<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: JANUARY 28, 1998
DAILEY INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1389 76-0503355
(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 offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (281) 350-3399
DAILEY PETROLEUM SERVICES CORP.
(Former name or former address, if changed since last report)
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EXHIBIT INDEX BEGINS ON PAGE 21.
<PAGE> 2
ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
On January 28, 1998, Dailey International Inc., a Delaware corporation (the
"Company"), acquired the operating assets and liabilities (the "DWS/DAMCO
Acquisition") of Directional Wireline Services, Inc., a Louisiana corporation
("DWS"), DAMCO Services, Inc., a Louisiana corporation ("DSI"), and DAMCO Tong
Services, Inc., a Louisiana corporation ("DTSI" and together with DWS and DSI,
"DWS/DAMCO"), for a total purchase price of $61 million, subject to adjustment
based upon working capital levels on the date of purchase. The purchase price
was determined through arms-length negotiations between the parties.
DWS/DAMCO provides specialized drilling, workover, completion, and
production services to the Gulf of Mexico and Nigerian markets. DWS operates
independently of DSI and DTSI, with DWS providing downhole electric wireline and
tubing conveyed perforating ("TCP") services and DSI and DTSI providing tubular
testing and handling services. Dailey intends to employ substantially all of
DWS/DAMCO's, management and other personnel.
The DWS/DAMCO Acquisition was effected pursuant to an Asset Purchase
Agreement dated effective as of November 30, 1997, by and among the Company,
DWS/DAMCO and the shareholders of each of DWS, DSI and DTSI. The DWS/DAMCO
Acquisition was funded utilizing advances of approximately $7.5 million under
the Company's line of credit with Wells Fargo Bank (Texas), National
Association, as Agent, and existing cash of the Company. The indebtedness under
the Revolving Credit Line is secured by substantially all of the Company's and
its domestic subsidiaries' assets, as well as a pledge of all of the outstanding
capital stock of the Company's material domestic subsidiaries.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
The following financial statements are filed herewith:
AUDITED COMBINED FINANCIAL STATEMENTS OF
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-1
Combined Balance Sheets as of September 30, 1997 and
December 31, 1996......................................... F-2
Combined Statements of Operations for the nine months ended
September 30, 1997 and the twelve months ended December
31, 1996 and 1995......................................... F-3
Combined Statements of Shareholders' Equity for the nine
months ended September 30, 1997 and for the years ended
December 31, 1996 and 1995................................ F-4
Combined Statements of Cash Flows for the nine months ended
September 30, 1997 and the twelve months ended December
31, 1996 and 1995......................................... F-5
Notes to Combined Financial Statements...................... F-6
</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........... P-1
Unaudited Pro Forma Combined Balance Sheet as of October 31,
1997...................................................... P-2
Unaudited Pro Forma Combined Statement of Operations for the
six months ended October 31, 1997......................... P-3
Unaudited Pro Form Combined Statement of Operations for the
twelve months ended April 30, 1997........................ P-4
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ P-5
</TABLE>
2
<PAGE> 3
(c) Exhibits.
<TABLE>
<C> <S>
2.1 -- Asset Purchase Agreement dated November 30, 1997 (the
"Asset Purchase Agreement"), by and among the Company,
DWS/DAMCO and the shareholders of each of DWS, DSI and
DTSI (incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the three-month and
six-month periods ended October 31, 1997). Pursuant to
Item 601(b)(2) of Regulation S-K, certain schedules and
similar attachments to the Asset 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 DWS/DAMCO in the Asset
Purchase Agreement. The Company agrees to furnish
supplementally any omitted schedule to the Securities and
Exchange Commission upon request.
10.1 -- Escrow Agreement dated January 28, 1998, by and among the
Company, DWS, DSI, DTSI, the Shareholder Representatives,
and U.S. Trust Company of Texas, National Association
(the "Escrow Agent").
23.1 -- Consent of Ernst & Young LLP
99.1 -- Press Release dated January 28, 1998
</TABLE>
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 INTERNATIONAL INC.
/s/ DAVID T. TIGHE
------------------------------------
Name: David T. Tighe
Title: Chief Financial Officer
Dated: February 11, 1998
4
<PAGE> 5
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Directional Wireline Services, Inc.,
DAMCO Services, Inc. and DAMCO Tong Services, Inc.
We have audited the accompanying combined balance sheets of Directional
Wireline Services, Inc., DAMCO Services, Inc. and DAMCO Tong Services, Inc.
(collectively, "DWS/DAMCO" -- see Note 1) as of September 30, 1997 and December
31, 1996, and the related combined statements of operations, shareholders'
equity, and cash flows for the nine-month period ended September 30, 1997 and
the years ended December 31, 1996 and 1995. These financial statements are the
responsibility of DWS/DAMCO's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position at September 30, 1997
and December 31, 1996 of DWS/DAMCO, and the combined results of their operations
and their cash flows for the nine-month period ended September 30, 1997 and the
years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
January 16, 1998
except for Note 1 as to which the date is January 28, 1998
F-1
<PAGE> 6
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,679,231 $ 141,318
Accounts receivable, less allowance ($110,134 in 1997 and
$120,383 in 1996)...................................... 6,843,469 8,691,374
Consumable supplies inventories........................... 2,407,074 2,230,302
Prepaid expenses and other assets......................... 572,370 293,164
----------- -----------
Total current assets.............................. 12,502,144 11,356,158
Property, plant and equipment:
Land...................................................... 25,000 25,000
Building and improvements................................. 358,488 358,488
Furniture and fixtures.................................... 63,421 40,696
Revenue producing tools................................... 16,569,370 15,825,158
Vehicles.................................................. 2,614,448 2,489,938
----------- -----------
19,630,727 18,739,280
Less accumulated depreciation............................... 15,301,746 14,622,987
----------- -----------
4,328,981 4,116,293
Deposits and other.......................................... 168,484 116,426
----------- -----------
Total assets...................................... $16,999,609 $15,588,877
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 1,178,114 $ 1,152,930
Current portion of notes payable to affiliated
companies.............................................. 128,963 203,917
Current portion of other notes payable.................... 213,992 183,988
Current portion of capital lease obligations.............. 14,077 --
----------- -----------
Total current liabilities......................... 1,535,146 1,540,835
Noncurrent portion of notes payable to affiliated
companies................................................. 77,028 184,728
Noncurrent portion of other notes payable................... 251,619 174,024
Long-term portion of capital lease obligation............... 64,046 --
Postretirement benefit obligations.......................... 86,369 88,761
Shareholders' equity:
Common stock, no par value:
Authorized shares -- 21,000 issued and outstanding
shares: 4,012 at September 30, 1997 and December 31,
1996.................................................. 498,828 498,828
Retained earnings......................................... 14,506,862 13,121,990
----------- -----------
15,005,690 13,620,818
Less common stock in treasury at cost -- 15 shares at
September 30, 1997 and December 31, 1996.................. 20,289 20,289
----------- -----------
Total shareholders' equity........................ 14,985,401 13,600,529
----------- -----------
Total liabilities and shareholders' equity........ $16,999,609 $15,588,877
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 7
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Service revenue..................................... $22,966,447 $26,284,671 $18,622,314
Costs and operating expenses........................ 8,007,225 9,318,652 9,755,257
Depreciation........................................ 829,061 1,020,672 898,320
General and administrative and indirect operating
expenses.......................................... 6,201,401 8,115,415 5,108,062
Non-cash compensation............................... -- 17,288 2,038,421
Selling and marketing expenses...................... 577,783 639,216 661,320
----------- ----------- -----------
15,615,470 19,111,243 18,461,380
----------- ----------- -----------
7,350,977 7,173,428 160,934
Other income (expense):
Settlement of shareholder litigation.............. -- -- (482,660)
Settlement of royalty agreement................... (234,507) -- --
Interest expense.................................. (51,641) (69,708) (63,610)
Gain (loss) on disposal of assets................. -- 34,633 (44,189)
Interest and other income......................... 320,043 97,601 212,663
----------- ----------- -----------
33,895 62,526 (377,796)
----------- ----------- -----------
Net income (loss)......................... $ 7,384,872 $ 7,235,954 $ (216,862)
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 8
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON TREASURY RETAINED
STOCK STOCK EARNINGS TOTAL
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............... $449,325 $ (3,000) $11,202,898 $11,649,223
Net loss................................. -- -- (216,862) (216,862)
Purchase of treasury stock............... -- (2,023,495) -- (2,023,495)
Issuance of treasury stock............... -- 1,988,918 -- 1,988,918
Issuance of capital stock................ 49,503 -- -- 49,503
-------- ----------- ----------- -----------
Balance at December 31, 1995............... 498,828 (37,577) 10,986,036 11,447,287
Net income............................... -- -- 7,235,954 7,235,954
Distributions to shareholders............ -- -- (5,100,000) (5,100,000)
Issuance of treasury stock............... -- 17,288 -- 17,288
-------- ----------- ----------- -----------
Balance at December 31, 1996............... 498,828 (20,289) 13,121,990 13,600,529
Net income............................... -- -- 7,384,872 7,384,872
Distributions to shareholders............ -- -- (6,000,000) (6,000,000)
-------- ----------- ----------- -----------
Balance at September 30, 1997.............. $498,828 $ (20,289) $14,506,862 $14,985,401
======== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 9
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................... $ 7,384,872 $ 7,235,954 $ (216,862)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 829,061 1,020,672 898,320
Non-cash compensation expense..................... -- 17,288 2,038,421
Provision for doubtful accounts................... 49,471 76,359 56,723
(Gain) loss on disposal of assets................. -- (34,633) 44,189
Changes in operating assets and liabilities:
Consumable supplies inventories................ (176,772) (334,489) (358,887)
Accounts receivable............................ 1,798,434 (4,080,176) (1,256,092)
Prepaid expenses and other assets.............. (279,206) 158,693 (98,073)
Deposits and other assets...................... (52,058) (21,463) (4,895)
Accounts payable and accrued expenses.......... 25,184 277,540 (18,780)
Accrued post-retirement benefit cost........... (2,392) (3,300) (3,070)
----------- ----------- -----------
Net cash provided by operating activities........... 9,576,594 4,312,445 1,080,994
INVESTING ACTIVITIES
Proceeds from disposal of assets.................... 64,929 136,939 36,697
Purchases of plant and equipment.................... (743,119) (1,145,464) (1,063,856)
----------- ----------- -----------
Net cash used in investing activities............... (678,190) (1,008,525) (1,027,159)
FINANCING ACTIVITIES
Purchases of treasury stock......................... -- -- (2,023,495)
Principal payments on notes payable and capital
lease obligations................................. (360,491) (321,372) (334,259)
Distributions to shareholders....................... (6,000,000) (5,100,000) --
----------- ----------- -----------
Net cash provided by (used in) financing
activities........................................ (6,360,491) (5,421,372) (2,357,754)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 2,537,913 (2,117,452) (2,303,919)
Cash and cash equivalents at beginning of year...... 141,318 2,258,770 4,562,689
----------- ----------- -----------
Cash and cash equivalents at end of year............ $ 2,679,231 $ 141,318 $ 2,258,770
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid....................................... $ 51,641 $ 69,708 $ 63,610
=========== =========== ===========
SUPPLEMENTAL NONCASH ACTIVITIES ARISING FROM
INVESTING AND FINANCING ACTIVITIES
Financing of equipment purchases with notes payable
and capital lease obligations..................... $ 363,559 $ 629,104 $ 337,399
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 10
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the accounts of Directional
Wireline Services, Inc. ("DWS"), DAMCO Services, Inc. and DAMCO Tong Services,
Inc., hereinafter collectively referred to as "DWS/DAMCO". All significant
intercompany transactions and balances have been eliminated in the combined
financial statements.
DAMCO Services, Inc. was organized in 1968 and began operations in 1969 as
DAMCO Testers, Inc. In 1980, this company was reorganized and, in 1992, its name
was formally changed to DAMCO Services, Inc. DAMCO Tong Services, Inc. began
operations in 1982. DWS was founded in 1973 and also reorganized in 1980.
DWS/DAMCO are under common ownership control and management.
In November 1997, DWS/DAMCO entered into an agreement with Dailey to sell
the operating assets and liabilities of DWS/DAMCO. On January 28, 1998, the
operating assets and liabilities of DWS/DAMCO were acquired for approximately
$61 million in cash by Dailey, subject to a working capital adjustment.
DWS/DAMCO are leading providers of electric wireline and tubing conveyed
perforating services and tubular testing and handling services to the offshore
and onshore oil and gas industry in the U.S. Gulf of Mexico region and Nigeria.
The electric wireline services are utilized in both the exploration and
production phases of an oil and gas well and include pipe recovery, cased hole
logging, electric line perforating services and other cased hole services such
as installation of bridge plugs, packers, retainers, pressure control equipment
and thru-tubing bridge plugs. The tubular testing services consist of
hydrostatic and gas pressure testing services that detect leaks and flaws in
tubulars as they are run into the wellbore. The tubular handling services
include assembling production pipe and tubing, dual completion strings, premium
threaded connections and ultra-high torque tubulars.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
DWS/DAMCO consider all investments with a maturity of three months or less
when purchased to be cash and cash equivalents.
Consumable Supplies Inventories
Consumable supplies inventories, consisting primarily of engineering
supplies and explosives, are valued using the first-in, first-out method and are
carried at the lower of cost or market.
Revenue-Producing Tools and Property and Equipment
Revenue-producing tools and property and equipment are stated at cost.
Depreciation is calculated on the straight-line method over the estimated useful
lives of less than 39 years for buildings and improvements, three to five years
for furniture and fixtures, seven years for revenue-producing tools and five
years for vehicles. Maintenance and repairs are charged to expense as incurred.
Major repairs and improvements are capitalized and depreciated. The cost and
accumulated depreciation of property and equipment retired or otherwise disposed
of are removed from the related accounts. Tools manufactured and assembled are
transferred to
F-6
<PAGE> 11
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
revenue-producing tools as completed at the total cost of components,
subassemblies, expendable parts, direct labor costs of each tool.
Impairment of Long-Lived Assets
The carrying value of long-lived assets, principally revenue-producing
tools and property and equipment, is reviewed for potential impairment when
events or changes indicate that the carrying amount of such assets may not be
recoverable. The determination of recoverability is made based upon the
estimated undiscounted future net cash flows of the related asset.
Revenue Recognition
Revenue is recognized as services are performed or equipment is provided in
accordance with contractual provisions.
Foreign Currency Translation
The U.S. dollar is the functional currency for all operations. Accordingly,
foreign currency translation gains and losses are recognized in the combined
statement of operations. Such gains and losses were not significant for any of
the periods presented. DWS/DAMCO do not enter into any transactions with
derivative instruments.
Income Taxes
DWS/DAMCO have elected S corporation status for federal and state income
tax purposes; accordingly, income taxes are the responsibility of the
shareholders of DWS/DAMCO.
3. NOTES PAYABLE
Notes Payable to Affiliated Companies
Notes payable to affiliated companies consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Various automotive notes payable maturing through November
1999, interest payable monthly at fixed rates ranging from
11.80% to 13.95%.......................................... $205,991 $313,645
Other....................................................... -- 75,000
-------- --------
205,991 388,645
Less current maturities..................................... 128,963 203,917
-------- --------
$ 77,028 $184,728
======== ========
</TABLE>
Automotive notes payable are secured by the related vehicles. The other
note payable to an affiliated company was paid in January 1997.
F-7
<PAGE> 12
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE -- (CONTINUED)
Other Notes Payable
Other notes payable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Various automotive notes payable maturing through October
2000, interest payable monthly at fixed rates ranging from
5.9% to 12.95%............................................ $439,798 $343,235
Other equipment notes maturing through February 1999 from
6.22% to 10%.............................................. 25,813 14,777
-------- --------
465,611 358,012
Less current maturities..................................... 213,992 183,988
-------- --------
$251,619 $174,024
======== ========
</TABLE>
Automotive notes payable and other equipment notes are secured by the
related vehicle or equipment.
The scheduled principal payments of notes payable to affiliated companies
and other notes payable for each of the next three years as of September 30 are
as follows:
<TABLE>
<S> <C>
1998...................................................... $342,955
1999...................................................... 253,613
2000...................................................... 75,034
--------
$671,602
========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
DWS/DAMCO are party to legal proceedings arising in the ordinary course of
business. It is the opinion of management that the outcome of these matters will
not have a material adverse effect on DWS/DAMCO's financial position or results
of operations.
DWS/DAMCO lease certain facilities and office space under noncancelable
operating leases from third parties and from an affiliated company which is
owned by the majority shareholder.
Future minimum payments under all noncancelable operating leases (including
those with the affiliated company) with initial or remaining terms in excess of
one year as of September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998...................................................... $157,500
1999...................................................... 157,500
2000...................................................... 157,500
2001...................................................... 36,300
2002...................................................... 4,800
--------
$513,600
========
</TABLE>
General and administrative and indirect operating expenses included rental
expense of $189,000, $262,000 and $217,000 in 1997, 1996 and 1995, respectively,
including $76,950, $92,000 and $69,000, respectively, of rent expense recognized
under lease agreements with an affiliated company owned by the majority
shareholder.
F-8
<PAGE> 13
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
In 1997, DWS/DAMCO entered into various capital lease arrangements to
acquire equipment. At September 30, 1997, equipment under capital lease, at
cost, was $81,556. Future minimum lease payments for capital leases at September
30, 1997 were as follows:
<TABLE>
<S> <C>
1998........................................................ $20,124
1999........................................................ 20,124
2000........................................................ 20,124
2001........................................................ 20,124
2002........................................................ 14,641
-------
Total minimum lease payments................................ 95,137
Less amount representing interest........................... 17,014
-------
Present value of net minimum lease payments
(including current portion of $14,077).................... $78,123
=======
</TABLE>
5. SETTLEMENT OF SHAREHOLDER LITIGATION
Effective January 1, 1995, DWS/DAMCO settled litigation with the spouse of
a deceased shareholder by making a cash payment of $482,660 and repurchasing the
deceased shareholder's stock for an additional $1,954,340. Also in 1995,
unrelated to the shareholder litigation, DWS/DAMCO repurchased additional
outstanding shares for $69,155. The treasury stock resulting from these
transactions, together with previously unissued stock, was thereafter awarded as
stock bonuses, which were recorded as $2,038,421 of non-cash compensation
expense in 1995.
6. RELATED PARTY TRANSACTIONS
Management fees for certain accounting and administrative services are paid
to an affiliated company owned by the majority shareholder. DWS/DAMCO paid
management fees totaling $122,389 for the nine-month period ended September 30,
1997, and $150,000 for each of the fiscal years ended December 31, 1996 and
1995, which management believes reasonably approximates the value of the related
services rendered.
DWS/DAMCO purchased vehicles from an affiliated company owned by the
majority shareholder. Purchases totaled $334,205 for the nine-month period ended
September 30, 1997 and $368,948 and $381,155 for the fiscal years ended December
31, 1996 and 1995, respectively. In addition, DWS/DAMCO are parties to lease
agreements with an affiliated company as previously described.
In 1991, DWS was assigned all rights, title, and interest in a patent
developed by a shareholder. In exchange for the assignment of the patent, DWS
was required to pay to a company under common ownership of DWS 35% of the
revenues attributable to the actual use of the patent. For the fiscal years
ended December 31, 1996 and 1995, DWS recorded royalty fees totaling $101,955
and $155,780, respectively. In January 1997, DWS paid $350,000, including
$115,437 of accrued royalty fees at December 31, 1996, to settle the royalty
agreement.
7. EMPLOYEE BENEFITS
Profit Sharing Plan
Substantially all employees with one year of service with DWS/DAMCO and who
have worked at least 1,000 hours during the year are eligible to participate in
DWS/DAMCO's defined contribution profit sharing plans. Participants may
contribute up to 5% of their annual compensation for which DWS/DAMCO match
F-9
<PAGE> 14
DIRECTIONAL WIRELINE SERVICES, INC., DAMCO SERVICES, INC.
AND DAMCO TONG SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. EMPLOYEE BENEFITS -- (CONTINUED)
the contribution 100%. Benefit costs recognized as expense under these plans
were $225,404 for the nine-month period ended September 30, 1997, and $248,706
and $197,480 for the fiscal years ended December 31, 1996 and 1995,
respectively.
Postretirement Health Care Benefits
DSI offers postretirement health care benefits to two retired employees and
their spouses. This plan does not cover any active personnel or other retirees.
At September 30, 1997 and December 31, 1996, the accrued postretirement benefit
costs included accumulated postretirement benefit obligations for retirees of
$86,369 and $88,761, respectively. For the nine months ending September 30, 1997
and fiscal years ending December 31, 1996 and 1995, net periodic postretirement
benefit costs included interest costs of $4,776, $6,584, and $6,815,
respectively.
The postretirement health care benefits consist solely of the payment of
supplemental medical insurance. For measurement purposes, contractual payments
for these health care benefits were used to determine net periodic
postretirement benefit costs.
8. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS
DWS/DAMCO are subject to credit risk and other risks inherent in
international operations. Substantially all of DWS/DAMCO accounts receivable are
due from oil and gas exploration companies and drilling contractors located
primarily in south Texas and the Gulf of Mexico. DWS/DAMCO perform periodic
credit evaluations of their customers' financial condition and generally do not
require collateral.
The following methods and assumptions were used by DWS/DAMCO in estimating
their fair value disclosures for financial instruments.
Cash and Cash Equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Notes Payable to Affiliated Companies and Other Notes Payable: The
carrying amount of the Combined Entities' borrowings under these notes
approximates fair value as all note terms are within 36 months.
F-10
<PAGE> 15
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The Company's acquisition of Air Drilling International, Inc. ("ADI") was
consummated on June 20, 1997 (the "ADI Acquisition") and the DWS/DAMCO
Acquisition was consummated on January 28, 1998. Accordingly, the Unaudited Pro
Forma Combined Statement of Operations for the six months ended October 31, 1997
combines the unaudited operating results for Dailey for the six months ended
October 31, 1997, the unaudited operating results for ADI for the period
beginning on May 1, 1997 and ending on June 20, 1997 and the unaudited operating
results for DWS/DAMCO for the six months ended September 30, 1997. The Unaudited
Pro Forma Combined Statement of Operations for the twelve months ended April 30,
1997 combines the audited operating results of Dailey for the twelve months
ended April 30, 1997, the unaudited operating results of ADI for the twelve
months ended April 30, 1997 and the unaudited combined operating results of
DWS/DAMCO for the twelve months ended March 31, 1997. The Unaudited Pro Forma
Combined Balance Sheet as of October 31, 1997 combines the unaudited balance
sheet of Dailey as of October 31, 1997 and the audited combined balance sheet of
DWS/DAMCO as of September 30, 1997.
The Unaudited Pro Forma Combined Statements of Operations should be read in
conjunction with the notes thereto and the historical financial statements of
DWS/DAMCO, including the notes thereto, included elsewhere herein; the
historical financial statements of ADI filed with the Company's current report
on Form 8-K dated June 20, 1997, as amended, and Dailey's historical financial
statements filed with its Annual Report on Form 10-K and its Quarterly Reports
on Form 10-Q.
The pro forma adjustments to give effect to the various events described
above are based upon currently available information and upon certain
assumptions that management believes are reasonable. The ADI Acquisition and the
DWS/DAMCO Acquisition were accounted for by the Company under the purchase
method of accounting, and the assets and liabilities of ADI and DWS/DAMCO have
been recorded at their estimated fair market values at the date of their
respective acquisition. The adjustments included in the Unaudited Pro Forma
Combined Statements of Operations reflect the Company's preliminary
determination of these adjustments based upon available information. There can
be no assurance that the actual adjustments will not vary significantly from the
estimated adjustments reflected in the Unaudited Pro Forma Combined Statements
of Operations.
The unaudited pro forma combined financial information does not purport to
be indicative of the financial position or results of operations that would
actually have occurred if the transactions described had occurred as presented
in such statements or that may be obtained in the future. In addition, future
results may vary significantly from the results reflected in such statements due
to general economic conditions, oil and gas commodity prices, the demand and
prices for contract drilling services and rental tools, the Company's ability to
successfully integrate the operations of ADI and DWS/DAMCO with its current
business, the Company's debt level, and several other factors, many of which are
beyond the Company's control.
P-1
<PAGE> 16
DAILEY INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
OCTOBER 31, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF AS OF
OCTOBER 31, 1997 SEPTEMBER 30, 1997
---------------- ------------------
DAILEY DWS/DAMCO(A) ADJUSTMENTS PRO FORMA
---------------- ------------------ ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 59,611 $ 2,679 $(62,290)(B2,C) $ --
Accounts receivable, net........ 36,877 6,844 43,721
Consumable inventories.......... -- 2,407 2,407
Other current assets............ 3,455 572 4,027
-------- ------- -------- --------
Total current assets.... 99,943 12,502 (62,290) 50,155
Revenue-producing tools and
inventory, net.................. 69,961 3,094 17,693(B3) 90,748
Property and equipment, net....... 6,417 1,236 7,653
Goodwill.......................... 21,736 -- 32,000(B4) 53,736
Intangibles and other assets...... 6,025 168 6,193
-------- ------- -------- --------
Total assets............ $204,082 $17,000 $(12,597) $208,485
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.................. $ 19,121 $ 1,178 $ 20,299
Accounts payable to
affiliates................... 697 -- 697
Income taxes payable............ 3,067 -- 3,067
Current portion of long-term
debt......................... 76 357 433
-------- ------- -------- --------
Total current
liabilities........... 22,961 1,535 24,496
-------- ------- -------- --------
Long-term debt.................... 114,217 393 $ 2,389(C) 116,999
Other non-current liabilities..... 1,829 86 -- 1,915
Stockholders' equity:
Common stock and paid-in
capital...................... 40,261 479 (479)(B1) 40,261
Retained earnings............... 24,814 14,507 (14,507)(B1) 24,814
-------- ------- -------- --------
Total stockholders'
equity................ 65,075 14,986 (14,986) 65,075
-------- ------- -------- --------
Total liabilities and
stockholders'
equity................ $204,082 $17,000 $(12,597) $208,485
======== ======= ======== ========
</TABLE>
See accompanying notes.
P-2
<PAGE> 17
DAILEY INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD
BEGINNING
SIX MONTHS MAY 1, 1997 SIX MONTHS
ENDED AND ENDING ENDED
OCTOBER 31, 1997 JUNE 20, 1997 SEPTEMBER 30, 1997
---------------- ------------- ------------------
DAILEY ADI(D) DWS/DAMCO(A) ADJUSTMENTS PRO FORMA
---------------- ------------- ------------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income............... $31,262 $ -- $ -- $31,262
Sales of products and
services.................. 11,427 227 15,606 27,260
Underbalanced drilling
revenues.................. 11,904 3,988 -- 15,892
-------- ------ -------- ------- -------
Total revenues....... 54,593 4,215 15,606 74,414
COSTS AND EXPENSES:
Cost of rentals............. 21,819 -- -- 21,819
Cost of products and
services.................. 6,901 168 5,990 $ 1,264(E) 14,323
Cost of underbalanced
drilling.................. 7,536 2,105 -- 35(E) 9,676
Selling, general and
administrative............ 10,224 1,277 4,255 796(E) 16,552
Reorganization costs........ 2,453 -- -- 2,453
Non-cash compensation....... 539 -- -- 539
Research and development.... 162 -- -- 162
-------- ------ -------- ------- -------
49,634 3,550 10,245 2,095 65,524
-------- ------ -------- ------- -------
Operating income.............. 4,959 665 5,361 (2,095) 8,890
Interest expense.............. 3,225 15 51 2,544(F) 5,835
Interest income............... (814) -- -- (814)
Other (income) expense
(net)....................... 195 23 (288) (70)
-------- ------ -------- ------- -------
Income before income taxes.... 2,353 627 5,598 (4,639) 3,939
Income tax provision.......... 1,035 41 -- (140)(G) 936
-------- ------ -------- ------- -------
Net income before
extraordinary item.......... $ 1,318 $ 586 $ 5,598 $(4,499) $ 3,003
======== ====== ======== ======= =======
Earnings per share before
extraordinary item.......... $ 0.14 $ 0.32
======== =======
</TABLE>
See accompanying notes.
P-3
<PAGE> 18
DAILEY INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED APRIL 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED MARCH 31,
APRIL 30, 1997 1997
----------------- ---------------
DAILEY ADI(D) DWS/DAMCO(A) ADJUSTMENTS PRO FORMA
------- ------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income............................. $49,497 $ -- $ -- $49,497
Sales of products and
services................................ 16,954 2,599 27,530 47,083
Underbalanced drilling revenues........... -- 23,542 -- 23,542
------- ------- ------- -------- -------
Total revenues..................... 66,451 26,141 27,530 120,122
COSTS AND EXPENSES:
Cost of rentals........................... 37,655 -- -- 37,655
Cost of products and
services................................ 8,890 1,270 10,902 $ 2,528(E) 23,590
Cost of underbalanced drilling............ -- 15,023 -- 250(E) 15,273
Selling, general and administrative....... 11,893 5,249 9,044 2,380(E) 28,566
Non-cash compensation..................... 2,807 -- -- 2,807
Research and development.................. 850 -- -- 850
------- ------- ------- -------- -------
62,095 21,542 19,946 5,158 108,741
------- ------- ------- -------- -------
Operating income............................ 4,356 4,599 7,584 (5,158) 11,381
Interest expense............................ 833 2,459 59 10,569(F) 13,920
Interest income............................. (640) -- (118) (758)
Other (income) expense
(net)..................................... 188 (221) 237 439(H) 643
------- ------- ------- -------- -------
Income (loss) before income taxes........... 3,975 2,361 7,406 (16,166) (2,424)
Income tax provision........................ 1,511 1,041 -- (84)(G) 2,468
------- ------- ------- -------- -------
Net income (loss) before extraordinary
item...................................... $ 2,464 $ 1,320 $ 7,406 $(16,082) $(4,892)
======= ======= ======= ======== =======
Earnings (loss) per share before
extraordinary item........................ $ 0.30 $ (0.60)
======= =======
</TABLE>
See accompanying notes.
P-4
<PAGE> 19
DAILEY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS
(A) The unaudited combined statements of operations of DWS/DAMCO for the six
months ended September 30, 1997 and for the twelve months ended March 31,
1997 were derived from the unaudited combined statements of operations of
DWS/DAMCO for the three month periods ended March 31, 1997 and 1996 and the
audited combined statements of operations of DWS/DAMCO for the nine months
ended September 30, 1997 and the year ended December 31, 1996. The audited
combined statements of operations of DWS/DAMCO for the nine months ended
September 30, 1997 and the year ended December 31, 1996 and the audited
combined balance sheet as of September 30, 1997 are included elsewhere in
this Current Report on Form 8-K. Certain reclassifications have been made
to conform the financial statements of DWS/DAMCO to the pro forma
presentation. Such reclassifications have no effect on total stockholders'
equity or net income.
(B) To reflect the purchase of the operating assets and liabilities of
DWS/DAMCO for total consideration of $61 million (subject to working
capital adjustment) plus approximately $1 million in transaction costs. The
acquired assets exclude cash and certain non-operating equipment. For
purposes of the unaudited pro forma combined balance sheet and statement of
operations, the purchase price has been allocated as follows (in
thousands):
<TABLE>
<S> <C>
(1) Historical net book value of DWS/DAMCO.................. $14,986
(2) Adjustment for cash and cash equivalents not acquired... (2,679)
(3) Fair value adjustment of revenue producing tools and
inventory............................................... 17,693
(4) Excess of purchase price over the sum of fair value of
net assets acquired..................................... 32,000
-------
$62,000
=======
</TABLE>
(C) For purposes of the unaudited pro forma combined balance sheet, the
proceeds for the DWS/DAMCO Acquisition were assumed to have been provided
with available cash and, to the extent necessary, additional borrowings
under the Company's credit facility.
(D) The unaudited statement of operations of ADI for the period beginning May
1, 1997 through June 20, 1997 was derived from the unaudited financial
statements of ADI for such period. The unaudited statement of operations of
ADI for the twelve months ended April 30, 1997 was derived from the audited
statement of operations of ADI for the year ended December 31, 1996 and the
unaudited statements of operations of ADI for the four month periods ending
April 30, 1997 and 1996. Certain reclassifications have been made to
conform the financial statements to the pro forma presentation. Such
reclassifications have no effect on total stockholders' equity or net
income.
(E) To record additional depreciation and amortization expense associated with
the purchase price adjustment for DWS/DAMCO assuming a 25-year life for
goodwill ($1.3 million per year, $640,000 for six months), an average life
for fixed assets of seven years ($2.5 million per year, $1.3 million for
six months) and to record additional depreciation and amortization expense
associated with the purchase price adjustment for ADI through June 20, 1997
assuming a 20-year life for goodwill ($1.1 million per year, $156,000 for
the period from May 1, 1997 through June 20, 1997) and an average life for
fixed assets of eight years ($250,000 per year, $35,000 for the period from
May 1, 1997 through June 20, 1997).
P-5
<PAGE> 20
(F) To record additional interest expense on (i) the ADI Acquisition for the
period from May 1, 1996 through the date of such acquisition, (ii) the
DWS/DAMCO Acquisition for the period from May 1, 1996 through August 19,
1997, the date of issuance of the Company's 9 3/4% Senior Notes due 2007
(the "Notes") and (iii) incremental borrowings of $7.5 million from August
20, 1997 to October 31, 1997 beyond the amount of the Notes, assuming a
fixed rate of 9 3/4%. A 1/8% increase in the assumed interest rate would
have increased annual pro forma interest expense by $136,000 for the twelve
months ended April 30, 1997 and $33,000 for the six-month period ended
October 31, 1997.
(G) To adjust consolidated income tax expense for the impact of the pro forma
adjustments and to reflect federal and state income tax expense for
DWS/DAMCO, which historically did not record such expense (having elected S
Corporation status). Because the pro forma adjustments result in Dailey
having net operating losses, and there is no assurance that these net
operating losses will be benefited for tax purposes before they expire,
related income tax benefits were not recognized in the pro forma
adjustments.
(H) To remove the gain on the sale of stock not assumed in the ADI Acquisition.
P-6
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Asset Purchase Agreement dated November 30, 1997 (the
"Asset Purchase Agreement"), by and among the Company,
DWS/DAMCO and the shareholders of each of DWS, DSI and
DTSI (incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the three-month and
six-month periods ended October 31, 1997). Pursuant to
Item 601(b)(2) of Regulation S-K, certain schedules and
similar attachments to the Asset 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 DWS/DAMCO in the Asset
Purchase Agreement. The Company agrees to furnish
supplementally any omitted schedule to the Securities and
Exchange Commission upon request.
10.1 -- Escrow Agreement dated January 28, 1998, by and among the
Company, DWS, DSI, DTSI, the Shareholder Representatives,
and U.S. Trust Company of Texas, National Association
(the "Escrow Agent").
23.1 -- Consent of Ernst & Young LLP
99.1 -- Press Release dated January 28, 1998
</TABLE>
<PAGE> 1
EXHIBIT 10.1
ESCROW AGREEMENT
This Escrow Agreement, dated as of January __, 1998, is among Dailey
International Inc., a Delaware corporation ("Buyer"), Directional Wireline
Services, Inc., a Louisiana corporation ("DWS"), DAMCO Services, Inc., a
Louisiana corporation ("DSI"), DAMCO Tong Services, Inc., a Louisiana
corporation ("DTSI", and collectively with DWS and DSI, the "Companies"), Henry
R. J. Cournoyer and Francis I. Bourque, Jr. in their capacity as
representatives of the shareholders of the Companies (the "Shareholder
Representatives" and each a "Shareholder Representative"), the shareholders
listed on the signature pages hereto (the "Shareholders") and U.S. Trust
Company of Texas, N.A. (the "Escrow Agent");
W I T N E S S E T H :
WHEREAS, Buyer, the Companies and the shareholders of the Companies
have entered into an Asset Purchase Agreement dated effective as of November
30, 1997 (the "Purchase Agreement"), which provides, among other things, for
the purchase (the "Purchase") of substantially all of the assets of the
Companies by Buyer; and
WHEREAS, the parties hereto desire, pursuant to Section 1.3 of the
Purchase Agreement, to set aside a portion of the consideration to be paid to
the Companies in connection with the Purchase, subject to the terms and
conditions set forth herein; and
WHEREAS, the parties hereto have agreed upon and wish to set forth
herein the terms and conditions relating to the escrow of the portion of the
consideration for the Purchase to be so delivered to and held by the Escrow
Agent; and
WHEREAS, pursuant to Section 9.7 of the Purchase Agreement, the
Shareholder Representatives have been appointed to act as the representatives
and attorneys-in-fact for the shareholders of the Companies with respect to the
Escrow Fund (as hereinafter defined);
NOW, THEREFORE, in consideration of the premises and of other good and
valuable consideration, the parties hereto hereby agree as follows:
1. Definitions. Except as otherwise defined herein, capitalized
terms used in this Escrow Agreement will have the meanings set forth in the
Purchase Agreement.
2. Appointment of Escrow Agent. U.S. Trust Company of Texas,
N.A. is hereby appointed as Escrow Agent for the purposes set forth herein and
the Escrow Agent hereby accepts such appointment on the terms herein provided.
3. Deposit of Escrow Fund for Claims and Classification of Funds.
For the purposes herein set forth, Buyer, together with the delivery of this
Escrow Agreement, deposits with the Escrow Agent the sum of $6,000,000 in cash.
The sum so deposited with the Escrow Agent, together with all income earned
thereon pursuant to Section 8 hereof, less payments made for costs and expenses
(including taxes) in connection with this Escrow Agreement pursuant to Sections
8 and 11 hereof, is herein called the
<PAGE> 2
"Escrow Fund". The Escrow Fund will be held, invested, reinvested and
disbursed by the Escrow Agent in accordance with the terms hereof.
4. Satisfaction of Claims with Escrow Fund. The Escrow Fund will
be retained by the Escrow Agent and shall be distributed at any time, or from
time to time, for the purpose of paying Claims as follows:
a. If Buyer has made a Claim with respect to which funds
from the Escrow Fund may be applied pursuant to the Purchase
Agreement, Buyer may advise the Shareholder Representatives in writing
of such Claim (an "Asserted Claim"), describing such Asserted Claim
(to the extent known) in reasonable detail and shall transmit a copy
of such notice to the Escrow Agent, and in the event such Claim is a
Third Party Claim, such notice shall comply with the provisions of
Section 9.5(a) of the Purchase Agreement relating to Third Party
Claims, provided however, that failure to provide such notice within
an applicable time period shall not affect the Buyer's right to
payment hereunder except to the extent the Companies have been
materially prejudiced as a result of such failure to provide timely
notice;
b. The amount of any Asserted Claim (the "Asserted
Amount") and the amount of Escrow Funds, if any, requested to be
delivered to Buyer pursuant to Section 4.d hereof shall be
simultaneously certified in the notice to be provided in Section 4.a
above to the Escrow Agent and the Shareholder Representatives in
writing by Buyer;
c. In connection with any Asserted Claim, Buyer will
make available to the Shareholder Representatives, counsel thereto and
accountants therefor such records pertaining to the Asserted Claim (to
the extent such Asserted Claim is a Third Party Claim) in accordance
with Section 9.5(a) of the Purchase Agreement, provided however, that
failure to provide such records within an applicable time period shall
not affect the Buyer's right to payment hereunder except to the extent
the Companies have been materially prejudiced as a result of such
failure to timely provide such records;
d. On the 31st day following receipt of the
certification pursuant to the provisions of Section 4.b hereof (or
pursuant to Section 6 hereof as to the certification of a final
Asserted Claim on account of a Third Party Claim) of the Asserted
Amount of any Asserted Claim, subject to Sections 4.e and 4.f hereof,
such Asserted Amount shall be distributed to Buyer in respect of such
Asserted Claim pursuant to Section 4(e) hereof and the other terms of
this Escrow Agreement; provided, however, that, if within 30 days
following receipt of such certification, the Shareholder
Representatives deliver a statement of specific objections thereto to
Buyer and the Escrow Agent (which written notification shall be
received by the Escrow Agent within such 30-day period following the
receipt by them of the above-referenced certification by Buyer) that
they intend to challenge
-2-
<PAGE> 3
Buyer's certification of its Asserted Claim or a specified part
thereof (the "Contested Amount"), then the Contested Amount shall,
notwithstanding the provisions of this Section 4, remain in escrow
with the Escrow Agent until a final resolution (by a written agreement
of Buyer and the Shareholder Representatives or pursuant to the
arbitration provisions hereof, or to the extent applicable, the
determination of a court of competent jurisdiction to the extent the
Claim arises from a Third Party Claim subject to such court's
jurisdiction) of the dispute as to such matters (the amount, if any,
so resolved is herein called the "Resolved Amount");
e. Upon the 31st day following such receipt of a
certificate in accordance with Section 4.b hereof (or upon resolution
of a Contested Amount as provided herein if such a certification shall
be challenged), subject to Section 4.f hereof, the Escrow Agent shall
pay to Buyer the lesser of (i) the Asserted Amount less the Contested
Amount with respect to that Asserted Claim, if such certification
shall have been challenged and such challenge shall not have been
resolved, or the Resolved Amount, if any, if such certification is
challenged and resolved and (ii) the amount then held in the Escrow
Fund.
f. At any time following the notice of challenge to an
Asserted Claim (other than with respect to Sections 5.5 of the
Purchase Agreement) as provided for by Section 4.d hereof, either
Buyer or the Shareholder Representatives may refer the matter to final
and binding arbitration in accordance with the applicable provisions
of the Purchase Agreement. The arbitration shall be conducted before
a single arbitrator in Houston, Texas to be appointed (in the absence
of agreement by the parties as to such appointment) by the American
Arbitration Association ("AAA") and shall be conducted in accordance
with the Commercial Arbitration Rules of the AAA. Such arbitrator
shall, upon completion of such arbitration proceedings, certify the
results of the arbitration to the Escrow Agent, including his decision
with respect to the existence of a Claim and the Resolved Amount
thereof, if any, and the Escrow Agent shall be entitled to rely and
act accordingly with respect to payments to Buyer hereunder, if any,
on the basis of the decision of such arbitrator as so certified. This
arbitration provision is expressly made pursuant to and shall be
governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 - 14 (the
"Arbitration Act"). The parties hereto agree that pursuant to Section
9 of the Arbitration Act that a judgment of the United States District
Court for the Southern District of Texas shall be entered upon the
award made pursuant to the arbitration. The fees, costs and expenses
of the arbitrator shall be borne by the parties in inverse proportion
as they may prevail on the matters resolved by the arbitrator, which
proportionate allocation shall be determined by the arbitrator at the
time the determination is rendered by the arbitrator on the merits of
the matters submitted. All fees, costs and expenses of the arbitrator
borne on behalf of the shareholders of the Companies or any of them,
as
-3-
<PAGE> 4
determined by the arbitrator, shall be subject to payment from the
Escrow Fund if not promptly paid by the Companies or their affected
shareholders. If the arbitrator decides in Buyer's favor with respect
to any Asserted Claim, Buyer's reasonable legal fees and related
expenses in connection with such arbitration (as determined by the
arbitrator) shall be included in the Resolved Amount.
5. Procedures for Application of Escrow Funds.
a. On April 30, 1998 (the "Interim Date"), the Escrow
Agent shall distribute to the Companies, to be allocated to each of the
Companies as directed by the Shareholder Representatives, an aggregate of
$3,000,000 less (i) all amounts paid to Buyer as of such date with respect to
Asserted Claims (excluding amounts paid pursuant to Section 9.2(d) of the
Purchase Agreement) and (ii) the amount of all Contested Claims or unpaid
Asserted Claims then existing (excluding any Contested Claims or unpaid
Asserted Claims arising under Section 9.2(d)).
b. On April 30, 1999 (the "Final Expiration Date"), if,
in Buyer's sole determination, there no longer exists any potential liability
or other cost or expense to a Buyer Indemnitee arising from or relating to the
matters addressed in Section 9.2(d) of the Purchase Agreement, the remaining
funds in the Escrow Fund (less the amount of Asserted Claims then unpaid or
unresolved) shall be distributed to the Companies as provided in Section 7
hereof. However, if, on April 30, 1999, in Buyer's sole determination, there
exists any potential liability or other cost or expense to a Buyer Indemnitee
arising from or relating to the matters addressed in Section 9.2(d) of the
Purchase Agreement, the Companies shall be entitled to receive a distribution
of an amount equal to the remaining funds in the Escrow Fund (less the amount
of any Asserted claims then unpaid or unresolved) less $1,000,000 (net of
amounts theretofore paid pursuant to Section 9.2(d) of the Purchase Agreement).
Any amounts remaining in the Escrow Fund following April 30, 1999 shall be
distributed to the Companies on the earlier to occur of (i) Buyer determining
in its sole discretion that there exists no potential liability or other cost
or expense to a Buyer Indemnitee arising from or relating to the matters
addressed in Section 9.2(d) of the Purchase Agreement for which such Buyer
Indemnitee has not been indemnified pursuant to the Purchase Agreement or (ii)
any claims for matters addressed in Section 9.2(d) of the Purchase Agreement
shall be time-barred by the applicable statute of limitations. Any amount so
distributed on the Final Expiration Date to the Companies shall be reduced by
the aggregate amount of all fees and expenses incurred or reasonably expected
to be incurred pursuant to Section 4.f (which fees and expenses shall be paid
from the Escrow Fund upon the direction of the Shareholder Representatives and
Buyer) and that have not been paid.
c. As to any amounts held under the Escrow Agreement
after the Final Expiration Date on account of the existence of unresolved or
unpaid Asserted Claims on the Final Expiration Date, such amounts shall be
distributed from time to time to Buyer or to the Companies in accordance with
Section 7 hereof, as such Asserted Claims are resolved; provided, however, that
the amount distributable to the Companies shall be reduced by all fees and
expenses incurred or reasonably expected
-4-
<PAGE> 5
to be incurred by the Shareholder Representatives that have not been paid
pursuant to Section 4.f (which fees and expenses shall be paid from the Escrow
Fund only following the resolution and payment of all Claims and upon the
direction of the Shareholder Representatives and Buyer).
6. Special procedures with respect to claims made against the
Buyer as to which liability, and amount thereof is uncertain. If a Third Party
Claim is made against the Buyer that Buyer believes constitutes, or may (upon
final resolution) constitute, a Claim hereunder, then Buyer shall certify such
matter to the Escrow Agent and the Shareholder Representatives as an Asserted
Claim in accordance with Section 4.b hereof even though such claim against the
Buyer or the Company is at the time uncertain or unresolved and even though the
exact amount of any loss, liability, cost or expense on account thereof may be
unknown at the time of such certification and, therefore, even though it is
unknown whether such matter may (upon final resolution) constitute a Claim
hereunder. In making such certification, Buyer may make a good faith estimate
of the maximum amount of exposure with respect thereto and such estimated
amount shall constitute a Contested Amount for purposes of Section 4.d hereof.
No portion of the Escrow Fund shall be available to any Indemnifying Party to
defray any of the costs and expenses incurred by such Indemnifying Party to
participate in the defense, negotiation and/or settlement of a Third Party
Claim as contemplated by Section 9.5(c) of the Purchase Agreement.
The provisions hereof with respect to arbitration shall,
notwithstanding any other provision hereof, be held in abeyance until such time
as Buyer certifies to the Shareholder Representatives and the Escrow Agent that
the uncertainties as to such Third Party Claim have been resolved or developed
in such manner that Buyer believes a Claim exists on account thereof and thus
that it is certifying a final Asserted Claim with respect thereto. The amount
of such final Asserted Claim shall thereafter constitute the Contested Amount
for purposes of Section 4.d hereof. If there is a disagreement between the
parties with respect thereto, then the procedure for arbitration provided for
by Section 4 hereof shall be followed.
7. Matters Pertaining to Distributions to the Companies. Amounts
to be distributed to the Companies shall be allocated among the Companies in
accordance with written instructions of the Shareholder Representatives. The
right of the Companies to receive any amounts under this Section 7 may not be
transferred or otherwise assigned by any of the Companies to any party other
than their respective shareholders. From time to time the Escrow Agent shall
provide Buyer and the Shareholder Representatives with any changes of address
or similar changes that it may receive with respect to the Companies. In
connection with any distribution to be made to the Companies, Buyer and the
Shareholder Representatives shall provide a schedule to the Escrow Agent
setting forth the names, addresses and the tax identification numbers of the
Companies and the amounts to which each of the Companies is entitled under this
Section 7. The Escrow Agent shall distribute such amounts in accordance with
such instructions as promptly as practicable after its receipt of such
instructions. After 120 days following the furnishing of such instructions,
the Shareholder Representatives shall be entitled to require the Escrow Agent
to deliver to them any funds (including any interest received with respect
thereto) that the Escrow Agent is unable to, or does not, disburse to the
Companies
<PAGE> 6
pursuant to this Section 7, and thereafter the Companies shall be entitled to
look to the Shareholder Representatives (subject to abandoned property, escheat
or other similar laws) only as a general creditor thereof with respect to the
cash payable to the Companies pursuant to this Escrow Agreement.
8. Investment of Cash Portion of Escrow Fund. The Escrow Agent
will invest the Escrow Fund in readily marketable securities of the United
States Government or its lawful agencies or in securities guaranteed by the
full faith and credit of the United States, which securities, in either case,
shall have maturities of less than one year, or in shares of investment
companies that, by their charter, invest solely in such securities. In
investing and reinvesting the Escrow Fund, the Escrow Agent will seek to obtain
the best yield consistent with safety of principal, ready marketability and
liquidity that may be necessary to pay Asserted Claims and to make
distributions hereunder. The Escrow Agent will have the authority to sell
investments that it has made from time to time as it deems appropriate. All
income earned on the cash portion of the Escrow Fund, after payment of expenses
incurred in connection therewith, will be held, invested, reinvested and
released with, and shall be deemed to be a part of, the Escrow Fund. All
income earned on the cash portion of the Escrow Fund, after payment of expenses
incurred in connection therewith, will be held, invested, reinvested and
released with, and shall be deemed to be a part of, the Escrow Fund. Neither
the Companies, the Buyer, the Shareholder Representatives, nor the Escrow Agent
shall be liable or responsible for any loss resulting from any investment or
reinvestment made pursuant to this Section 8. The Escrow Fund created by this
Escrow Agreement shall constitute a trust taxable pursuant to Subchapter J of
the Internal Revenue Code of 1986, as amended, and applicable state tax law.
From time to time during the term of this Agreement, as reasonably directed by
Buyer and the Representatives, Ernst & Young LLP or such other accounting firm
as is mutually acceptable to the Buyer and the Representatives shall file all
required income tax returns for the Escrow Fund. The Escrow Agent is
authorized to provide such accounting firm with any records related to the
Escrow Fund necessary to prepare such returns and to disburse from the Escrow
Fund the amount of taxes shown on such returns to be due and payable. The
Escrow Agent shall not be responsible for any acts, omissions, verifications or
calculations conducted or performed by such accounting firm in the course of
its preparing and filing such income tax returns. Such accounting firm will be
employed by the Buyer and the Representatives, on behalf of the Escrow Fund,
and not by the Escrow Agent, and such accounting firm shall not be an agent of
the Escrow Agent. The fees for such accounting firm shall be paid from the
Escrow Fund.
9. Liability of Escrow Agent. The duties of the Escrow Agent
hereunder will be limited to the observance of the express provisions of this
Escrow Agreement. The Escrow Agent will not be subject to, or be obliged to
recognize, any other agreement between the parties hereto or directions or
instructions not specifically set forth as provided for herein. The Escrow
Agent will not make any payment or disbursement from or out of the Escrow Fund
that is not expressly authorized pursuant to this Escrow Agreement. The Escrow
Agent may rely upon and act upon any instrument received by it pursuant to the
provisions of this Escrow Agreement that it reasonably believes to be genuine
and in conformity with the requirements of this Escrow Agreement. The Escrow
Agent undertakes to use the same degree of care and skill in performing its
services hereunder as an ordinary prudent person would do or use under
<PAGE> 7
the circumstances in the conduct of his or her own affairs. The Escrow Agent
will not be liable for any error of judgment or any act done or any step taken
by it in good faith or for any mistake of fact or law or for anything that it
might do or refrain from doing in connection with this Escrow Agreement
(including its simple negligence), except to the extent such actions shall be
proved to constitute a material breach of the Escrow Agent's obligations
hereunder, gross negligence or willful misconduct on the part of the Escrow
Agent.
10. Indemnification of Escrow Agent. The Companies, together with
their respective shareholders as distributee hereunder, and Buyer will
severally, but not jointly, indemnify and hold the Escrow Agent harmless from
and against any and all losses, costs, damages or expenses (including, but not
limited to, reasonable attorneys' fees) it may sustain by reason of its service
as Escrow Agent hereunder but only to the extent such losses, costs, damages or
expenses exceed the amount of the funds available in the Escrow Fund, and
except such losses, costs, damages or expenses (including, but not limited to,
reasonable attorneys' fees) incurred by reason of such acts or omissions for
which the Escrow Agent is liable or responsible under the last sentence of
Section 9 hereof. The foregoing indemnification shall survive the resignation
of the Escrow Agent or the termination of this Escrow Agreement.
11. Fees and Expenses of the Escrow Agent. Except as provided in
Section 16 hereof, all fees of the Escrow Agent for its service hereunder,
together with any expenses reasonably incurred by the Escrow Agent in
connection with this Escrow Agreement, shall be paid from the income earned on
the amount deposited in the Escrow Fund, provided that if and to the extent
that such income is not sufficient to cover such fees and expenses of the
Escrow Agent, then the Buyer shall advance such funds as may be required to pay
such fees and expenses on a current basis, and the Buyer shall thereafter have
the right to recover any such advances out of income earned on the amount
deposited in the Escrow Fund. The fees and expenses for services hereunder
shall be calculated pursuant to the terms and conditions set forth in the
letter attached hereto as Exhibit A.
12. Designees for Instructions. Buyer, may, by notice to the
Escrow Agent, designate one or more persons who will execute notices and from
whom the Escrow Agent may take instructions hereunder. Such designations may
be changed from time to time upon notice to the Escrow Agent from Buyer. Until
further notice, Mr. William D. Sutton and David T. Tighe are each designated as
the respective designees of Buyer to give notices and instructions to the
Escrow Agent. The Escrow Agent will be entitled to rely conclusively on any
notices or instructions from any person so designated by Buyer.
13. Resignation of Escrow Agent. The Escrow Agent may resign from
its duties hereunder by giving each of the Buyer and the Shareholder
Representatives written notice of the effective date of such resignation (which
effective date shall be at least 60 days after the date of such notice is
given). If on or before the effective date of such resignation, the Escrow
Agent has not received joint written instructions from Buyer and the
Shareholder Representatives regarding the transfer of the Escrow Fund, it will
thereupon deposit the Escrow Fund into the registry of a court of competent
jurisdiction. The parties hereto intend that a substitute Escrow Agent will be
appointed
<PAGE> 8
to fulfill the duties of the Escrow Agent hereunder for the remaining term of
this Escrow Agreement in the event of the Escrow Agent's resignation and agree
reasonably to cooperate to make such appointment.
14. Notices. All notices, requests, instructions and demands that
may be given by any party hereto to any other party in the course of the
transactions herein contemplated will be in writing and will be deemed given
when posted in the United States mail, certified return receipt requested,
addressed to the respective parties as follows, or when received, if earlier,
by other written or electronic communication as follows:
(a) If to Buyer:
Dailey International Inc.
One Lawrence Center
P.O. Box 1863
Conroe, Texas 77305
Attention: General Counsel
Tel: 281/350-3399
Fax: 409/539-2132
with a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney Street, Suite 5100
Houston, Texas 77010-3095
Attention: Mr. Robert F. Gray, Jr.
Tel: 713/651-5151
Fax: 713/651-5246
(b) If to the Escrow Agent:
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, Texas 75201
ATTN: Corporate Trust
Tel: 214/754-1200
Fax: 214/754-1303
(c) If to the Shareholder Representatives:
Henry R. J. Cournoyer
2323 West Main Street
Houma, Louisiana 70360
Tel: 504/868-4400
Fax: 504/876-2188
<PAGE> 9
and to:
Francis I. Bourque, Jr.
601 Poydras Street, Suite 2700
New Orleans, Louisiana 70130-6027
Tel: 504/529-4300
Fax: 504/529-4321
15. Binding Effect. This Escrow Agreement will be binding upon
and inure to the benefit of the parties hereto and their permitted assigns.
16. Amendment and Termination. This Escrow Agreement may be
amended from time to time by and upon written notice to the Escrow Agent, given
jointly by Buyer, the Shareholder Representatives, and the Companies, but the
duties and responsibilities of the Escrow Agent may not be increased without
its written consent. This Escrow Agreement will terminate on the date on which
no amounts remain in the Escrow Fund; provided, however, that Buyer shall pay
the Escrow Agent all reasonable fees and expenses incurred by it and remaining
unpaid on the date of such termination; and provided further that this Escrow
Agreement shall not terminate until the final resolution of all Asserted
Claims.
17. Applicable Law. THIS ESCROW AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING
EFFECT TO CONFLICTS OF LAW PRINCIPLES.
18. Counterparts. This Escrow Agreement may be executed in one or
more counterparts, each of which will be deemed an original, but all of which
together will constitute but one and the same instrument.
19. Captions and Paragraph Headings. Captions and paragraph
headings used herein are for convenience only and are not part of this Escrow
Agreement and will not be used in construing it.
SIGNATURES BEGIN ON THE FOLLOWING PAGE
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement as of the day and year first above written.
DAILEY INTERNATIONAL INC.
By: /s/ William D. Sutton
--------------------------------
William D. Sutton
Senior Vice President and
General Counsel
SHAREHOLDER REPRESENTATIVES,
Individually and as Attorneys-in-Fact
for Edrick Fontenot, Emile Marcantel,
Randy Raymond, Joseph McGoey, Darwin
Ladon Miller, Craig Soileau and Don
Umphries
/s/ Henry R. J. Cournoyer
----------------------------------
Henry R. J. Cournoyer
/s/ Francis I. Bourque, Jr.
----------------------------------
Francis I. Bourque, Jr.
U.S. TRUST COMPANY OF TEXAS, N.A.
By: /s/ Peter Gerrer
-------------------------------
Name: Peter Gerrer
----------------------------
Title: Vice President
---------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-10747) pertaining to the 1996 Key Employee Stock Plan and the
1996 Non-Employee Director Stock Plan of Dailey International Inc. of our
report dated January 16, 1998 (except for Note 1 as to which the date is
January 28, 1998), with respect to the combined financial statements of
Directional Wireline Services, Inc., DAMCO Services, Inc. and DAMCO Tong
Services, Inc., (collectively, "DWS/DAMCO") for the nine-month period ended
September 30, 1997 and the years ended December 31, 1996 and 1995, and agree
to the inclusion of our report in this Form 8-K.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Houston, Texas
February 12, 1998
<PAGE> 1
EXHIBIT 99.1
Dailey International Inc. Completes Acquisition of Directional Wireline
Services, Inc., DAMCO Tong Services, Inc. and DAMCO Services, Inc.
HOUSTON, Jan. 28 /PRNewswire/ -- Dailey International Inc. (Nasdaq: DALY)
announced today that it completed the acquisition of Directional Wireline
Services, Inc. ("DWS"), DAMCO Tong Services, Inc. and DAMCO Services, Inc.
(collectively, "DAMCO", and with DWS, the "Companies"), all of which are
headquartered in Houma, Louisiana, pursuant to a previously announced
agreement.
DWS and DAMCO provide specialized drilling, workover, completion, and
production services to the Gulf of Mexico and Nigerian markets. DWS and DAMCO
operate independently, with DWS providing downhole electric wireline and tubing
conveyed perforating ("TCP") services and DAMCO providing tubular testing and
handling services. Dailey intends to employ substantially all of DWS's and
DAMCO's management and other personnel.
President and CEO, James F. Farr, stated, "This acquisition follows our
strategic mission to increase Dailey's presence in the production and drilling
sectors. We believe that the acquisition of DAMCO and DWS will further
position Dailey to take advantage of synergies between our respective product
lines across the spectrum of drilling, completion, and work-over in the
upstream oil services business worldwide."
(more)
<PAGE> 2
-2-
Except for historical information contained herein, some matters set forth
in this news release and statements made are forward-looking statements. When
used in this press release, expressions, such as "belief", "expect" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected or estimated,
including without limitation, Dailey's and the Companies' dependence on the
level of exploration and production activity in the oil and gas industry and
the willingness of oil and gas companies to spend capital on drilling and
workover applications, significant competition in the businesses in which
Dailey, DWS and DAMCO compete, the ability of Dailey to integrate and manage
the businesses and operations of DWS and DAMCO, which are related to but
substantially different from Dailey's historical operations, operating risks
and hazards inherent in the oil and gas industry and Dailey's, DWS's and
DAMCO's respective operations, risks of international operations, including
Nigeria where DWS has significant operations, technological evolution and
product obsolescence, and other risks and uncertainties contained in Dailey's
documents filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934. In addition, the historical financial
information provided with respect to DWS's and DAMCO's operations has never
been audited, and therefore, is subject to the risk and uncertainties that
adjustments to such information would be necessary in order for an unqualified
audit opinion to be rendered by an independent accounting and auditing firm.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
Headquartered in Conroe, Texas, Dailey International Inc. is a provider of
specialty drilling services to the oil and gas industry and designs,
manufactures and rents proprietary downhole tools for oil and gas drilling and
workover applications worldwide.
SOURCE Dailey International Inc.
-0- 01/28/98
/CONTACT: K. Jean Davenport, Manager, Investor Relations, of Dailey
International Inc., 281-350-3399, or Fax: 409-760-3415, or E-Mail:
[email protected]/
/Web site: http://www.dailey.com/
(DALY)
