<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
ON
FORM 8-K/A
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: JUNE 20, 1997
DAILEY PETROLEUM SERVICES CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 1389 76-0503351
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
CODE NUMBER)
2507 NORTH FRAZIER
P.O. BOX 1863
CONROE, TEXAS 77305
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 350-3399
================================================================================
EXHIBIT INDEX BEGINS ON PAGE 41.
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
The following financial statements are filed herewith:
<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF AIR
DRILLING INTERNATIONAL, INC. AND SUBSIDIARIES:
Report of Independent Accountants.................... F-1
Consolidated Balance Sheets as of December 31, 1996
and 1995............................................ F-2
Consolidated Statements of Operations for the year
ended December 31, 1996, and the period from May 19,
1995 (Inception) through December 31, 1995.......... F-3
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-4
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-5
Notes to Consolidated Financial Statements........... F-6
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-16
Combined Balance Sheet as of May 18, 1995............ F-17
Combined Statements of Income for the period from
January 1, 1995 through May 18, 1995................ F-18
Combined Statement of Changes in Stockholders' Equity
for the period from January 1, 1995 through May 18,
1995................................................ F-19
Combined Statement of Cash Flows for the period from
January 1, 1995 through May 18, 1995................ F-20
Notes to Combined Financial Statements............... F-21
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF AIR
DRILLING INTERNATIONAL, INC. AND SUBSIDIARIES:
Consolidated Balance Sheets as of April 30, 1997 and
December 31, 1996................................... F-29
Consolidated Statements of Operations for the four
month periods ended April 30, 1997 and 1996......... F-30
Consolidated Statements of Cash Flows for the four
month periods ended April 30, 1997 and 1996......... F-31
Notes to Unaudited Consolidated Financial
Statements.......................................... F-32
</TABLE>
(b) Pro forma financial information.
The following pro forma financial statements of the Company are filed
herewith:
<TABLE>
<S> <C>
Unaudited Pro Forma Combined Financial Statements.... F-33
Unaudited Pro Forma Combined Balance Sheet as of
April 30, 1997...................................... F-34
Unaudited Pro Forma Combined Statements of Operations
for the twelve months ended April 30, 1997.......... F-35
Notes to Unaudited Pro Forma Combined Financial
Statements.......................................... F-36
</TABLE>
2
<PAGE> 3
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*2.1 -- 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. Pursuant to
Item 601(b)(2) of Regulation S-K, certain schedules and
similar attachments to the Stock Purchase Agreement have
not been filed with this exhibit. The Schedules contain
various items relating to the representations and
warranties made by the Company and the ADI shareholders
in the Stock Purchase Agreement. The Company agrees to
furnish supplementally any omitted schedule to the
Securities and Exchange Commission upon request.
*2.2 -- 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.
*10.1 -- 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 (the
"Escrow Agent").
*10.2 -- 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.
*10.3 -- 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.
*10.4 -- 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.;
*10.5 -- 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.;
*10.6 -- 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.
23.1 -- Consent of Coopers & Lybrand, L.L.P.
</TABLE>
- ---------------
* Previously filed the Current Report on Form 8-K dated June 20, 1997, and filed
with the Securities and Exchange Commission on July 7, 1997.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DAILEY PETROLEUM SERVICES CORP.
Dated: August 29, 1997 /s/ DAVID T. TIGHE
----------------------------------------
David T. Tighe
Chief Financial Officer
4
<PAGE> 5
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-1
<PAGE> 6
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-2
<PAGE> 7
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-3
<PAGE> 8
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-4
<PAGE> 9
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-5
<PAGE> 10
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-6
<PAGE> 11
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 antidilutive.
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-7
<PAGE> 12
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
</TABLE>
F-8
<PAGE> 13
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-9
<PAGE> 14
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-10
<PAGE> 15
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-11
<PAGE> 16
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) 14,943
--------- ---------
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-12
<PAGE> 17
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-13
<PAGE> 18
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-14
<PAGE> 19
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-15
<PAGE> 20
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-16
<PAGE> 21
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-17
<PAGE> 22
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-18
<PAGE> 23
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-19
<PAGE> 24
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-20
<PAGE> 25
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-21
<PAGE> 26
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-22
<PAGE> 27
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)
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
===========
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-23
<PAGE> 28
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-24
<PAGE> 29
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-25
<PAGE> 30
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-26
<PAGE> 31
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-27
<PAGE> 32
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-28
<PAGE> 33
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 4,655
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-29
<PAGE> 34
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-30
<PAGE> 35
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-31
<PAGE> 36
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 89
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-32
<PAGE> 37
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
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 the ADI Acquisition as if it had occurred on May
1, 1996. The Unaudited Pro Forma Combined Balance Sheet as of April 30, 1997
reflects the ADI Acquisition as if it had occurred on April 30, 1997.
The unaudited pro forma combined financial information should be read in
conjunction with the notes thereto and the historical financial statements of
Dailey, including the notes thereto, included in the Company's Annual Report on
Form 10-K for the year ended April 30, 1997 and historical financial statements
of ADI, including the notes thereto, included elsewhere herein.
The pro forma adjustments to give effect to the ADI Acquisition 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
Financial Statements 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 financial information.
The unaudited pro forma combined financial information does not purport to
be indicative of the financial position or results of operations that would
actually have occurred if the ADI Acquisition 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.
F-33
<PAGE> 38
DAILEY PETROLEUM SERVICES CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
APRIL 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF APRIL 30, 1997
---------------------
DAILEY ADI ADJUSTMENTS PRO FORMA
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $15,200 $ (318) $ (900)(1) $ 7,205
(6,777)(1)
Accounts receivable, net........................... 18,606 7,924 26,530
Prepaid expenses................................... 346 -- 346
Deferred income taxes.............................. 597 -- 597
Other current assets............................... 907 628 1,535
------- ------- ------- --------
Total current assets....................... 35,656 8,234 (7,677) 36,213
Revenue-producing tools and inventory, net........... 37,488 22,835 2,000(1) 62,323
Property and equipment, net.......................... 5,622 500 6,122
Deferred income taxes................................ 1,959 -- (1,959)(2) --
Accounts receivable from officer..................... 250 -- 250
Goodwill............................................. -- -- 22,252(1) 22,252
Intangibles and other assets......................... 1,384 2,065 (1,616)(1) 1,833
------- ------- ------- --------
Total assets............................... $82,359 $33,634 $13,000 $128,993
======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 8,324 $ 3,317 $ $ 11,641
Accounts payable to affiliates..................... 442 -- 442
Current debt (revolver)............................ -- -- 4,000(1) 4,000
Income taxes payable............................... 3,241 1,475 4,716
Current portion of long-term debt.................. 1,711 1,509 (2,679)(1) 1,941
1,400(1)
------- ------- ------- --------
Total current liabilities.................. 13,718 6,301 2,721 22,740
------- ------- ------- --------
Long-term debt....................................... 5,155 16,940 (21,396)(1) 40,799
40,100(1)
Deferred income taxes................................ -- 2,781 (813)(2) 1,968
Other non-current liabilities........................ 159 -- 159
Stockholders' equity:
Preferred stock.................................... -- 1,553 (1,553)(1) --
Put warrants....................................... -- 1,150 (1,150)(1) --
Common stock....................................... 93 1 (1)(1) 93
Treasury stock..................................... (234) -- (234)
Paid-in capital.................................... 39,972 4,708 (4,708)(1) 39,972
Retained earnings.................................. 23,496 200 (200)(1) 23,496
------- ------- ------- --------
Total stockholders' equity................. 63,327 7,612 (7,612) 63,327
------- ------- ------- --------
Total liabilities and stockholders'
equity................................... $82,359 $33,634 $13,000 $128,993
======= ======= ======= ========
</TABLE>
F-34
<PAGE> 39
DAILEY PETROLEUM SERVICES CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED APRIL 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
APRIL 30, 1997
--------------------
DAILEY ADI(A) ADJUSTMENTS PRO FORMA
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Rental income.................................. $49,497 $49,497
Sales of products and services................. 16,954 $ 2,599 19,553
Underbalanced drilling revenues................ -- 23,542 23,542
------- ------- ------- -------
Total revenues......................... 66,451 26,141 92,592
COSTS AND EXPENSES:
Cost of rentals................................ 37,655 -- 37,655
Cost of products and services.................. 8,890 1,270 10,160
Cost of underbalanced drilling revenues........ -- 15,023 15,023
Selling, general and administrative............ 11,893 5,249 1,350(B) 18,492
Non-cash compensation.......................... 2,807 -- 2,807
Research and development....................... 850 -- 850
------- ------- ------- -------
62,095 21,542 1,350 84,987
------- ------- ------- -------
Operating income................................. 4,356 4,599 (1,350) 7,605
Interest expense................................. 833 2,459 472(C) 3,764
Interest income.................................. (640) -- (640)
Other (income) expense (net)..................... 169 (236) 439(D) 372
Foreign exchange (gain) loss..................... 19 15 34
------- ------- ------- -------
Income (loss) before income taxes................ 3,975 2,361 (2,261) 4,075
Provision for income taxes....................... 1,511 1,041 (441)(E) 2,111
------- ------- ------- -------
Net income (loss) before extraordinary item...... $ 2,464 $ 1,320 $(1,820) $ 1,964
======= ======= ======= =======
Earnings (loss) per share before extraordinary
item........................................... $ 0.30 $ 0.24
======= =======
</TABLE>
F-35
<PAGE> 40
DAILEY PETROLEUM SERVICES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS -- COMBINED BALANCE SHEET
The pro forma adjustments to the Unaudited Pro Forma Combined Balance Sheet
as of April 30, 1997 are set forth below:
(1) To record the purchase of ADI utilizing interim financing of $45.5 million
under the Credit Facility and to extinguish debt of Dailey and ADI (except
for capitalized equipment leases and other minor amounts).
(2) To record the deferred income taxes associated with the purchase of ADI.
PRO FORMA ADJUSTMENTS -- COMBINED STATEMENT OF OPERATIONS
(A) 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 herein.
(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) and an average life for fixed assets of eight years
($250,000 per year).
(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 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.
F-36
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*2.1 -- 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. Pursuant to
Item 601(b)(2) of Regulation S-K, certain schedules and
similar attachments to the Stock Purchase Agreement have
not been filed with this exhibit. The Schedules contain
various items relating to the representations and
warranties made by the Company and the ADI shareholders
in the Stock Purchase Agreement. The Company agrees to
furnish supplementally any omitted schedule to the
Securities and Exchange Commission upon request.
*2.2 -- 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.
*10.1 -- 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 (the
"Escrow Agent").
*10.2 -- 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.
*10.3 -- 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.
*10.4 -- 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.;
*10.5 -- 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.;
*10.6 -- 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.
23.1 -- Consent of Coopers & Lybrand, L.L.P.
</TABLE>
- ---------------
* Previously filed the Current Report on Form 8-K dated June 20, 1997, and filed
with the Securities and Exchange Commission on July 7, 1997.
41
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Dailey Petroleum Services Corp. on Form S-8 (File No. 333-10747) of our report
dated April 2, 1997, on our audits of the consolidated financial statements 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 report dated July 25, 1995,
on our audits of 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, which reports are included in this
Form 8-K/A.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
August 28, 1997
