUANT TO THE PROSPECTUS DATED OCTOBER , 1997.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON NOVEMBER , 1997, UNLESS THE OFFER IS EXTENDED.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
U.S. TRUST COMPANY OF TEXAS, N.A.
<TABLE>
<S> <C> <C>
By mail: By hand: By overnight mail:
</TABLE>
For information call:
Confirm:
Facsimile:
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. THE
INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
The undersigned acknowledges that he or she has received the Prospectus,
dated October , 1997 (the "Prospectus"), of Dailey International Inc. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute the Company's offer (the "Exchange Offer") to exchange up to
$115,000,000 aggregate principal amount of the Company's 9 3/4% Series B Senior
Notes due 2007 (the "Exchange Notes") for a like principal amount of its
outstanding 9 3/4% Series A Senior Notes due 2007 (the "Outstanding Notes" and,
together with the Exchange Notes, the "Notes"). The Exchange Notes will be
unsecured obligations of the Company and are identical in all respects to the
Outstanding Notes, except (i) the Exchange Notes have been registered pursuant
to the Securities Act of 1933, as amended (the "Securities Act") and, therefore,
will not bear legends restricting their transfer, (ii) the holders of the
Exchange Notes will not be entitled to certain rights under the Registration
Rights Agreement dated as of August 19, 1997 among the Company, the Subsidiary
Guarantors (as defined in the Prospectus) and the Initial Purchaser (as defined
in the Prospectus) of the Outstanding Notes, and (iii) the Exchange Notes will
not contain certain provisions providing for an increase in the interest rate
paid thereon. The Outstanding Notes have been, and the Exchange Notes will be,
issued under an Indenture dated as of August 19, 1997
<PAGE> 2
among the Company, the Subsidiary Guarantors (as defined in the Prospectus) and
U.S. Trust Company of Texas, N.A., as trustee. The term "Expiration Date" shall
mean 5:00 p.m. New York City time, on November , 1997, unless the Exchange
Offer is extended as provided in the Prospectus, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. Capitalized terms used but not defined herein shall have the
same meaning given them in the Prospectus.
The Letter of Transmittal is to be completed by holders of Outstanding
Notes either (i) if the Outstanding Notes are forwarded herewith or (ii) if
tender of Outstanding Notes is to be made by book-entry transfer to an account
maintained by U.S. Trust Company of Texas, N.A. (the "Exchange Agent") at The
Depository Trust Company ("DTC") pursuant to the procedures set forth in "The
Exchange Offer--Procedures for Tendering" in the Prospectus.
Holders of Outstanding Notes whose certificates (the "Certificates") for
such Outstanding Notes are not immediately available or who cannot deliver their
Certificates and all other required documents to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date or who cannot complete the
procedures for book-entry transfer prior to the Expiration Date must tender
their Outstanding Notes according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus.
See Instruction 1.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Outstanding Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their Outstanding
Notes must complete this Letter of Transmittal in its entirety.
<PAGE> 3
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY
BEFORE COMPLETING THIS LETTER OF TRANSMITTAL
ALL TENDERING HOLDERS COMPLETE THIS BOX
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OUTSTANDING NOTES TENDERED
- -----------------------------------------------------------------------------------------------------------------
OUTSTANDING PRINCIPAL NUMBER OF
NOTES TENDERED AMOUNT OF BENEFICIAL HOLDERS
NAME AND ADDRESS OF REGISTERED (ATTACH OUTSTANDING FOR WHOM
HOLDER CERTIFICATE ADDITIONAL LIST NOTES (IF LESS OUTSTANDING
(PLEASE FILL IN IF BLANK) NUMBERS* IF NECESSARY) THAN ALL)** NOTES ARE HELD
- -----------------------------------------------------------------------------------------------------------------
$
- -----------------------------------------------------------------------------------------------------------------
$
- -----------------------------------------------------------------------------------------------------------------
$
- -----------------------------------------------------------------------------------------------------------------
Total Amount Tendered: $
- -----------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Outstanding Notes may be tendered in integral multiples of $1,000. All Outstanding Notes held shall be deemed
tendered unless a lesser number is specified in this column.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH DTC AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN DTC MAY DELIVER
NOTES BY BOOK-ENTRY TRANSFER (SEE INSTRUCTION 1)):
Name of Tendering Institution:
------------------------------------------------------------------------------
DTC Account Number:
---------------------------------------------------------------------------
Transaction Code Number:
---------------------------------------------------------------------------
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED
DELIVERY IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING (SEE INSTRUCTION 5):
Name of Registered Holder(s):
------------------------------------------------------------------------------
Window Ticket Number (if any):
----------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-------------------------------------------------------
Name of Institution which executed the notice of Guaranteed Delivery:
------------------------------------
If Guaranteed Delivery is to be made by Book-Entry Transfer:
---------------------------------------------
Name of Tendering Institution:
------------------------------------------------------------------------------
DTC Account Number:
---------------------------------------------------------------------------
Transaction Code Number:
---------------------------------------------------------------------------
<PAGE> 4
[ ] CHECK HERE IF OUTSTANDING NOTES TENDERED BY BOOK-ENTRY TRANSFER
BUT NOT EXCHANGED ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER
SET FORTH ABOVE.
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OUTSTANDING
NOTES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
Name:
---------------------------------------------------------------------------
Address:
---------------------------------------------------------------------------
Area Code and Telephone Number:
-------------------------------------------------------------------------
<PAGE> 5
Ladies and Gentlemen:
The undersigned hereby tenders to the Company the above described aggregate
principal amount of Outstanding Notes in exchange for a like aggregate principal
amount of Exchange Notes.
Subject to and effective upon the acceptance for exchange of all or any
portion of the Outstanding Notes tendered herewith in accordance with the terms
and conditions of the Exchange Offer (including, if the Exchange Offer is
extended or amended, the terms and conditions of any such extension or
amendment), the undersigned hereby sells, assigns and transfers to or, upon the
order of the Company, all right, title and interest in and to such Outstanding
Notes as are being tendered herewith. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent as its agent and attorney-in-fact
(with full knowledge that the Exchange Agent is also acting as agent of the
Company in connection with the Exchange Offer) with respect to the tendered
Outstanding Notes, with full power of substitution (such power of attorney being
deemed to be an irrevocable power coupled with an interest), subject only to the
right of withdrawal described in the Prospectus, to (i) deliver Certificates for
Outstanding Notes together with all accompanying evidence of transfer and
authenticity to, or upon the order of the Company, upon receipt by the Exchange
Agent, as the undersigned's agent, of the Exchange Notes to be issued in
exchange for such Outstanding Notes, (ii) present Certificates for such
Outstanding Notes for transfer, and to transfer the Outstanding Notes on the
books of the Company, and (iii) receive for the account of the Company all
benefits and otherwise exercise all rights of beneficial ownership of such
Outstanding Notes, all in accordance with the terms and conditions of the
Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE
OUTSTANDING NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR
EXCHANGE, THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE
THERETO, FREE AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES,
AND THAT THE OUTSTANDING NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE
CLAIMS OR PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY
OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE
OUTSTANDING NOTES TENDERED HEREBY. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF
THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Outstanding
Notes tendered hereby should be printed above, if they are not already set forth
above, as they appear on the Certificates representing such Outstanding Notes.
The Certificate number(s) and the Outstanding Notes that the undersigned wishes
to tender should be indicated in the appropriate boxes above.
If any tendered Outstanding Notes are not exchanged pursuant to the
Exchange Offer for any reason, or if Certificates are submitted for more
Outstanding Notes than are tendered or accepted for exchange, Certificates for
such nonexchanged or nontendered Outstanding Notes will be returned (or, in the
case of Outstanding Notes tendered by book-entry transfer, such Outstanding
Notes will be credited to an account maintained at DTC) without expense to the
tendering holder, as soon as practicable following the withdrawal or rejection
of tender or the expiration or termination of the Exchange Offer.
The undersigned understands that tender of Outstanding Notes pursuant to
any one of the procedures described in "The Exchange Offer -- Procedures for
Tendering and -- Guaranteed Delivery Procedures" in the Prospectus and in this
Letter of Transmittal, and the Company's acceptance for exchange of such
tendered Outstanding Notes, will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of the
Exchange Offer. The undersigned recognizes that, under certain circumstances set
forth in the Prospectus, the Company may not be required to accept for exchange
any of the Outstanding Notes tendered hereby.
<PAGE> 6
Unless otherwise indicated herein in the box entitled "Special Registration
Instructions" below, the undersigned hereby directs that the Exchange Notes be
issued in the name(s) of the undersigned or, in the case of book-entry transfer
of Outstanding Notes, that such Exchange Notes be credited to the account
indicated above maintained at DTC. If applicable, substitute Certificates
representing Outstanding Notes not exchanged or not accepted for exchange will
be issued to the undersigned or, in the case of a book-entry transfer of
Outstanding Notes, will be credited to the account indicated above maintained at
DTC. Similarly, unless otherwise indicated under "Special Delivery
Instructions," please deliver Exchange Notes to the undersigned at the address
shown below the undersigned's signature.
BY TENDERING OUTSTANDING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL,
THE UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (I) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (II) ANY EXCHANGE NOTES TO BE RECEIVED BY THE
UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (III) THE
UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE
IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF EXCHANGE NOTES
TO BE RECEIVED IN THE EXCHANGE OFFER, AND (IV) IF THE UNDERSIGNED IS NOT A
BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE
IN, A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF SUCH EXCHANGE
NOTES BY TENDERING OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER AND
EXECUTING THIS LETTER OF TRANSMITTAL. A HOLDER OF OUTSTANDING NOTES WHICH IS A
BROKER-DEALER REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE
LETTERS ISSUED BY THE STAFF OF THE DIVISION OF CORPORATION FINANCE OF THE
SECURITIES AND EXCHANGE COMMISSION TO THIRD PARTIES, THAT (A) SUCH OUTSTANDING
NOTES HELD BY THE BROKER-DEALER ARE HELD ONLY AS A NOMINEE OR (B) SUCH
OUTSTANDING NOTES WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES AND IT WILL
DELIVER A PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH
EXCHANGE NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A
PROSPECTUS, SUCH BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME
TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER (AS DEFINED BELOW) IN
CONNECTION WITH RESALES OF EXCHANGE NOTES RECEIVED IN EXCHANGE FOR OUTSTANDING
NOTES, WHERE SUCH OUTSTANDING NOTES WERE ACQUIRED BY SUCH PARTICIPATING
BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR
OTHER TRADING ACTIVITIES, FOR A PERIOD ENDING DAYS AFTER THE EXPIRATION
DATE (SUBJECT TO EXTENSION UNDER CERTAIN LIMITED CIRCUMSTANCES DESCRIBED IN THE
PROSPECTUS) OR, IF EARLIER, WHEN ALL SUCH EXCHANGE NOTES HAVE BEEN DISPOSED OF
BY SUCH PARTICIPATING BROKER-DEALER. IN THAT REGARD, EACH BROKER-DEALER WHO
ACQUIRED OUTSTANDING NOTES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR
OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-DEALER"), BY TENDERING SUCH
OUTSTANDING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON
RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY EVENT OR THE
DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY
REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES THE
PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE
STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE THEREIN, IN LIGHT OF THE
CIRCUM-
<PAGE> 7
STANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF
CERTAIN OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH
PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF EXCHANGE NOTES PURSUANT TO
THE PROSPECTUS UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO
CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE EXCHANGE NOTES MAY BE RESUMED, AS THE CASE MAY
BE. IF THE COMPANY GIVES SUCH NOTICE TO SUSPEND THE SALE OF THE EXCHANGE NOTES,
IT SHALL EXTEND THE DAY PERIOD REFERRED TO ABOVE DURING WHICH PARTICIPATING
BROKER-DEALERS ARE ENTITLED TO USE THE PROSPECTUS IN CONNECTION WITH THE RESALE
OF EXCHANGE NOTES BY THE NUMBER OF DAYS DURING THE PERIOD FROM AND INCLUDING THE
DATE OF THE GIVING OF SUCH NOTICE TO AND INCLUDING THE DATE WHEN PARTICIPATING
BROKER-DEALERS SHALL HAVE RECEIVED COPIES OF THE SUPPLEMENTED OR AMENDED
PROSPECTUS NECESSARY TO PERMIT RESALES OF THE EXCHANGE NOTES OR TO AND INCLUDING
THE DATE ON WHICH THE COMPANY GIVES NOTICE THAT THE SALE OF EXCHANGE NOTES MAY
BE RESUMED, AS THE CASE MAY BE.
Holders of Outstanding Notes whose Outstanding Notes are accepted for
exchange will not receive accrued interest on such Outstanding Notes for any
period from and after the exchange of such Outstanding Notes for the Exchange
Notes.
Except as stated in the Prospectus, this tender is irrevocable.
<PAGE> 8
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE [ ])
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Outstanding Notes hereby tendered or on a security
position listing, or by any person(s) authorized to become the registered
holder(s) by endorsements and documents transmitted herewith (including such
opinions of counsel, certifications and other information as may be required by
the Company for the Outstanding Notes to comply with the restrictions on
transfer applicable to the Outstanding Notes). If signature is by an
attorney-in-fact, trustee, officer of a corporation or another acting in a
fiduciary capacity or representative capacity, please set forth the signer's
full title. See Instruction 5.
- --------------------------------------------------------------------------------
(Signature(s) of Holder(s))
Dated ______________ , 1997
Name(s):
- --------------------------------------------------------------------------------
(Please Print)
Capacity (full title):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:
- --------------------------------------------------------------------
Tax Identification or Social Security Number:
- ----------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(See Instructions 2 and 5)
- --------------------------------------------------------------------------------
(Authorized Signature)
Date: ______________ , 1997
Name of Firm:
- --------------------------------------------------------------------------------
Capacity (full title):
- --------------------------------------------------------------------------------
(Please Print)
Address:
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:
- --------------------------------------------------------------------
<PAGE> 9
SPECIAL REGISTRATION INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the Exchange Notes are to be issued in the name of
someone other than the registered holder of the Outstanding Notes whose name(s)
appear(s) above.
Issue
[ ] Exchange Notes and/or
[ ] Outstanding Notes not tendered
to:
Name(s):
--------------------------------------------------------
Address:
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
(Include Zip Code)
Area Code and
Telephone Number:
-------------------------------------------------------
Tax Identification or
Social Security Number(s):
-------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if Exchange Notes are to be sent to someone other than the
registered holder of the Outstanding Notes whose name(s) appear(s) above, or to
such registered holder(s) at an address other than that shown above.
Mail
[ ] Exchange Notes and/or
[ ] Outstanding Notes not tendered
to:
Name(s):
--------------------------------------------------------
Address:
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
(Include Zip Code)
Area Code and
Telephone Number:
-------------------------------------------------------
Tax Identification or
Social Security Number(s):
-------------------------------------------------------
<PAGE> 10
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES, GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed either if (a)
Certificates are forwarded herewith or (b) tenders are to be made pursuant to
the procedures for tender by book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering" in the Prospectus. Certificates for Outstanding
Notes being tendered, or timely confirmation of a book-entry transfer of such
Outstanding Notes into the Exchange Agent's account at DTC, as well as this
Letter of Transmittal (or a facsimile thereof), properly completed and duly
executed, with any required signature guarantees, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Outstanding Notes may be tendered in integral multiples of
$1,000.
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available or (ii) who cannot deliver their
Outstanding Notes, this Letter of Transmittal or any other required documents to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date or (iii) who cannot complete the procedures for delivery by book-entry
transfer prior to the Expiration Date may tender their Outstanding Notes by
properly completing and duly executing a Notice of Guaranteed Delivery pursuant
to the guaranteed delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures" in the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
(as defined below); (ii) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form made available by the Company,
must be received by the Exchange Agent prior to 5:00 p.m., New York City time,
on the Expiration Date; and (iii) the Certificates (or a confirmation of
book-entry transfer of such Outstanding Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility (as defined in the Prospectus)) representing
all tendered Outstanding Notes, in proper form for transfer, together with a
Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
within five New York Stock Exchange, Inc. trading days after the Expiration
Date, all as provided in "The Exchange Offer--Guaranteed Delivery Procedures" in
the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice. As used herein and in
the Prospectus, "Eligible Institution" means a firm or other entity identified
as an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under
the Exchange Act, including (as such terms are defined therein) (i) a bank; (ii)
a broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association that is a participant in a securities transfer association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER
AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document, shall include any participant
in DTC whose name appears on a security position listing as the owner of
the Outstanding Notes) of Outstanding Notes tendered herewith, unless such
holder has completed either the box entitled "Special Registration
Instructions" or the box entitled "Special Delivery Instructions" above, or
(ii) such Outstanding Notes are tendered for the account of a firm
that is an Eligible Institution.
<PAGE> 11
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Outstanding Notes Tendered" is inadequate, the Certificate
number(s) and/or the principal amount of Outstanding Notes and any other
required information should be listed on a separate signed schedule which is
attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Outstanding Notes will
be accepted only in integral multiples of $1,000. If less than all the
Outstanding Notes evidenced by any Certificate submitted are to be tendered,
fill in the principal amount of Outstanding Notes which are to be tendered in
the box entitled "Principal Amount of Outstanding Notes Tendered (if less than
all)." In such case, the holder will receive new Certificate(s) for the
remainder of the Outstanding Notes, promptly after the Expiration Date. All
Outstanding Notes represented by Certificates delivered to the Exchange Agent
will be deemed to have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. In order for a withdrawal to be effective on or prior to that time, a
written or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at one of its addresses set forth above or in the
Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Outstanding Notes to be withdrawn (the "Depositor"), (ii) identify
the Outstanding Notes to be withdrawn (including the certificate number(s) and
principal amount of such Outstanding Notes, or, in the case of Outstanding Notes
transferred by book-entry transfer, the name and number of the account at the
Book-Entry Transfer Facility to be credited), (iii) be signed by the Holder in
the same manner as the original signature on the Letter of Transmittal by which
such Outstanding Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Outstanding Notes register the transfer of such
Outstanding Notes into the name of the person withdrawing the tender, (iv)
specify the name in which any such Outstanding Notes are to be registered, if
different from that of the Depositor and (v) if applicable because the
Outstanding Notes have been tendered pursuant to book-entry procedures, specify
the name and number of the participant's account at DTC to be credited, if
different from that of the depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Outstanding Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Outstanding Notes so withdrawn are validly tendered.
Properly withdrawn Outstanding Notes may be retendered by following one of the
procedures described in "The Exchange Offer--Procedures for Tendering" in the
Prospectus at any time prior to the Expiration Date.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
The Company, any affiliates or assigns of the Company, the Exchange Agent or any
other person shall not be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Outstanding Notes which have been tendered but
which are withdrawn will be returned to the holder thereof without cost to such
holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the
Outstanding Notes tendered hereby, the signature(s) must correspond exactly with
the name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Outstanding Notes tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Outstanding Notes are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
person
<PAGE> 12
should so indicate when signing and, unless waived by the Company, evidence
satisfactory to the Company, in its sole discretion, of their authority to so
act must be submitted with this Letter of Transmittal.
When this Letter of Transmittal is signed by the registered owner(s) of the
Outstanding Notes listed and transmitted hereby, no endorsement(s) of
Certificate(s) or separate bond power(s) are required unless Exchange Notes are
to be issued in the name of a person other than the registered holder(s).
Signature(s) on such Certificate(s) or bond power(s) must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Outstanding Notes listed, the Certificates must be
endorsed or accompanied by appropriate bond powers, signed by the registered
owner(s) exactly as the name or names of the registered owner(s) appear(s) on
the Certificates[, and also must be accompanied by such opinions of counsel,
certifications and other information as the Company or the Trustee for the
Outstanding Notes may require in accordance with the restrictions on transfer
applicable to the Outstanding Notes]. Signatures on such Certificates or bond
powers must be guaranteed by an Eligible Institution.
If tendered Outstanding Notes are registered in the name of the signer of
the Letter of Transmittal and the Exchange Notes to be issued in exchange
therefor are to be issued (and any untendered Outstanding Notes are to be
reissued) in the name of the registered holder (including any participant in The
Depository Trust Company (also referred to as a book-entry facility) whose name
appears on a security listing as the owner of Outstanding Notes), the signature
of such signer need not be guaranteed. In any other case, the tendered
Outstanding Notes must be endorsed or accompanied by written instruments of
transfer in form satisfactory to the Company and duly executed by the registered
holder and the signature on the endorsement or instrument of transfer must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" as defined by Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. If Exchange Notes are to
be issued in the name of a person other than the signer of this Letter of
Transmittal, or if Exchange Notes are to be sent to someone other than the
signer of this Letter of Transmittal or to an address other than that shown
above, the appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Outstanding Notes not exchanged will be returned by mail or, if
tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time of
receipt), acceptance and withdrawal of tendered Outstanding Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for, may, in the view of
counsel to the Company, be unlawful. The Company also reserves the absolute
right, subject to applicable law, to waive any of the conditions of the Exchange
Offer set forth in the Prospectus under "The Exchange Offer -- Conditions" or
defects, irregularities or conditions of tender as to particular Outstanding
Notes, whether or not similar conditions or irregularities are waived in the
case of other holders. The Company's interpretation of the terms and conditions
of the Exchange Offer (including this Letter of Transmittal and the instructions
hereto) will be final and binding on all parties. No tender of Outstanding Notes
will be deemed to have been validly made until all irregularities with respect
to such tender have been waived or cured within such time as the Company shall
determine. Although the Company intends to notify Holders of defects or
irregularities with respect to tenders of Outstanding Notes, neither the
Company, any affiliate or assign of the Company or the Exchange Agent nor any
person shall be under any duty to give notification of any irregularities in
tenders or incur any liability for failure to give such notification. Any
Outstanding Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived will
be returned by the Exchange Agent to the tendering Holders as soon as
practicable following the Expiration Date.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and
requests for assistance may be directed to the Exchange Agent at its address and
telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING, SUBSTITUTE FORM W-9. Under the U.S. Federal
income tax law, a Holder whose tendered Outstanding Notes are accepted for
exchange is required to provide the Exchange Agent with such Holder's
<PAGE> 13
correct taxpayer identification number ("TIN") on the Substitute Form W-9 below.
If the Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the Holder or the payee to a $50 penalty. In
addition, payments to such Holders or other payees with respect to Exchange
Notes exchanged pursuant to the Exchange Offer may be subject to 31% backup
withholding.
The box in Part 3 of Substitute Form W-9 may be checked if the tendering
Holder has not been issued a TIN and has applied for a TIN or intends to apply
for a TIN in the near future. If the box in Part 3 is checked, the Holder or
other payee must also complete the certifications in Part 2 and the Certificate
of Awaiting Taxpayer Identification Number below in order to avoid backup
withholding. Notwithstanding that the box in Part 3 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the
Exchange Agent will withhold 31% of all payments made to the payee 7 days
following receipt by the Exchange Agent of the Certificate of Awaiting Taxpayer
Identification Number and prior to the time a properly certified TIN is provided
to the Exchange Agent.
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
Outstanding Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Outstanding Notes. If the Outstanding Notes are
registered in more than one name or are not in the name of the actual owner,
consult the enclosed "Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9" for additional guidance on which number to
report.
Certain Holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such Holders should nevertheless
complete the Substitute Form W-9 below, and write "exempt" on the face thereof,
to avoid possible erroneous backup withholding. A foreign person may qualify as
an exempt recipient by submitting a properly completed IRS Form W-8, signed
under penalties of perjury, attesting to that Holder's exempt status. Please
consult the enclosed "Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9" for additional guidance on which Holders are
exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather,
the U.S. Federal Income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be applied for.
10. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Outstanding Notes have been lost, destroyed or stolen, the holder
should promptly notify the Exchange Agent. The holder will then be instructed by
the Exchange Agent as to the steps that must be taken in order to replace the
Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES. Holders who tender their Outstanding Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith. If, however, certificates representing the Exchange Notes or the
Outstanding Notes for the principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Outstanding Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(whether imposed on the registered holder or any other person) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with this Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON THE EXPIRATION DATE.
<PAGE> 14
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
PAYER'S NAME: U.S. TRUST COMPANY OF TEXAS, N.A.
- ------------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT Social Security Number or
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. Employer Identification Number
FORM W-9 ------------------------------------
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
---------------------------------------------------------------------------------------------
PART 2 -- CERTIFICATIONS -- Under penalties of perjury, I certify that:
PAYER'S REQUEST FOR
TAXPAYER IDENTIFICATION (1) The number shown on this form is my correct Taxpayer Identification Number (or I am
NUMBER ("TIN") waiting for a number to be issued to me) and
(2) I am not subject to backup withholding because: (a) I am exempt from backup withholding,
or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am
subject to backup withholding as a result of failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to backup
withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by
the IRS that you are currently subject to backup withholding because of underreporting
interest or dividends on your tax return. However, if after being notified by the IRS that
you are subject to backup withholding, you received another notification from the IRS that
you are no longer subject to backup withholding, do not cross out such item (2).
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT
OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP WITHHOLDING.
---------------------------------------------------------------------------------------------
PART 3
Signature ------------------------------------------ Awaiting TIN [ ]
Date-----------------------------------------------
Name (please print)------------------------------
Address (please print)----------------------------
-----------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU WITH RESPECT TO EXCHANGE NOTES
EXCHANGED PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED
"GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATION IF YOU CHECKED
THE BOX IN PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number within 60 days, 31% of all
reportable payments made to me thereafter will be withheld until I provide a
number. Moreover, I understand that during this 60-day period, 31% of all
reportable payments made to me will be withheld commencing 7 business days after
the payor receives this Certificate of Awaiting Taxpayer Identification Number
and terminating on the date I provide a certified TIN to the payor.
Signature
- ------------------------------------------------ Date
- ------------------------------------
Name (please print)
- --------------------------------------------------------------------------------
Address (please print)
- --------------------------------------------------------------------------------
<PAGE> 15
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
9 3/4% SERIES A SENIOR NOTES DUE 2007
(PRINCIPAL SERIES A AMOUNT $1,000 PER NOTE)
OF
DAILEY INTERNATIONAL INC.
This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used for a holder of the Issuer's (as defined below) 9 3/4% Series
A Senior Notes due 2007 (the "Outstanding Notes") to accept the Exchange Offer
(as defined below) if (i) certificates for such holder's Outstanding Notes are
not immediately available, (ii) such holder cannot deliver its certificates for
Outstanding Notes, the Letter of Transmittal or any other required documents to
U.S. Trust Company of Texas, N.A. (the "Exchange Agent") prior to 5:00 p.m., New
York City time, on the Expiration Date (as defined in the Prospectus referred to
below) or (iii) the procedures for delivery by book-entry transfer cannot be
completed prior to the Expiration Date. This Notice of Guaranteed Delivery may
be delivered by hand, [overnight courier or] mail, or transmitted by facsimile
transmission, to the Exchange Agent. See "The Exchange Offer -- Guaranteed
Delivery Procedures" in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
U.S. TRUST COMPANY OF TEXAS, N.A.
<TABLE>
<S> <C> <C>
By mail: By hand: By overnight mail:
</TABLE>
For information call:
Confirm:
Facsimile:
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tenders to Dailey International Inc., a Delaware
corporation (the "Issuer"), upon the terms and subject to the conditions set
forth in the Prospectus dated October , 1997 (as the same may be amended or
supplemented from time to time, the "Prospectus"), and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Outstanding Notes set
forth below pursuant to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures." All capitalized terms used herein but not defined shall have the
meanings ascribed to them in the Prospectus.
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on November , 1997, unless extended
by the Issuer. The term "Expiration Date" shall mean 5:00 p.m., New York City
time, on November , 1997, unless the Exchange Offer is extended as
<PAGE> 16
provided in the Prospectus, in which case the term "Expiration Date" shall mean
the latest date and time to which the Exchange Offer is extended.
SIGNATURE
X
- --------------------------------------------------------------- Date:
- ---------------------
X
- --------------------------------------------------------------- Date:
- ---------------------
Signature(s) of Registered Holder(s)
or Authorized Signatory
Area Code and Telephone Number:
- --------------------------------------------------------------------
Name(s):
- --------------------------------------------------------------------------------
(Please Print)
Capacity (full title,
if signing in a fiduciary
or representative capacity):
- ------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Taxpayer Identification
Number or Social Security No.:
- -------------------------------------------------------------------------
Aggregate Principal Amount of
Outstanding Notes Tendered (must
be integral multiples of $1,000): $
- ----------------------------------------------------------------------
Certificate Number(s) of
Outstanding Notes (if available):
- -----------------------------------------------------------------------
Aggregate Principal Amount
Represented by Certificate(s): $
- ------------------------------------------------------------------------
IF TENDERED OUTSTANDING NOTES
WILL BE DELIVERED BY BOOK-ENTRY
TRANSFER, PROVIDE THE DEPOSITORY
TRUST COMPANY ("DTC") ACCOUNT NO.
AND TRANSACTION CODE (if available):
- ---------------------------------------------------------
Account No.:
- --------------------------------------------------------------------------------
Transaction No.:
- --------------------------------------------------------------------------------
<PAGE> 17
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified as an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 promulgated under the
Securities Exchange Act of 1934, as amended, guarantees deposit with the
Exchange Agent of a properly completed and executed Letter of Transmittal (or
facsimile thereof), [or an Agent's Message,] as well as the certificate(s)
representing all tendered Outstanding Notes in proper form for transfer, or
confirmation of the book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at DTC as described in the Prospectus under the caption
"The Exchange Offer -- Guaranteed Delivery Procedures" and other documents
required by the Letter of Transmittal, all by 5:00 p.m., New York City time, on
the fifth New York Stock Exchange trading day following the Expiration Date.
Name of Eligible Institution:
- --------------------------------------------------------------------------------
Authorized Signature
<TABLE>
<S> <C>
Address: ------------------------------------------- Name: --------------------------------------------
------------------------------------------- Title: ----------------------------------------------
------------------------------------------- Date: ---------------------------------------------
</TABLE>
Area Code and Telephone No.
- ------------------------
NOTE: DO NOT SEND OUTSTANDING NOTES WITH THIS NOTICE OF GUARANTEED
DELIVERY. ACTUAL SURRENDER OF OUTSTANDING NOTES MUST BE MADE PURSUANT TO, AND BE
ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND
ANY OTHER REQUIRED DOCUMENTS.
<PAGE> 18
DAILEY INTERNATIONAL INC.
OFFER TO EXCHANGE ITS 9 3/4% SERIES B SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 FOR ANY AND ALL OF ITS OUTSTANDING
9 3/4% SERIES A SENIOR NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER NOTE)
PURSUANT TO THE PROSPECTUS
DATED OCTOBER , 1997
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON NOVEMBER , 1997 UNLESS THE OFFER IS EXTENDED.
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Dailey International Inc., a Delaware corporation (the "Issuer"), is
offering, upon the terms and subject to the conditions set forth in the
Prospectus dated October , 1997 (the "Prospectus") and the accompanying Letter
of Transmittal enclosed herewith (which together constitute the "Exchange
Offer"), to exchange its 9 3/4% Series B Senior Notes due 2007 (the "Exchange
Notes") for a like principal amount of its outstanding 9 3/4% Series A Senior
Notes due 2007 (the "Outstanding Notes", and together with the Exchange Notes,
the "Notes"). The Exchange Notes will be unsecured obligations of the Company
and are identical in all respects to the Outstanding Notes, except (i) the
Exchange Notes have been registered pursuant to the Securities Act of 1933, as
amended (the "Securities Act") and, therefore, will not bear legends restricting
their transfer, (ii) the holders of the Exchange Notes will not be entitled to
certain rights under the Registration Rights Agreement dated as of August 19,
1997 among the Company, the Subsidiary Guarantors (as defined in the Prospectus)
and the Initial Purchaser (as defined in the Prospectus) of the Outstanding
Notes, and (iii) the Exchange Notes will not contain certain provisions
providing for an increase in the interest rate paid thereon. The Outstanding
Notes have been, and the Exchange Notes will be, issued under an Indenture dated
as of August 19, 1997 among the Company, the Subsidiary Guarantors (as defined
in the Prospectus) and U.S. Trust Company of Texas, N.A., as trustee.
Outstanding Notes may be tendered in whole or in part in integral multiples of
$1,000.
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE EXCHANGE
OFFER -- CONDITIONS" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. the Prospectus, dated October , 1997;
2. the Letter of Transmittal for your use and for the information of
your clients (facsimile copies of the Letter of Transmittal may be used to
tender Outstanding Notes);
3. a form of letter which may be sent to your clients for whose
accounts you hold Outstanding Notes registered in your name or in the name
of your nominee, with space provided for obtaining such clients'
instructions with regard to the Exchange Offer; and
4. a Notice of Guaranteed Delivery.
YOUR PROMPT ACTION IS REQUESTED. PLEASE NOTE THAT THE EXCHANGE OFFER WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON NOVEMBER , 1997, UNLESS
EXTENDED. PLEASE FURNISH COPIES OF THE ENCLOSED MATERIALS TO THOSE OF YOUR
CLIENTS FOR WHOM YOU HOLD OUTSTANDING NOTES REGISTERED IN YOUR NAME OR IN THE
NAME OF YOUR NOMINEE AS QUICKLY AS POSSIBLE.
<PAGE> 19
In all cases, exchanges of Outstanding Notes accepted for exchange pursuant
to the Exchange Offer will be made only after receipt by the Exchange Agent of
(a) certificates representing such Outstanding Notes, or a confirmation of a
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility (as defined in the Prospectus), as the case may be, (b) the Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, [or an
Agent's Message (as defined in the Prospectus)] and (c) any other required
documents.
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available or (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal [or an Agent's Message] or any
other documents required by the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date or (iii) who cannot complete the procedures for
book-entry transfer prior to the Expiration Date must tender their Outstanding
Notes according to the guaranteed delivery procedures set forth under the
caption "The Exchange Offer -- Guaranteed Delivery Procedures" in the
Prospectus.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of Outstanding Notes residing in any jurisdiction in
which the making of the Exchange Offer or acceptance thereof would not be in
compliance with the laws of such jurisdiction.
The Issuer will not make any payments to brokers, dealers or other persons
for soliciting acceptances of the Exchange Offer. The Issuer will, however, upon
request, reimburse you for customary clerical and mailing expenses incurred by
you in forwarding any of the enclosed materials to your clients. The Issuer will
pay or cause to be paid any transfer taxes payable on the transfer of
Outstanding Notes to it, except as otherwise provided in the Letter of
Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for copies of the Prospectus and Letter of Transmittal may be directed to the
Exchange Agent at its address set forth in the Prospectus or at
[( ) ].
Very truly yours,
DAILEY INTERNATIONAL INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE ISSUER OR ANY AFFILIATE THEREOF, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS OR USE ANY DOCUMENT ON
BEHALF OF ANY OF THEM IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE
ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
<PAGE> 20
DAILEY INTERNATIONAL INC.
OFFER TO EXCHANGE ITS
9 3/4% SERIES B SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
9 3/4% SERIES A SENIOR NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER NOTE)
PURSUANT TO THE PROSPECTUS
DATED OCTOBER , 1997
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON NOVEMBER , 1997 UNLESS THE OFFER IS EXTENDED.
TO OUR CLIENTS:
Enclosed for your consideration is a Prospectus dated October , 1997 (the
"Prospectus") and a Letter of Transmittal (which together constitute the
"Exchange Offer") relating to the offer by Dailey International Inc. (the
"Issuer") to exchange its 9 3/4% Series B Senior Notes due 2007 (the "Exchange
Notes") for a like principal amount of its outstanding 9 3/4% Series A Senior
Notes due 2007 (the "Outstanding Notes", and together with the Exchange Notes,
the "Notes"). The Exchange Notes will be unsecured obligations of the Company
and are identical in all respects to the Outstanding Notes, except (i) the
Exchange Notes have been registered pursuant to the Securities Act of 1933, as
amended (the "Securities Act") and, therefore, will not bear legends restricting
their transfer, (ii) the holders of the Exchange Notes will not be entitled to
certain rights under the Registration Rights Agreement dated as of August 19,
1997 among the Company, the Subsidiary Guarantors (as defined in the Prospectus)
and the Initial Purchaser (as defined in the Prospectus) of the Outstanding
Notes, and (iii) the Exchange Notes will not contain certain provisions
providing for an increase in the interest rate paid thereon. The Outstanding
Notes have been, and the Exchange Notes will be, issued under an Indenture dated
as of August 19, 1997 among the Company, the Subsidiary Guarantors (as defined
in the Prospectus) and U.S. Trust Company of Texas, N.A., as trustee.
Outstanding Notes may be tendered in whole or in part in integral multiples of
$1,000.
The enclosed material is being forwarded to you as the beneficial owner of
Outstanding Notes held by us for your account at benefit but not registered in
your name. An exchange of any Outstanding Notes may only be made by us as the
registered Holder pursuant to your instructions. Therefore, the Issuer urges
beneficial owners of Outstanding Notes registered in the name of a broker,
dealer, commercial bank, trust company or other nominee to contact such Holder
promptly if they wish to exchange Outstanding Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to exchange
any or all such Outstanding Notes held by us for your account or benefit,
pursuant to the terms and conditions set forth in the Prospectus and Letter of
Transmittal. We urge you to read carefully the Prospectus and Letter of
Transmittal before instructing us to exchange your Outstanding Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to exchange Outstanding Notes on your behalf in accordance
with the provisions of the Exchange Offer. The Exchange Offer expires at 5:00
p.m., New York City time, on November , 1997, unless extended. The term
"Expiration Date" shall mean 5:00 p.m., New York City time, on November ,
1997, unless the Exchange Offer is extended as provided in the Prospectus, in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended. A tender of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
<PAGE> 21
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount
of Exchange Notes for each $1,000 principal amount of Outstanding Notes.
$115,000,000 aggregate principal amount of Outstanding Notes was
outstanding as of October , 1997.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE
EXCHANGE OFFER -- CONDITIONS" IN THE PROSPECTUS.
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m.,
New York City time, on November , 1997, unless extended.
4. The Issuer has agreed to pay certain expenses of the Exchange
Offer. Any transfer taxes incident to the transfer of Outstanding Notes
from the tendering Holder to the Issuer will be paid by the Issuer, except
as provided in the Prospectus and the Letter of Transmittal. See "The
Exchange Offer -- Fees and Expenses" in the Prospectus.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of Holders of Outstanding Notes, residing in any jurisdiction in
which the making of the Exchange Offer or acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish us to tender any or all of your Outstanding Notes held by us
for your account or benefit, please do instruct us by completing, executing and
returning to us the attached instruction form. The accompanying Letter of
Transmittal is furnished to you for informational purposes only and may not be
used by you to exchange Outstanding Notes held by us and registered in our name
for your account or benefit.
<PAGE> 22
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of Dailey
International Inc.
This will instruct you to tender for exchange the aggregate principal
amount of Outstanding Notes indicated below (or, if no aggregate principal
amount is indicated below, all Outstanding Notes) held by you for the account or
benefit of the undersigned, pursuant to the terms of and conditions set forth in
the Prospectus and the Letter of Transmittal.
Aggregate Principal Amount of Outstanding Notes to be tendered for exchange:
$
------------------------------ *
*I (we) understand that if I (we) sign this instruction form without indicating
an aggregate principal amount of Outstanding Notes in the space above, all
Outstanding Notes held by you for my (our) account will be tendered for
exchange.
------------------------------------
------------------------------------
Signature(s)
------------------------------------
Capacity (full title) if signing in
a
fiduciary or representative capacity
------------------------------------
------------------------------------
------------------------------------
Name(s) and address, including zip
code
Date:
------------------------------------
------------------------------------
Area Code and Telephone Number
------------------------------------
Taxpayer Identification or Social
Security No.
<PAGE> 23
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. Social Security numbers have nine digits separated by two hyphens (i.e.
000-00-0000). Employer identification numbers have nine digits separated by only
one hyphen (i.e. 00-0000000). The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
GIVE THE
SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF --
- --------------------------------------------------------------
<C> <S> <C>
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of the
account) account or, if combined
funds, any one of the
individual(s)
3. Husband and wife (joint The actual owner of the
account) account or, if joint
funds, either person(1)
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult and minor (joint account) The adult or, if the
minor is the only
contributor, the
minor(1)
6. Account in the name of guardian The ward, minor, or
or committee for a designated incompetent person(3)
ward, minor or incompetent
person
7. a. The usual revocable savings The grantor-trustee(1)
trust (grantor is also
trustee)
b. So-called trust account that The actual owner(1)
is not a legal or valid
trust under state law
8. Sole proprietorship The owner(4)
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
GIVE THE EMPLOYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF --
- --------------------------------------------------------------
<C> <S> <C>
9. A valid trust, estate or The legal entity (5) (Do
pension trust not furnish the
identifying number of
the personal
representative or
trustee unless the legal
entity itself is not
designated in the
account title.)
10. Corporate account The corporation
11. Religious, charitable or The organization
educational organization
account
12. Partnership account The partnership
13. Association, club or other tax- The organization
exempt organization
14. A broker or registered nominee The broker or nominee
15. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a state
or local government, school
district or prison) that
receives agricultural program
payments
- --------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension trust.
NOTE:If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 24
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
- - A corporation.
- - A financial institution.
- - An organization exempt from tax under Section 501(a), of the Internal Revenue
Code or an individual retirement plan.
- - The United States or any agency or instrumentality thereof.
- - A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- - A foreign government, a political subdivision of a foreign government, or any
agency or instrumentality thereof.
- - An international organization or any agency, or instrumentality thereof.
- - A dealer in securities or commodities required to register in the United
States or a possession of the United States.
- - A real estate investment trust.
- - A common trust fund operated by a bank under Section 584(a) of the Internal
Revenue Code.
- - An exempt charitable remainder trust, or a non-exempt trust described in
Section 4947(a)(1) of the Internal Revenue Code.
- - An entity registered at all times under the Investment Company Act of 1940.
- - A foreign central bank of issue.
Payments of interest not generally subject to backup withholding include the
following:
- - Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid in
the course of the payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
- - Payments of tax-exempt interest (including exempt-interest dividends under
Section 852 of the Internal Revenue Code).
- - Payments described in Section 6049(b)(5) of the Internal Revenue Code.
- - Payments on tax-free covenant bonds under Section 1451 of the Internal Revenue
Code.
- - Payments made by certain foreign organizations.
Exempt payees described above must still complete the Substitute Form W-9
enclosed herewith to avoid possible erroneous backup withholding. FILE THIS FORM
WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON
THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST,
DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends, that
are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6042, 6044, 6045, 6049, 6050A and 6050N of the Internal Revenue Code.
PRIVACY ACT NOTICE. -- Section 6109 of the Internal Revenue Code requires most
recipients of dividends, interest, or other payments to give taxpayer
identification numbers to payers who must report the payments to the Internal
Revenue Service. Internal Revenue Service uses the numbers for identification
purposes and to help verify the accuracy of the recipient's tax return. Payers
must be given the numbers whether or not recipients are required to file tax
returns. Payers must generally withhold 31% of the gross amount of interest,
dividends, and certain other payments to a payee who does not furnish a taxpayer
identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
