<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-11963
---------
Dailey International Inc.
- - -------------------------------------------------------------------------------
(See table of additional Registrants on the following page)
(Exact Name of Registrant in its Charter)
Delaware 76-0503351
- - -------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2507 North Frazier, Conroe, Texas 77303
- - -------------------------------------------------------------------------------
(Address of Principal Executive Officers) (Zip Code)
281/350/3399
- - -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- - -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
Number of shares outstanding of issuer's Class A Common Stock as of October 31,
1998 was 5,135,504. The Company has 5,000,000 shares of Class B Common Stock
Outstanding.
<PAGE> 2
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
ADDRESS, INCLUDING
ZIP CODE, AND
TELEPHONE NUMBER,
STATE OR INCLUDING AREA
OTHER PRIMARY STANDARD CODE OF
JURISDICTION INDUSTRIAL IRS REGISTRANTS
OF IDENTIFICATION EMPLOYER ID PRINCIPAL EXECUTIVE
INCORPORATION CODE NO NO. OFFICES
------------- ---------------- -------------- --------------------
<S> <C> <C> <C> <C>
Dailey Energy Services, Inc............... Delaware 8999 76-0066576 *
Dailey International Sales Corporation.... Delaware 8999 74-1869524 *
Colombia Petroleum Services Corp.......... Delaware 8999 76-0074604 *
International Petroleum Services, Inc... Delaware 8999 76-0084387 *
Dailey Environmental Remediation
Technologies, Inc...................... Texas 8999 76-0276940 *
Dailey Worldwide Services, Corp........... Texas 8999 76-0477660 *
Air Drilling International, Inc........... Delaware 1380 84-1305964 *
Air Drilling Services, Inc................ Wyoming 1380 83-0181069 *
</TABLE>
- - --------------
* 2507 North Frazier, Conroe, Texas 77303, telephone (281) 350-3399.
Dailey International Inc. (the "Company") owns directly or indirectly all of
the outstanding capital stock of each of the additional Registrants listed
above. Each of the additional Registrants is a guarantor of the Company's
obligations under its 9 1/2% Senior Notes Due 2008 (the "Senior Notes"). No
separate financial statements for the additional Registrants has been provided
or incorporated because: (1) the consolidated financial statements of the
Company included in this report include the operations of each of the additional
Registrants and (2) Note 9 to the Company's accompanying unaudited consolidated
financial statements includes unaudited condensed consolidated financial
statements of the Company separating the financial results for the additional
Registrants from the Company and any subsidiaries that are not guarantors of the
Company's obligations under the Senior Notes.
<PAGE> 3
DAILEY INTERNATIONAL INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements (unaudited)
Consolidated balance sheets - September 30, 1998 and December 31, 1997 1
Consolidated statements of operations - Three and nine months ended September 30, 1998 and 1997 2
Consolidated statements of cash flows - Nine months ended September 30, 1998 and 1997 3
Notes to consolidated financial statements - September 30, 1998 4 - 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
15 - 21
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 23
</TABLE>
i
<PAGE> 4
DAILEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 44,368 $ 59,837
Accounts receivable, net .................................................... 38,833 34,601
Other current assets ........................................................ 4,954 2,769
----------- -----------
Total current assets ................................................ 88,155 97,207
Revenue-producing tools and inventory, net .................................... 146,221 79,056
Property and equipment, net ................................................... 14,851 8,181
Accounts receivable from officer .............................................. -- 250
Goodwill, net ................................................................. 72,849 19,183
Intangibles and other assets .................................................. 17,687 5,400
----------- -----------
Total assets ........................................................ $ 339,763 $ 209,277
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .................................... $ 20,462 $ 23,804
Accounts payable to affiliates .............................................. 12 483
Income taxes payable ........................................................ 4,541 2,417
Current portion of long-term debt ........................................... 1,247 146
----------- -----------
Total current liabilities ........................................... 26,262 26,850
Long-term debt ................................................................ 275,321 114,229
Deferred income taxes ......................................................... 6,018 1,238
Other noncurrent liabilities .................................................. 1,769 1,559
Commitments and contingencies ................................................. -- --
Stockholders' equity:
Preferred stock, $0.01 par value: 5,000,000
shares authorized; none issued ............................................ -- --
Common stock Class A, $0.01 par value: 20,000,000 shares
authorized; 5,703,655 and 4,627,598 issued and 5,135,504
and 4,483,598 outstanding at September 30, 1998 and
December 31, 1997, respectively; Class B, $0.01 par value:
10,000,000 shares authorized; 5,000,000 shares issued
and outstanding at September 30, 1998 and December 31, 1997 ......... 106 94
Treasury stock (568,151 shares at September 30, 1998 and 144,000
shares at December 31, 1997) ........................................ (4,048) (1,047)
Paid-in capital ............................................................. 52,332 41,335
Foreign currency translation-accumulated comprehensive income ............... (1,135) (155)
Retained earnings (deficit) ................................................. (16,862) 25,174
----------- -----------
Total stockholders' equity .......................................... 30,393 65,401
----------- -----------
Total liabilities and stockholders' equity .......................... $ 339,763 $ 209,277
=========== ===========
</TABLE>
See accompanying notes.
1
<PAGE> 5
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental income ...................................... $ 14,872 $ 15,417 $ 47,647 $ 41,390
Sales of products and services ..................... 8,522 6,344 31,672 14,720
Underbalanced drilling services .................... 7,826 8,040 23,700 8,764
------------ ------------ ------------ ------------
31,220 29,801 103,019 64,874
Costs and expenses:
Cost of rentals .................................... 10,314 9,394 31,863 25,341
Cost of products and services ...................... 5,880 3,724 18,467 8,121
Cost of underbalanced drilling services ......... 5,424 4,150 14,215 4,610
Selling, general and administrative ................ 8,552 5,262 24,625 11,198
Depreciation and amortization ...................... 6,559 3,157 17,260 6,804
Reorganization costs ............................... 2,385 656 2,385 2,453
Non-cash compensation .............................. 133 -- 604 3,285
Research and development ........................... 168 63 372 476
------------ ------------ ------------ ------------
39,415 26,406 109,791 62,288
------------ ------------ ------------ ------------
Operating income (loss) .............................. (8,195) 3,395 (6,772) 2,586
Other (income) expense:
Interest income .................................... (690) (424) (2,854) (754)
Interest expense ................................... 6,778 1,984 17,808 2,328
Other, net ......................................... 265 201 478 529
------------ ------------ ------------ ------------
Income (loss) before income taxes .................... (14,548) 1,634 (22,204) 483
Income tax provision ................................. 495 391 2,253 545
------------ ------------ ------------ ------------
Income (loss) before extraordinary item .............. (15,043) 1,243 (24,457) (62)
Extraordinary item ................................... -- -- (17,579) --
------------ ------------ ------------ ------------
Net income (loss) .................................... $ (15,043) $ 1,243 $ (42,036) $ (62)
============ ============ ============ ============
Income (loss) per share before extraordinary item:
Basic ............................................ $ (1.50) $ .14 $ (2.50) $ (.01)
============ ============ ============ ============
Diluted .......................................... $ (1.50) $ .13 $ (2.50) $ (.01)
============ ============ ============ ============
Income (loss) per share:
Basic ............................................ $ (1.50) $ .14 $ (4.30) $ (.01)
============ ============ ============ ============
Diluted .......................................... $ (1.50) $ .13 $ (4.30) $ (.01)
============ ============ ============ ============
Weighted average shares outstanding:
Basic ............................................ 10,015,349 9,190,825 9,785,989 9,229,478
============ ============ ============ ============
Diluted .......................................... 10,015,349 9,255,885 9,785,989 9,229,478
============ ============ ============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 6
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................. $ (42,036) $ (62)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization ...................................... 17,260 6,804
Deferred income taxes .............................................. (136) (1,303)
Write-off/amortization of debt issue costs ......................... 5,479 60
Provision for doubtful accounts .................................... 789 331
Provision for stock awards ......................................... 1,614 3,285
(Gain)loss on sale and disposition of property and equipment ..... (139) 172
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable--trade ...................................... 3,514 (9,808)
Accounts receivable from/payable to officers and affiliates .... (221) 4,987
Other assets and liabilities, net ............................... (3,782) 345
Accounts payable and accrued liabilities ........................ (2,800) 4,528
Income taxes payable ............................................ 871 708
----------- -----------
Net cash provided by (used in) operating activities .................. (19,587) 10,047
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory ................... (44,155) (20,735)
Inventory transferred to cost of rentals ............................. 5,422 5,183
Revenue-producing tools lost in hole, abandoned, and sold ........... 1,932 1,754
Additions to property and equipment .................................. (6,146) (543)
Proceeds from sale of property and equipment ......................... 599 407
Acquisitions ......................................................... (91,167) (48,976)
----------- -----------
Net cash used in investing activities ................................ (133,515) (62,910)
FINANCING ACTIVITIES:
Net proceeds from the issuance of debt ............................... 268,125 159,653
Payments on outstanding debt ......................................... (126,490) (52,918)
Financing costs ...................................................... -- (3,855)
Exercise of stock options ............................................ -- 650
Purchase of treasury stock ........................................... (3,100) (1,047)
----------- -----------
Net cash provided by financing activities ............................ 138,535 102,483
----------- -----------
Effect of foreign exchange rate changes on cash ...................... (902) 234
----------- -----------
Increase (decrease) in cash and cash equivalents ..................... (15,469) 49,854
Cash and cash equivalents at beginning of period ..................... 59,837 11,557
----------- -----------
Cash and cash equivalents at end of period ........................... $ 44,368 $ 61,411
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 7
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include
the accounts of Dailey International Inc. and its subsidiaries ("Dailey" or the
"Company") and have been prepared in accordance with United States generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. For further information, reference is made to
the consolidated financial statements and footnotes thereto included in the
Company's Form 10-K filed with the Securities and Exchange Commission on March
31, 1998. Certain reclassifications have been made to the December 31, 1997
financial information to conform to the current period presentation.
As of January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, Reporting Comprehensive Income (SFAS No.
130). SFAS No. 130 established new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net loss or stockholders' equity. SFAS No. 130
requires the Company's foreign currency translation adjustments to be included
in comprehensive income. For the three months ended September 30, 1998 and 1997,
the total comprehensive income (loss) was $(15,559) and $1,237, respectively.
For the nine months ended September 30, 1998 and 1997, the total comprehensive
loss was $43,016 and $68, respectively.
Certain reclassifications having no effect on net income (loss) have
been made to the 1997 financial statements to conform to the 1998 presentation.
2. ORGANIZATION
The accompanying consolidated financial statements reflect the
operations of Dailey International Inc. (formerly Dailey Petroleum Services
Corp.), a Delaware corporation. In October 1997, Dailey Petroleum Services Corp.
changed its name to Dailey International Inc.
In July 1997, the Company changed its fiscal year end to December 31,
effective December 31, 1997.
The Company is an integrated supplier of specialty services and a
provider of technologically-advanced downhole tools to the oil and gas industry
on a worldwide basis. Founded in 1945 as a rental tool company, Dailey began
offering directional drilling services in 1984 and currently provides such
services in the Gulf of Mexico, the United States Gulf Coast region, and most
recently, Venezuela, Louisiana and the Austin Chalk formation in Texas. In June
1997, the Company acquired Air Drilling International, Inc. ("ADI" and the "ADI
Acquisition") and, as a result, became a leading provider worldwide of air
drilling services for underbalanced drilling applications. In January 1998, the
Company acquired the operating assets and liabilities of Directional Wireline
Services, Inc. ("DWS"), DAMCO Tong Services, Inc. and DAMCO Services, Inc.
(collectively, "DAMCO", and with DWS, "DWS/DAMCO"), which are headquartered in
Houma, Louisiana. DWS/DAMCO provides specialized drilling, workover, completion
and production services to the Gulf of Mexico and Nigerian markets. In March
1998, the Company acquired Integrated Drilling Systems, Limited ("IDS"), which
is headquartered in Aberdeen, Scotland. IDS manufactures directional drilling
tools. In August 1998, the Company acquired substantially all of the assets of
the directional drilling business of Transocean Petroleum Technology Limited
("Transocean") located in Aberdeen, Scotland.
Effective July 14, 1998, the shareholders of Dailey's Class B Common
Stock changed the structure under which they owned their Class B Common Stock
through a reorganization whereby the shareholders contributed all of the stock
in a company controlled by the shareholders (which company's assets consisted
solely of 5,000,000 shares of Class B Common Stock of Dailey) to Dailey in
exchange for 5,000,000 new shares of Dailey's Class B Common Stock. As a result
of these transactions, Dailey acquired the net operating loss carryforward of
the company, for which an offsetting allowance was provided. These transactions
had no effect on Dailey's financial position or results of operation or number
of outstanding shares of Class B Common Stock.
4
<PAGE> 8
3. ACQUISITIONS
ADI Acquisition. On June 20, 1997, the Company purchased the stock of
ADI (a provider of air drilling services for underbalanced drilling
applications) for $46.4 million, including the repayment of approximately $16.8
million of ADI indebtedness, financed with bank debt of $45.5 million and
proceeds from the Company's initial public offering in 1996. The ADI Acquisition
was accounted for under the purchase method of accounting. As a result, the
assets and liabilities of ADI were recorded at their estimated fair market
values as of the date of the ADI Acquisition. The Company recorded goodwill of
approximately $21.1 million relating to the excess of the purchase price over
the fair market value of ADI's assets, which will be amortized over 20 years and
result in approximately $1.1 million in amortization expense per year.
DWS/DAMCO Acquisition. On January 28, 1998, the Company acquired the
operating assets and liabilities of DWS/DAMCO. The aggregate purchase price for
DWS/DAMCO was $61 million financed with proceeds from a $115 million 9 3/4%
senior notes offering in August 1997 and borrowings under the Company's
revolving credit facility. The acquisition was accounted for under the purchase
method of accounting, accordingly the assets and liabilities of DWS/DAMCO were
recorded at their estimated fair market values as of the date of acquisition.
The Company recorded goodwill of approximately $32.0 million relating to the
excess of the purchase price over the fair market value of the assets, which
will be amortized over 25 years and result in approximately $1.3 million in
amortization expense per year. The purchase price allocation was based on
preliminary estimates and may be revised at a later date.
IDS Acquisition. The Company acquired the outstanding capital stock of
IDS on March 23, 1998 (with additional consideration paid in July 1998 in
connection with the resolution of certain contingencies) for approximately $18.8
million in cash and 755,084 shares of Class A Common Stock, plus assumption of
debt of approximately $6.5 million. The IDS Acquisition was accounted for under
the purchase method of accounting. The assets and liabilities of IDS were
recorded at their estimated fair market values as of the date of acquisition.
The Company recorded approximately $19.7 million in goodwill, representing the
excess of the purchase price over the estimated fair market value of the IDS
assets, which will be amortized over 25 years and result in additional annual
amortization expense of $788,000.
Transocean Acquisition. In August 1998, the Company acquired
substantially all of the assets of the directional drilling business of
Transocean located in Aberdeen, Scotland for $10 million in cash. The Company
assumed certain Transocean directional contracts and operations in the North
Sea and Europe. The Transocean Acquisition was accounted for under the purchase
method of accounting. The assets and liabilities were recorded at their
estimated fair market value as of the date of the acquisition. The Company
recorded goodwill of $1.2 million relating to the excess of purchase price over
the fair market value of the assets, which will be amortized over 25 years and
result in approximately $48,000 in amortization expense per year.
The pro forma unaudited results of operations for the nine months ended
September 30, 1998 and 1997, assuming consummation of the purchase of ADI and
DWS/DAMCO as of January 1, 1997, utilizing a portion of the proceeds from the
issuance of the $275 million Senior Notes, are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues ................................................................ $ 101,627 $ 100,167
Net loss before extraordinary item ...................................... (22,403) (2,765)
Net loss ................................................................ (39,982) (2,765)
Net loss before extraordinary item per common share
(basic and diluted) .............................................. (2.29) (0.30)
Net loss per common share (basic and diluted) ........................... (4.09) (0.30)
</TABLE>
The pro forma information for the nine months ended September 30, 1998
and 1997, includes adjustments for additional depreciation and amortization
expense associated with the purchase price allocation using the respective lives
for goodwill and an average life of seven years for fixed assets, increased
interest expense for the additional borrowings as if they were incurred at the
beginning of the period and related adjustments for income taxes. The pro forma
information is not necessarily indicative of the results of operations had the
acquisitions been effected on the assumed date or the results of operations for
any future period. The IDS Acquisition and Transocean Acquisition were not
significant acquisitions and have not been included in the pro forma unaudited
results above.
5
<PAGE> 9
4. REORGANIZATION COSTS
Reorganization costs incurred in 1998 were primarily related to the
resignation of the former chief executive officer and to the consolidation of
corporate leased facilities.
In June 1997, the Company implemented a cost reduction program to
flatten its corporate management structure and streamline the Company's
operations. As a result, the Company incurred a $2.5 million restructuring
charge during June 1997 associated primarily with staff reductions, severance
settlements and various reorganization costs.
5. REVENUE-PRODUCING TOOLS AND INVENTORY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenue-producing tools ............................................... $ 158,317 $ 95,266
Accumulated depreciation .............................................. (49,219) (37,284)
----------- -----------
109,098 57,982
Inventory:
Components, subassemblies and expendable parts .................. 30,521 17,748
Rental tools and expendable parts under production .............. 4,661 2,100
Raw materials ................................................... 1,941 1,226
----------- -----------
37,123 21,074
----------- -----------
Revenue-Producing Tools and Inventory ..................... $ 146,221 $ 79,056
=========== ===========
</TABLE>
6. STOCK OPTIONS AND AWARDS
During the nine months ended September 30, 1998, the Company issued
347,500 options at a weighted average fair value and price of $5.50 in
connection with existing stock option plans. Effective August 12, 1998, all
options outstanding with employees which had an option price above $6.00 were
repriced to $6.00. The options granted have a vesting period between one and
three years from the date of grant.
During the nine months ended September 30, 1998, the Company also
granted 6,000 shares of restricted common stock at a fair value of $8.50 which
vest over a four year period.
7. BORROWING ARRANGEMENTS AND EXTRAORDINARY ITEM
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
9 1/2% Senior Notes ........................... $ 275,000 $ --
9 3/4% Senior Notes ........................... -- 114,223
Note payable to a bank ........................ 1,521 --
Other notes payable ........................... 47 152
---------- ----------
276,568 114,375
Less current portion of long-term debt......... 1,247 146
---------- ----------
Total long-term debt ..................... $ 275,321 $ 114,229
========== ==========
</TABLE>
On February 13, 1998, the Company issued $275 million of 9 1/2% Senior
Notes due 2008 (the "Senior Notes"). Of the $268.1 million net proceeds to the
Company, approximately $127.7 million were utilized to repurchase at a premium
of 111% of their principal amount all of the outstanding principal amount of the
Company's 9 3/4% Senior Notes (the "Old Notes") and approximately $7.5 million
were utilized to repay outstanding debt under the Company's revolving credit
facility. As a result of the repurchase of the Old Notes, the Company recorded
an extraordinary loss of approximately $17.6 million, or $1.89 per diluted
share, with no related income tax benefit, representing the excess of the
purchase price for the Old Notes over their carrying value on the date of
repurchase. The Senior Notes are unsecured senior obligations of the Company.
The Senior Notes are redeemable at the option of the Company on or after
February 15, 2003 at stipulated redemption prices.
8. INCOME TAXES
Income tax expense exceeded the amount that would have resulted from
applying the U.S. federal statutory tax rate due to foreign income taxes and
withholding taxes with no offsetting benefit from U.S. net operating losses, net
of valuation allowances.
6
<PAGE> 10
9. CONSOLIDATING FINANCIAL STATEMENTS
The $275 million 9 1/2% Senior Notes due 2008 issued on February 13,
1998 are unconditionally guaranteed on a joint and several basis by certain
subsidiaries of the Company. Accordingly, the following condensed consolidating
balance sheets as of September 30, 1998 and December 31, 1997 and the related
condensed consolidating statements of operations for the three and nine months
ended September 30, 1998 and 1997 and condensed consolidating statements of cash
flows for the nine months ended September 30, 1998 and 1997 have been provided.
The condensed consolidating financial statements herein are followed by notes
which are an integral part of these statements.
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 42,018 $ 293 $ 2,057 $ -- $ 44,368
Accounts receivable, net ....................... 18,642 7,564 12,627 -- 38,833
Other current assets ........................... 2,365 1,370 1,219 -- 4,954
---------- ---------- ---------- ---------- ----------
Total current assets ..................... 63,025 9,227 15,903 -- 88,155
Revenue producing tools and
inventory, net ............................... 77,417 43,304 25,500 -- 146,221
Property and equipment, net .................... 9,613 2,339 2,899 -- 14,851
Investments in subsidiaries .................... 71,281 35 (35) (71,281) --
Goodwill, net .................................. 32,470 20,977 19,402 -- 72,849
Intangibles and other assets ................... 10,050 2,145 5,492 -- 17,687
---------- ---------- ---------- ---------- ----------
Total assets ............................. $ 263,856 $ 78,027 $ 69,161 $ (71,281) $ 339,763
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ....... $ 13,047 $ 3,835 $ 3,580 $ -- $ 20,462
Accounts payable to affiliates ................. (56,016) 17,833 38,195 -- 12
Income taxes payable ........................... 1,799 452 2,290 -- 4,541
Current portion of long-term debt .............. 36 2 1,209 -- 1,247
---------- ---------- ---------- ---------- ----------
Total current liabilities ............... (41,134) 22,122 45,274 -- 26,262
Long-term debt ....................................... 275,010 35 276 -- 275,321
Deferred income taxes ................................ (2,172) 3,811 4,379 -- 6,018
Other noncurrent liabilities ......................... 624 155 990 -- 1,769
Stockholders' equity:
Common stock ................................... 106 8 1,723 (1,731) 106
Treasury stock ................................. (4,048) -- -- -- (4,048)
Paid in capital ................................ 52,332 23,786 23,591 (47,377) 52,332
Foreign currency translation-accumulated
comprehensive income ........................ -- -- (1,135) -- (1,135)
Retained earnings (deficit) .................... (16,862) 28,110 (5,937) (22,173) (16,862)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity ..................... 31,528 51,904 18,242 (71,281) 30,393
---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity ................... $ 263,856 $ 78,027 $ 69,161 $ (71,281) $ 339,763
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
7
<PAGE> 11
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
ASSETS PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 56,672 $ 860 $ 2,305 $ -- $ 59,837
Accounts receivable, net ............................... 18,220 6,580 9,801 -- 34,601
Other current assets ................................... 1,318 601 850 -- 2,769
--------- --------- --------- --------- ---------
Total current assets ............................. 76,210 8,041 12,956 -- 97,207
Revenue producing tools and inventory, net ........... 37,598 31,102 10,356 -- 79,056
Property and equipment, net ............................. 5,880 1,786 515 -- 8,181
Investments in subsidiaries ............................. 52,399 -- -- (52,399) --
Accounts receivable from officer ........................ 250 -- -- -- 250
Goodwill, net ........................................... 803 18,157 223 -- 19,183
Intangibles and other assets ............................ 5,095 146 159 -- 5,400
--------- --------- --------- --------- ---------
Total assets ..................................... $ 178,235 $ 59,232 $ 24,209 $ (52,399) $ 209,277
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............... $ 16,270 $ 4,726 $ 2,808 $ -- $ 23,804
Accounts payable to affiliates ......................... (16,846) 835 16,494 -- 483
Income taxes payable ................................... 1,269 214 934 -- 2,417
Current portion of long-term debt ...................... 47 2 97 -- 146
--------- --------- --------- --------- ---------
Total current liabilities ....................... 740 5,777 20,333 -- 26,850
Long-term debt ............................................... 114,143 40 46 -- 114,229
Deferred income taxes ........................................ (2,172) 1,595 1,815 -- 1,238
Other noncurrent liabilities ................................. 123 296 1,140 -- 1,559
Stockholders' equity:
Common stock ........................................... 94 8 5 (13) 94
Treasury stock ......................................... (1,047) -- -- -- (1,047)
Paid in capital ........................................ 41,335 23,786 3,895 (27,681) 41,335
Foreign currency translation - accumulated
comprehensive income ................................. -- -- (155) -- (155)
Retained earnings (deficit) ............................ 25,019 27,730 (2,870) (24,705) 25,174
--------- --------- --------- --------- ---------
Total stockholders' equity ............................. 65,401 51,524 875 (52,399) 65,401
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity .......................... $ 178,235 $ 59,232 $ 24,209 $ (52,399) $ 209,277
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
8
<PAGE> 12
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income ............................... $ 10,789 $ 2,010 $ 2,073 $ -- $ 14,872
Sales of products and services .............. 5,787 1,368 1,367 -- 8,522
Underbalanced drilling services ............. 251 3,582 3,993 -- 7,826
--------- --------- --------- --------- ---------
16,827 6,960 7,433 -- 31,220
Cost and expenses:
Cost of rentals ............................. 8,316 809 1,222 (33) 10,314
Cost of products and services ............... 4,152 774 954 -- 5,880
Cost of underbalanced drilling services ... 570 1,954 2,900 -- 5,424
Selling, general and administrative ......... 5,092 1,222 2,302 (64) 8,552
Depreciation and amortization ............... 3,460 1,918 1,181 -- 6,559
Reorganization costs ........................ 2,385 -- -- -- 2,385
Non-cash compensation ....................... 133 -- -- -- 133
Research and development .................... 101 1 66 -- 168
--------- --------- --------- --------- ---------
24,209 6,678 8,625 (97) 39,415
--------- --------- --------- --------- ---------
Operating income (loss) ........................... (7,382) 282 (1,192) 97 (8,195)
Other (income) expense:
Interest income ............................. (666) (5) (19) -- (690)
Interest expense - nonaffiliates ............ 6,616 18 144 -- 6,778
Equity in subsidiaries, net of taxes ...... 1,223 -- -- (1,223) --
Other, net .................................. 25 (238) 381 97 265
--------- --------- --------- --------- ---------
Income (loss) before taxes ........................ (14,580) 507 (1,698) 1,223 (14,548)
Income tax provision (benefit) .................... 463 186 (154) -- 495
--------- --------- --------- --------- ---------
Net income (loss) ................................. $ (15,043) $ 321 $ (1,544) $ 1,223 $ (15,043)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
9
<PAGE> 13
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income .......................... $ 11,768 $ 1,861 $ 1,788 $ -- $ 15,417
Sales of products and services ......... 4,687 408 1,249 -- 6,344
Underbalanced drilling services ........ -- 3,461 4,579 -- 8,040
--------- --------- --------- --------- ---------
16,455 5,730 7,616 -- 29,801
Cost and expenses:
Cost of rentals ........................ 7,340 997 1,188 (131) 9,394
Cost of products and services .......... 2,951 33 740 -- 3,724
Cost of underbalanced drilling
services ............................. -- 1,653 2,497 -- 4,150
Selling, general and administrative .... 2,923 1,384 1,118 (163) 5,262
Depreciation and amortization cost ..... 1,559 1,286 312 -- 3,157
Reorganization cost .................... 656 -- -- -- 656
Research and development ............... 63 -- -- -- 63
--------- --------- --------- --------- ---------
15,492 5,353 5,855 (294) 26,406
--------- --------- --------- --------- ---------
Operating income ............................. 963 377 1,761 294 3,395
Other (income) expense:
Interest income ........................ (421) (3) -- -- (424)
Interest expense ....................... 1,945 23 16 -- 1,984
Equity in subsidiaries, net of tax ..... (1,824) -- -- 1,824 --
Other, net ............................. 82 (229) 54 294 201
--------- --------- --------- --------- ---------
Income before taxes .......................... 1,181 586 1,691 (1,824) 1,634
Income tax provision (benefit) ............... (62) 224 229 -- 391
--------- --------- --------- --------- ---------
Net income ................................... $ 1,243 $ 362 $ 1,462 $ (1,824) $ 1,243
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
10
<PAGE> 14
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income ............................... $ 36,511 $ 5,366 $ 5,770 $ -- $ 47,647
Sales of products and services .............. 24,194 1,896 5,582 -- 31,672
Underbalanced drilling services ............. 251 10,920 12,529 -- 23,700
--------- --------- --------- --------- ---------
60,956 18,182 23,881 -- 103,019
Cost and expenses:
Cost of rentals ............................. 24,851 3,050 4,089 (127) 31,863
Cost of products and services ............... 13,871 832 3,764 -- 18,467
Cost of underbalanced drilling services .... 570 4,489 9,156 -- 14,215
Selling, general and administrative ......... 15,017 4,179 5,704 (275) 24,625
Depreciation and amortization ............... 9,302 5,188 2,770 -- 17,260
Reorganization costs ........................ 2,385 -- -- -- 2,385
Non-cash compensation ....................... 604 -- -- -- 604
Research and development .................... 238 1 133 -- 372
--------- --------- --------- --------- ---------
66,838 17,739 25,616 (402) 109,791
--------- --------- --------- --------- ---------
Operating income (loss) ........................... (5,882) 443 (1,735) 402 (6,772)
Other (income) expense:
Interest income ............................. (2,809) -- (45) -- (2,854)
Interest expense ............................ 17,437 57 314 -- 17,808
Equity in subsidiaries, net of taxes ........ 2,854 -- -- (2,854) --
Other, net .................................. 7 (483) 552 402 478
--------- --------- --------- --------- ---------
Income (loss) before taxes ........................ (23,371) 869 (2,556) 2,854 (22,204)
Income tax provision .............................. 1,086 490 677 -- 2,253
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary item ....... (24,457) 379 (3,233) 2,854 (24,457)
Extraordinary item ................................ (17,579) -- -- -- (17,579)
--------- --------- --------- --------- ---------
Net income (loss) ................................. $ (42,036) $ 379 $ (3,233) $ 2,854 $ (42,036)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
11
<PAGE> 15
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income ............................ $ 30,978 $ 5,005 $ 5,407 $ -- $ 41,390
Sales of products and services ........... 11,293 1,331 2,096 -- 14,720
Underbalanced drilling services .......... -- 4,185 4,579 -- 8,764
--------- --------- --------- --------- ---------
42,271 10,521 12,082 -- 64,874
Cost and expenses:
Cost of rentals .......................... 18,380 3,079 5,631 (1,749) 25,341
Cost of products and services ............ 7,069 118 934 -- 8,121
Cost of underbalanced drilling services .. -- 2,113 2,497 -- 4,610
Selling, general and administrative ...... 7,735 2,015 1,759 (311) 11,198
Depreciation and amortization ............ 4,347 2,082 375 -- 6,804
Reorganization costs ..................... 2,453 -- -- -- 2,453
Non-cash compensation .................... 3,285 -- -- -- 3,285
Research and development ................. 476 -- -- -- 476
--------- --------- --------- --------- ---------
43,745 9,407 11,196 (2,060) 62,288
--------- --------- --------- --------- ---------
Operating income (loss) ........................ (1,474) 1,114 886 2,060 2,586
Other (income) expense:
Interest income .......................... (741) (13) -- -- (754)
Interest expense ......................... 2,285 27 16 -- 2,328
Equity in subsidiaries, net of taxes ..... (2,155) -- -- 2,155 --
Other, net ............................... (585) (755) (191) 2,060 529
--------- --------- --------- --------- ---------
Income (loss) before taxes ..................... (278) 1,855 1,061 (2,155) 483
Income tax provision (benefit) ................. (216) 310 451 -- 545
--------- --------- --------- --------- ---------
Net income (loss) .............................. $ (62) $ 1,545 $ 610 $ (2,155) $ (62)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
12
<PAGE> 16
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................... $ (42,036) $ 379 $ (3,233) $ 2,854 $ (42,036)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in subsidiaries ........................ 2,854 -- -- (2,854) --
Depreciation and amortization ................. 9,302 5,188 2,770 -- 17,260
Deferred income taxes ......................... (123) 123 (136) -- (136)
Write-off/amortization of debt issue costs .... 5,479 -- -- -- 5,479
Provision for doubtful accounts ............... 334 436 19 -- 789
Provision for stock awards .................... 1,614 -- -- -- 1,614
(Gain) loss on sale and disposition of
property and equipment ................... 59 2 (200) -- (139)
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable - trade .............. 6,713 (2,654) (545) -- 3,514
Accounts receivable from/payable to
officer and affiliates................. (33,118) 17,721 15,176 -- (221)
Prepaid expenses and other ............... (3,473) (1,437) 1,128 -- (3,782)
Accounts payable and accrued liabilities.. (4,251) (383) 1,834 -- (2,800)
Income taxes payable ..................... 504 140 227 -- 871
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities.. (56,142) 19,515 17,040 -- (19,587)
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory .. (33,254) (5,184) (5,717) -- (44,155)
Inventory transferred to cost of rentals ............ 4,018 900 504 -- 5,422
Revenue-producing tools lost in hole,
abandoned, and sold .............................. 3,819 (1,645) (242) -- 1,932
Additions to property and equipment ................. (3,951) (413) (1,782) -- (6,146)
Proceeds from sale of property and equipment ........ 322 (91) 368 -- 599
Acquisitions ........................................ (73,518) (13,519) (4,130) -- (91,167)
--------- --------- --------- --------- ---------
Net cash used in investing activities ............... (102,564) (19,952) (10,999) -- (133,515)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt .................. 268,125 -- -- -- 268,125
Payments on outstanding debt ........................ (120,973) (130) (5,387) -- (126,490)
Purchase of treasury stock........................... (3,100) -- -- -- (3,100)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities.. 144,052 (130) (5,387) -- 138,535
--------- --------- --------- --------- ---------
Effect of foreign exchange rate changes on cash...... -- -- (902) -- (902)
--------- --------- --------- --------- ---------
Decrease in cash and cash equivalents ............... (14,654) (567) (248) -- (15,469)
Cash and cash equivalents at beginning of period .... 56,672 860 2,305 -- 59,837
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period .......... $ 42,018 $ 293 $ 2,057 $ -- $ 44,368
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
13
<PAGE> 17
DAILEY INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income (loss) ..................................... $ (62) $ 1,544 $ 611 $ (2,155) $ (62)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Equity in subsidiaries .......................... (2,155) -- -- 2,155 --
Depreciation and amortization ................... 4,347 2,082 375 -- 6,804
Deferred income taxes ........................... (1,303) 10 (10) -- (1,303)
Write-off/amortization of debt issue costs ...... 60 -- -- -- 60
Provision for doubtful accounts ................. 219 29 83 -- 331
Provision for stock awards ...................... 3,285 -- -- -- 3,285
Loss on sale and disposition of
property and equipment ..................... 172 -- -- -- 172
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable - trade ................ (4,515) 167 (5,460) -- (9,808)
Accounts receivable from/payable to
officers and affiliates................ 1,266 (982) 4,703 -- 4,987
Prepaid expenses and other ................. 268 265 (188) -- 345
Accounts payable and accrued liabilities ... 3,397 (506) 1,637 -- 4,528
Income taxes payable ....................... 747 159 (198) -- 708
-------- -------- -------- -------- --------
Net cash provided by operating activities ............. 5,726 2,768 1,553 -- 10,047
INVESTING ACTIVITIES:
Additions to revenue-producing tools and inventory .... (14,691) (4,078) (1,966) -- (20,735)
Inventory transferred to cost of rentals .............. 3,084 1,369 730 -- 5,183
Revenue-producing tools lost in hole, abandoned,
and sold ........................................... 2,369 (578) (37) -- 1,754
Additions to property and equipment ................... (431) (79) (33) -- (543)
Proceeds from sale of property and equipment .......... 441 22 (56) -- 407
Acquisitions .......................................... (48,976) -- -- -- (48,976)
-------- -------- -------- -------- --------
Net cash used in investing activities ................. (58,204) (3,344) (1,362) -- (62,910)
FINANCING ACTIVITIES:
Net proceeds from the issuance of debt ............... 159,597 -- 56 -- 159,653
Payments on outstanding debt .......................... (52,865) (28) (25) -- (52,918)
Financing costs ....................................... (3,855) -- -- -- (3,855)
Exercise of stock options ............................. 650 -- -- -- 650
Purchase of treasury stock ............................ (1,047) -- -- -- (1,047)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities ... 102,480 (28) 31 -- 102,483
-------- -------- -------- -------- --------
Effect of foreign exchange rate changes on cash ...... -- 271 (37) -- 234
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash equivalents ...... 50,002 (333) 185 -- 49,854
Cash and cash equivalents at beginning of period ...... 10,814 553 190 -- 11,557
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period ............ $ 60,816 $ 220 $ 375 $ -- $ 61,411
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
14
<PAGE> 18
DAILEY INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995) and that involve risk and uncertainty. Words such as
"anticipate", "expect", "estimate", "project" and similar expressions are
intended to identify such forward-looking statements. These forward-looking
statements may include, but are not limited to, future capital expenditure and
information systems plans, anticipated results from current and future
operations, earnings, margins, acquisitions, market trends in the oilfield
services industry, including demand for the Company's drilling services and
downhole tools, competition and various business trends. Forward-looking
statements may be made by management orally or in writing including, but not
limited to, the Managements's Discussion and Analysis of Financial Condition and
Results of Operations section and other sections of the Company's filings with
the Securities and Exchange Commission under the Securities Act of 1933 and the
Securities Exchange Act of 1934.
Such forward-looking statements are subject to certain risks,
uncertainties and assumptions, including without limitation those identified
below and in the Company's Transition Report on Form 10-K for the period ended
December 31, 1997. Should one or more of these risks or uncertainties
materialize, or should any of the underlying assumptions prove incorrect, actual
results of current and future operations may vary materially from those
anticipated, estimated or projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates.
Among the factors that may have a direct bearing on the Company's
results of operations and the oilfield services industry in which it operates
are changes in the price of oil and natural gas; the impact of competitive
products and pricing; the presence of competitors with greater financial
resources; product demand and acceptance risks, including product obsolescence
risks with respect to its downhole tools and directional drilling technology;
risks associated with the DWS/DAMCO Acquisition, the IDS Acquisition, and the
Transocean Acquisition, including failure to successfully manage the Company's
growth and integrate the operations acquired in such acquisitions; the Company's
substantial leverage following its recent offering of senior notes, including
risks that available cash and cashflow from operations will be sufficient to
cover future interest payments; ability of the Company to decrease certain costs
despite certain unfavorable terms in employment agreements, leases, supply
contracts, licenses and other agreements entered into by the Company; risks that
the Company or its third party vendors will not be Year 2000 compliant in a
timely manner; typical operating risks inherent in the oilfield services
industry, including risks of environmental liability; delays in receiving raw
materials utilized in the manufacture and assembly of the Company's downhole
tools and other difficulties in the manufacture, assembly or delivery of the
Company's downhole tools including those acquired in the Company's recent
acquisitions; worldwide political stability and economic growth and other risks
associated with international operations, including foreign exchange and other
currency risks; risk of failure to maintain listing of the Class A Common Stock
on the Nasdaq National Market System, including failure to obtain listing on
alternative markets; and the Company's successful execution of internal
operating plans, including the ability of the Company to streamline and
reorganize operations in light of current market conditions to bring its cost
structure in line with current industry conditions, as well as regulatory
uncertainties and legal proceedings.
CHANGE IN FISCAL YEAR
Effective December 31, 1997, the Company changed its fiscal year end to
December 31 from April 30. The Company believes such a change allows the
Company's stockholders and other investors to more easily compare the Company's
operating results with those of other oil field services companies.
RECENT DEVELOPMENTS
Industry Conditions. Demand for the Company's products and services
depends to a large extent upon the level of exploration and production activity
in the oil and gas industry and the industry's willingness to spend capital on
drilling operations, which in turn depends in part on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves, domestic
and international political, military, regulatory and economic conditions and
the ability of oil and gas companies to raise capital. Prices for oil and gas
historically have been extremely volatile and have reacted to changes in the
supply of and demand for oil and natural gas, domestic and worldwide economic
conditions and political instability in oil producing countries.
15
<PAGE> 19
During 1996 and much of 1997, including the three and nine months ended
September 30, 1997, the oil field service industry experienced a general
improvement in product demand and pricing as relatively stable and improved oil
and natural gas prices combined with a strong world economy to increase
exploration and development activity worldwide. This trend benefited the Company
and its results during the three and nine months ended September 30, 1997.
Beginning in late 1997, the worldwide price of oil declined significantly and
prices for natural gas weakened. As prices for oil continue to decline, the
Company and others in the oil field services industry have experienced a
reduction in demand for their products and services, in particular products
associated with exploration activity and oil production. During 1998, such
economic and industry conditions put significant downward pressure on all of the
Company's operations. As a result, the Company's revenues and operations during
the three and nine months ended September 30, 1998 declined significantly from
the comparable periods in 1997. Operations during the third quarter of 1998 also
were adversely affected by work stoppages in the Gulf of Mexico for its products
and services as a result of adverse weather conditions. Continued adverse
industry conditions further weakened demand for the Company's products and
services during the third quarter of 1998. In response to these adverse industry
conditions, the Company is reviewing and implementing cost saving strategies to
reduce its cost structure to bring it more in line with current industry
conditions, including consolidating or eliminating operations and reducing
personnel; however, there can be no assurance that such strategies will be
successful and return the Company to profitability. In addition, the Company has
retained Jeffries & Company to advise the Company on alternatives to enhance
shareholder value, including acquisitions and/or divestitures of certain
business lines, although there can be no assurance that such alternatives will
be available to the Company, or can be pursued on terms favorable to the
Company.
Delisting of Securities. The Nasdaq National Market rules, which govern
the listing of securities such as the Company's Class A Common Stock on the
Nasdaq National Market System ("Nasdaq NMS"), require that the Company maintain
a minimum bid price of $5.00 per share on its Class A Common Stock and a minimum
market value for the Class A Common Stock's public float (i.e., securities not
owned by officers, directors or 10% stockholders) of $15 million. Due to
prevailing industry conditions, the market value of the Company's Class A Common
Stock, (as well as securities of other oil service companies) has deteriorated,
and, as a result, the Company no longer meets the Nasdaq NMS' standards with
respect to minimum bid price or public float market value. The Nasdaq will
delist the Company's Class A Common Stock if the Company does not take action to
cure these deficiencies. The Company currently is reviewing the alternatives
available to it in this regard but there can be no assurance that any realistic
alternatives will be available to the Company that can be implemented in a
timely manner to prevent delisting. The Company currently expects that it will
be delisted from the Nasdaq NMS as early as mid to late December 1998 unless it
is able to take actions to cure its current deficiencies. The Company currently
is assessing its ability to arrange for its securities to be traded on other
markets, including the American Stock Exchange and Nasdaq Small Rep Quotations
System, but has not determined whether it can meet the listing standards for
such markets. Any delisting, from the Nasdaq NMS without a suitable replacement
market will have a material adverse affect on the liquidity of the Company's
Class A Common Stock and potentially its market value.
Issuance of Senior Notes. On February 13, 1998, the Company issued $275
million principal amount of its 9 1/2% Senior Notes due 2008 (the "Senior
Notes"). Of the $268.1 million net proceeds to the Company, approximately $127.7
million were utilized to repurchase at a premium of 111% of their principal
amount all of the outstanding principal amount of the Company's 9 3/4% Senior
Notes due 2007 (the "Old Notes") and approximately $7.5 million were utilized to
repay outstanding debt under the Company's credit facility. The remaining net
proceeds were used to fund the acquisitions of IDS and Transocean's directional
drilling business and will be utilized to fund capital expenditures, to fund
future acquisitions and for general and working capital purposes. The Company is
currently investing the remaining net proceeds in temporary short-term
investments. The Senior Notes significantly increased the Company's debt levels
and will result in annualized interest payments of approximately $26.1 million
per year. As a result of the repurchase of the Old Notes, the Company recorded
an extraordinary loss in the first quarter of 1998 of $17.6 million representing
the excess of the purchase price for the Old Notes over their carrying value on
the date of repurchase.
Transocean Acquisition. In August 1998, the Company acquired
substantially all of the assets of the directional drilling business of
Transocean Petroleum Technology Limited ("Transocean") for $10 million in cash,
utilizing a portion of the proceeds from the Senior Notes offering (the
"Transocean Acquisition"). As a result of the Transocean Acquisition, the
Company expanded its directional drilling services to the North Sea. The
Transocean Acquisition was accounted for utilizing the purchase method of
accounting. The assets and liabilities were recorded at their estimated fair
market value as of the date of the acquisition. The Company recorded goodwill of
$1.2 million relating to the excess of purchase price over the fair market value
of the assets, which will be amortized over 25 years and result in approximately
$48,000 in amortization expense per year. Activities from the assets acquired in
the Transocean Acquisition were included in the Company's results beginning in
the third quarter of 1998.
IDS Acquisition. Utilizing a portion of the proceeds from the issuance
of the Senior Notes, the Company acquired the outstanding capital stock of IDS
in March 1998 for approximately $18.8 million in cash and 755,084 shares of
Class A Common Stock, plus assumption or repayment of debt of approximately $6.5
million. As a result of the IDS Acquisition, the Company acquired key
technologies, including a resistivity tool for LWD equipment that is compatible
with Dailey's MWD equipment. The Company believes that the addition of LWD
technology to its MWD equipment will allow the Company to offer more fully
integrated directional drilling services. At present, the Company is in the
process of integrating IDS operations and instituting production of IDS
products, which is not expected to be fully complete for several quarters. As a
result of the IDS Acquisition, which has been accounted for under the purchase
method of accounting, the Company initially recorded approximately $19.7 million
in goodwill, representing the excess of the purchase price over the estimated
fair market value of the IDS assets, which will be amortized over 25 years and
result in additional annual amortization expense of $788,000. Since the goodwill
associated with the IDS Acquisition will not be deductible for tax purposes, the
effective tax rate on Dailey's financial statements has increased as a result of
the acquisition.
16
<PAGE> 20
DWS/DAMCO Acquisition. The Company's operations and future results has
been significantly impacted by the DWS/DAMCO Acquisition, which was consummated
in January 1998. Dailey acquired the operating assets and liabilities of
DWS/DAMCO for $61 million in cash and financed the acquisition with remaining
proceeds from its offering of the Old Notes in August 1997 and borrowings under
its credit facility. As a result of the DWS/DAMCO Acquisition, the Company
became a leading supplier of electric wireline services and tubular testing and
handling services in the U.S. Gulf of Mexico region and Nigeria. The DWS/DAMCO
Acquisition was accounted for under the purchase method of accounting. As a
result, the assets and liabilities of DWS/DAMCO were recorded at their estimated
fair market values as of the date of the DWS/DAMCO Acquisition. The Company
recorded goodwill of approximately $32.0 million relating to the excess of the
purchase price paid for the assets over their fair market value, which will be
amortized over 25 years and result in approximately $1.3 million in annualized
amortization expense.
ADI Acquisition. On June 20, 1997, Dailey acquired ADI for $46.4
million, including the repayment of approximately $16.8 million in debt. As a
result of the ADI Acquisition, Dailey became a leading worldwide provider of air
drilling services for underbalanced drilling applications. The ADI Acquisition
was accounted for under the purchase method of accounting. As a result, the
operations of ADI following June 20, 1997 are reflected in Dailey's historical
operations and the assets and liabilities of ADI were recorded at their
estimated fair market values as of the date of the ADI Acquisition. Dailey
recorded goodwill of approximately $21.1 million relating to the excess of the
purchase price paid for the assets over their fair market value, which is being
amortized over 20 years and is resulting in approximately $1.1 million in
annualized amortization expense. Since the goodwill associated with the ADI
Acquisition is not amortized for tax purposes, the effective tax rate shown on
Dailey's financial statements has increased significantly as a result of the ADI
Acquisition.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
Rental Income. Rental income for the three months ended September 30,
1998 was $14.9 million, compared to $15.4 million for the same three months last
year. Excluding revenues from IDS, which was acquired in March 1998, and
Transocean, which was acquired in August 1998, of $1.6 million, rental income
decreased 14% from the same three months last year. Domestic rental income
decreased $1.3 million. Rental income from downhole tools decreased $1.1 million
as the result of decreased demand caused by adverse industry conditions. Rental
income from directional drilling activities along the Gulf of Mexico decreased
$1.6 million as a result of decreased demand caused by adverse industry
conditions as well as due to severe storms in that area during the period. This
decrease in domestic rental income was partially offset by increased rental
income of $1.4 million from the expansion of directional drilling activities
into the U.S. mid-continent region. Internationally, rental income decreased
$831,000. This decrease was due primarily to the curtailment by the Company of
directional drilling activity in Venezuela due to adverse market conditions in
this region resulting in decreased rental income of $899,000 and due to
decreased rental income from downhole tools in Latin America, the Far East and
Europe of $443,000 as a result of decreased demand due to adverse industry
conditions. This was partially offset by rental income from the expansion of
directional drilling activities into Thailand of $150,000 and increased revenue
from downhole tool rentals in the Middle East and West Africa of $362,000.
Sales of Products and Services. Sales of products and services for the
three months ended September 30, 1998 were $8.5 million compared to $6.3 million
for the same three months last year. Excluding revenues from DWS/DAMCO, which
was acquired in January 1998, and Transocean, which was acquired in August 1998,
of $4.6 million, revenues decreased 39% due primarily to decreased revenue from
tools lost-in-hole of $1.2 million, decreased revenue from drilling activity
along the Gulf Coast and in the Gulf of Mexico of $831,000 due to the severe
storms in that area during the period, decreased revenue of $368,000 in
Venezuela due primarily to the decline in directional drilling activity in that
region and decreased revenue from ADI of $278,000. This decrease was partially
offset by increased revenue from the expansion of directional drilling
operations into the U.S. mid-continent beginning in the third quarter of 1997,
of $251,000.
Underbalanced Drilling Services Revenue. Underbalanced drilling
services revenue for the three months ended September 30, 1998 was $7.8 million
compared to $8.0 million for the three months ended September 30, 1997.
Decreased activity caused by adverse industry conditions primarily in Colombia,
Indonesia and Canada, caused revenues to decrease $3.1 million. This was almost
completely offset by increased revenues primarily from Venezuela and the U.S. of
$3.0 million.
17
<PAGE> 21
Cost of Rentals. Cost of rentals for the three months ended September
30, 1998 was $10.3 million, compared to $9.4 million for the same three months
last year. Excluding cost of rentals from IDS, which was acquired in March 1998,
and Transocean, which was acquired in August 1998, of $942,000, costs were
unchanged compared to the third quarter of 1997. The margins on rental income
decreased from 39% for the three months ended September 30, 1997 to 29% for the
three months ended September 30, 1998, primarily due to an increase in fixed
costs associated with the expansion of directional drilling operations in the
U.S. mid-continent region and downhole tool rental in Saudi Arabia beginning
during the third quarter of 1997. In addition, margins were unfavorably impacted
by the utilization of third party tools (which typically generate lower margins)
as a result of expansion into new applications for the Company's directional
drilling services, increased commission expense due to an increase in rental
revenue in regions where the Company utilizes third-party agents and increased
costs associated with the manufacturing of downhole rental tools.
Cost of Products and Services. Cost of products and services for the
three months ended September 30, 1998 was $5.9 million, which was a $2.2 million
increase from the three months ended September 30, 1997. Excluding costs
associated with DWS/DAMCO, which was acquired in January 1998, and Transocean,
which was acquired in August 1998, of $2.9 million, costs decreased $704,000.
The margin on sales of products and services for the three months ended
September 30, 1998, excluding the impact of DWS/DAMCO and Transocean, decreased
to 22% from 41% for the same three months last year primarily due to the hiring
of additional directional drillers and MWD technicians combined with increased
salaries and other costs to retain qualified personnel in those positions. In
addition, decreased revenues from tools lost-in-hole in the third quarter of
1998 also caused margins to be lower. The third quarter 1998 margin declined 3%
compared to the margin in the first quarter of 1998 but was an improvement of 3%
over the second quarter of 1998. The Company currently has implemented and is
exploring additional cost saving strategies to adjust the Company's cost
structure to current industry conditions; however, the ability to consolidate
operations and reduce personnel in the short term could be limited by certain
existing contractual obligations.
Cost of Underbalanced Drilling Services. Cost of underbalanced drilling
services for the three months ended September 30, 1998 was $5.4 million compared
to $4.2 million for the three months ended September 30, 1997. Margins on
underbalanced drilling revenues during the third quarter of 1998 were 31%,
compared to 48% during the same quarter last year. This decrease is primarily a
result of the increase in lower margin project management services in Venezuela
during the third quarter of 1998. In connection with its review of cost saving
strategies in connection with its other operations, the Company is reviewing
ways to adjust its cost structure with respect to underbalanced drilling
operations to current industry conditions; however, the ability to consolidate
operations and reduce personnel in the short term could be limited by certain
existing contractual obligations.
Selling, General and Administrative. Selling, general and
administrative expenses for the three months ended September 30, 1998 were $8.6
million, compared to $5.3 million for the same three months last year. Excluding
costs associated with DWS/DAMCO and IDS, which were acquired in January 1998 and
March 1998 respectively, of $2.2 million, costs increased by $1.1 million during
the third quarter of 1998 compared to the third quarter of 1997 primarily as a
result of increased personnel and compensation costs and increased costs related
to business expansion and development activities. The Company has implemented
and is exploring additional cost saving strategies in order to reduce the level
of overhead to adjust the Company's cost structure to current industry
conditions; however, the ability to consolidate operations and reduce personnel
in the short term could be limited by existing certain contractual obligations.
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended September 30, 1998 were $6.6 million compared to $3.2
million for the same three months last year. This increase is due primarily to
the depreciation of the fair market value of assets acquired with DWS/DAMCO in
January 1998, IDS in March 1998 and Transocean in August 1998, and to the
increased manufacture and purchase of downhole tools and directional equipment,
of $2.7 million. Amortization of goodwill from the acquisitions of DWS/DAMCO,
IDS and Transocean during the current year increased amortization expense
$687,000.
Reorganization Costs. Reorganization costs for the three months ended
September 30, 1998 were $2.4 million compared to $656,000 for the three months
ended September 30, 1997. The costs incurred in 1998 were primarily related to
the resignation of the former chief executive officer and to the consolidation
of corporate leased facilities.
Interest Expense. Interest expense for the three months ended September
30, 1998 was $6.8 million compared to $2.0 million for the same three months
last year. This increase was due to interest on the $275 million 9 1/2% Senior
Notes.
18
<PAGE> 22
Income Tax Provision. Income tax expense for the three months ended
September 30, 1998 was $495,000, compared to $391,000 for the same three months
last year. Income tax expense exceeded the amount that would have resulted from
applying the U.S. federal statutory tax rate due to foreign income taxes and
withholding taxes with no offsetting benefit from U.S. net operating losses, net
of valuation allowances.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
Rental Income. Rental income for the nine months ended September 30,
1998 was $47.6 million , an increase of 15% from $41.4 million for the same nine
months last year. Exclusive of revenues from IDS, which was acquired in March
1998, and Transocean, which was acquired in August 1998, of $2.7 million, rental
revenues increased 9% from the same period last year. Domestic rental income
increased $3.5 million. Rental income from domestic directional drilling
activities increased $4.6 million primarily from the expansion of these
activities into the U.S. mid-continent region. This increase in domestic rental
income was partially offset by decreased rental income of $1.1 million from
downhole tools as the result of decreased demand caused by adverse industry
conditions. Internationally, rental income was the same as last year. This was
the result of increased downhole tool rental income in the Middle East, Far East
and East Africa of $2.3 million and to the expansion of directional drilling
activities into Thailand in the third quarter of $150,000. This increase in
international rental income was offset by decreased directional drilling
revenues of $1.7 million in Venezuela due to adverse market conditions in this
region resulting in the curtailment by the Company of directional drilling
activity in that area and a decrease in rental income from downhole tools
primarily in Latin America and Europe of $677,000 as a result of decreased
demand due to adverse industry conditions.
Sales of Products and Services. Sales of products and services for the
nine months ended September 30, 1998 were $31.7 million compared to $14.7
million for the same nine months last year. Excluding revenues associated with
DWS/DAMCO, which was acquired in January 1998, Transocean, which was acquired in
August 1998, and the first two quarters of 1998 for ADI, which was acquired in
June 1997, of $17.7 million, revenues decreased $727,000 primarily due to
decreased directional revenue in Venezuela of $549,000 resulting from the
decline in directional drilling activity in that region, decreased revenue from
tools lost-in-hole of $567,000 and decreased revenues from ADI of $278,000. This
was partially offset by increased revenues from domestic drilling operations of
$660,000.
Underbalanced Drilling Services. Underbalanced drilling services
revenue for the nine months ended September 30, 1998 was $23.7 million compared
to $8.8 million for the same nine months last year resulting from the
acquisition of ADI on June 20, 1997.
Cost of Rentals. Cost of rentals for the nine months ended September
30, 1998 was $31.9 million, an increase of 26% from $25.3 million for the same
nine months last year. Excluding costs associated with IDS, which was acquired
in March 1998, and Transocean, which was acquired in August 1998, of $1.6
million, costs increased 19%. Margins, exclusive of IDS and Transocean,
decreased from 39% for the nine months ended September 30, 1997 to 33% for the
nine months ended September 30, 1998, primarily due to an increase in fixed
costs associated with the expansion of directional drilling operations in the
U.S. mid-continent region and the increased use of third party tools which
typically generated lower margins as a result of expansion into new applications
for the Company's directional drilling services.
Cost of Products and Services. Cost of products and services for the
nine months ended September 30, 1998 was $18.5 million, which was a $10.3
million increase from the same nine months last year. Excluding costs associated
with DWS/DAMCO, which was acquired in January 1998, Transocean, which was
acquired in August 1998, and the first two quarters of 1998 for ADI, which was
acquired in June 1997, of $8.4 million, costs increased $1.9 million. The margin
on sales of products and services for the nine months ended September 30, 1998,
excluding the impact of ADI and DWS/DAMCO, Transocean and ADI decreased to 28%
from 45% for the same nine months last year primarily due to the hiring of
additional directional drillers and MWD technicians combined with increased
costs to retain qualified personnel in those positions and to decreased revenues
from tools lost-in-hole.
Cost of Underbalanced Drilling Services. Cost of underbalanced drilling
services for the nine months ended September 30, 1998 was $14.2 million compared
to $4.6 million for the same nine months last year. Excluding costs incurred
during the first two quarters of 1998 for ADI, which was acquired in June 1997,
costs increased $1.2 million. Margins on underbalanced drilling services were
40% compared to 47% during the same period last year, primarily due to the
increase in lower margin project management services in Venezuela during the
third quarter.
19
<PAGE> 23
Selling, General and Administrative. Selling, general and
administrative expenses for the nine months ended September 30, 1998 were $24.6
million, compared to $11.2 million for the same nine months last year. Excluding
costs associated with ADI for the first and second quarters, DWS/DAMCO and IDS
of $10.1 million, costs increased by $3.3 million primarily as a result of
increased personnel and compensation costs, increased costs related to business
expansion and development activity and increased costs related to an evaluation
of an enterprise-wide computer system.
Depreciation and Amortization. Depreciation and amortization expenses
for the nine months ended September 30, 1998 were $17.3 million compared to $6.8
million for the same nine months last year. Depreciation expense increased $8.4
million due primarily to increased depreciation expense related to assets
acquired in the acquisitions of ADI, DWS/DAMCO, IDS and Transocean and the
increased manufacture and purchase of downhole tools and directional equipment.
Amortization expense increased $2.0 million primarily as the result of the
amortization of goodwill associated with these acquisitions.
Reorganization Costs. Reorganization costs for the nine months ended
September 30, 1998 were $2.4 million compared to $2.5 million for the same
period last year. The costs incurred in the third quarter of 1998 were primarily
related to the resignation of the former chief executive officer and to the
consolidation of corporate leased facilities.
Non-cash Compensation. Non-cash compensation for the nine months ended
September 30, 1998 was $604,000 which was primarily related to vesting of
restricted stock granted to certain executive officers of the Company on October
7, 1997 in connection with the 1997 Long-Term Incentive Plan, compared to $3.3
million for the same period last year related to the vesting of prior grants.
Interest Income. Interest income for the nine months ended September
30, 1998 was $2.9 million compared to $754,000 for the same nine months last
year. This increase in interest income was the result of interest earned on
temporary, short term investments utilizing excess funds from the issuance of
the $115 million 9 3/4% Senior Notes through mid-February and the 9 1/2% Senior
Notes from that date forward.
Interest Expense. Interest expense for the nine months ended September
30, 1998 was $17.8 million compared to $2.3 million for the same nine months
last year. This increase was due to the interest on the $115 million 9 3/4%
Senior Notes through mid-February and the $275 million 9 1/2% Senior Notes from
that date forward.
Income Tax Provision. Income tax expense for the nine months ended
September 30, 1998 was $2.3 million, an increase from $545,000 for the same nine
months last year. Income tax expense exceeded the amount that would have
resulted from applying the U.S. federal statutory tax rate due to foreign income
taxes and withholding taxes with no offsetting benefit from U.S. net operating
losses, net of valuation allowances.
Extraordinary Item. As a result of the repurchase of the $115 million 9
3/4% Senior Notes, the Company recorded an extraordinary loss in the first
quarter of 1998 of approximately $17.6 million, representing the excess of the
purchase price for the notes over the carrying value on the date of the
repurchase.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. Cash used in operating activities was $19.6 million
during the nine months ended September 30, 1998. The primary source of cash was
the net proceeds from the issuance of debt of $268.1 million. Principal uses of
cash were to fund acquisitions (net of cash acquired) of $91.2 million, repay
outstanding debt of $126.5 million, pay interest on the Senior Notes of $13.2
million and fund capital expenditures of $44.9 million. During the past several
years, working capital requirements have been funded through cash generated from
operations, additional borrowings, credit facilities, asset sales and proceeds
from equity and debt offerings.
Senior Notes. The Senior Notes were issued pursuant to an indenture
dated February 13, 1998 (the "Indenture"). The Indenture contains various
covenants customary in such instruments, including covenants that (i) restrict
the Company's ability to incur additional indebtedness; (ii) restrict the
Company's ability to make restricted payments, including dividends; (iii)
restrict the Company's ability to sell assets; (iv) restrict the Company's
ability to grant liens on its assets; (v) limit transactions with affiliates and
(vi) limit the Company's ability to engage in certain extraordinary
transactions, including transactions involving a change in control of the
Company or the sale of substantially all of the Company's assets. The Senior
Notes are guaranteed by all of the Company's domestic subsidiaries, bear
interest at 9 1/2% that is payable semi-annually on February 15 and August 15 of
each year, mature on February 15, 2008 and are redeemable at the option of the
Company for stipulated redemption prices on or after February 15, 2003. The
issuance of the Senior Notes substantially increased the Company's level of
indebtedness over historical
20
<PAGE> 24
levels. The Company's increased level of indebtedness has had, and will have
several important affects on the Company's operations, including (i) a
substantial portion of the Company's cash flows from operations must be
dedicated to the payment of interest and principal on its indebtedness, (ii) the
Company's leveraged position will substantially increase its vulnerability to
adverse changes in general economic and industry conditions (including current
industry conditions), as well as to competitive pressure, and (iii) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate and other purposes may be
limited.
Revolving Credit Line. The Company currently does not have any
outstanding borrowings under its Revolving Credit Line. The Company and the bank
have mutually agreed that there will be no borrowings under the Revolving Credit
Line until the existing loan agreement is amended upon terms acceptable to
the bank.
Capital Expenditures. Capital expenditures, exclusive of acquisitions,
of approximately $44.9 million were made during the nine months ended September
30, 1998. Of this amount, $38.7 million was for downhole tools, primarily MWD
and other directional equipment, hydraulic drilling jars, hydraulic fishing jars
and related inventory. The Company currently has budgeted capital expenditures
for the remainder of 1998 of $4.1 million. The level of additional capital
expenditures beyond 1998 will be determined based upon a variety of factors,
including the Company's assessment of future demand for its products and
services, the level of cash flows being generated by the Company's operations
and the success of the Company's plans for streamlining and reorganizing
operations to current industry conditions and the level of funds necessary to
service the Company's debt burden. Although the Company's level of operations
during the nine months ended September 30, 1998 have been depressed, causing
neither cash flow from operations or earnings before interest, taxes,
depreciation or amortization to cover interest expense on its Senior Notes
during the period, the Company believes that the remaining proceeds from the
Senior Notes, cash flows from operations, asset sales and other investing and
financing activities will be sufficient to fund its planned capital
expenditures for 1998 and its operating activities and debt service
requirements for the next twelve months; however, absent an upturn in
industry conditions, no assurances can be given for periods beyond such time.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time sensitive software that recognizes a date
using "00" as the year 1900 rather than the year 2000. If not corrected, this
could cause a system failure or miscalculations causing disruptions of
operations, including, among other things, temporary inability to process
transactions, send invoices or engage in similar normal business activities.
The Company's plan to resolve the Year 2000 issue involves the
following four phases for both internal systems and operating equipment and
third party systems: assessment, remediation, testing and implementation. For
internal systems and operating equipment, the Company has reviewed all domestic
systems and hardware and is in the process of performing the same for
international systems and hardware and operating equipment. The Company
estimates that it is approximately 70% complete in the assessment and
remediation phases and 50% complete in the testing and implementation phases for
internal systems and operating equipment. For third party systems, the Company
has mailed a survey to all customers and vendors requesting evaluation of their
Year 2000 issues and currently expects receipt of responses by December 31,
1998. The Company will compile and analyze these responses and establish
appropriate action at that time.
The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement software and operating equipment
for Year 2000 modifications. The total cost of the Year 2000 project is
estimated to be $350,000 and is being funded using existing working capital. To
date, the Company has expensed approximately $39,000 related to all phases of
the Year 2000 project. Of the total remaining costs, approximately $250,000 is
attributable to the purchase of new software and operating equipment, which
will be capitalized. The remaining $61,000 relates to repair of hardware and
software and will be expensed as incurred.
The Company also is currently in the process of converting certain
accounting information systems as part of a total business knowledge management
process conversion, which will include all operating systems, for a total
estimated cost of approximately $2.6 million. The system conversion is estimated
to be completed no later than December, 1999. The Company believes that with
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, the completion of this
implementation does not affect the Year 2000 project since the Company's current
accounting systems are in the process of being made Year 2000 compliant.
The Company believes that it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not completed all phases of the Year 2000 project. Although the Company
currently expects to complete its Year 2000 project prior to the millenium, in
the event the Company does not complete additional phases or if such phases are
ineffective in addressing the Year 2000 issue, the Company would be unable to
perform certain international directional drilling operations, process
international financial ledgers, and track inventory. In addition, disruptions
in the economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. In addition, if the Company's third party vendors,
suppliers or customers are not Year 2000 compliant, the Company's operations
could be adversely affected if such third parties cannot supply goods and
services required by the Company in a timely manner, causing the Company to be
unable to provide its goods and services in a timely manner or at the Company's
current standards of quality, which could subject the Company to third party
lawsuits and reduce demand for the Company's goods and services. In addition,
demand for the Company's goods and services will be adversely affected if its
customers operations are adversely affected by the Year 2000 issue. The Company
could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
The Company has no contingency plans in the event it does not complete
all phases of the Year 2000 program. The Company plans to evaluate the status
of completion of its Year 2000 project in March 1999 and determine whether such
plans are necessary.
The estimated costs and the anticipated dates are based on management's
best estimates; however, there can be no assurance that these estimates will be
achieved, and actual results could differ materially from those anticipated.
21
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
Effective July 14, 1998, the shareholders of Dailey's Class B
Common Stock changed the structure under which they owned
their Class B Common Stock through a reorganization whereby
the shareholders contributed all of the stock in a company
controlled by the shareholders (which company's assets
consisted solely of 5,000,000 shares of Class B Common Stock
of Dailey) to Dailey in exchange for 5,000,000 new shares of
Dailey's Class B Common Stock. As a result of these
transactions, Dailey acquired the net operating loss
carryforward of the company, for which an offsetting allowance
will be provided. These transactions had no effect on Dailey's
financial position or results of operation or number of
outstanding shares of Class B Common Stock.
Effective August 12, 1998, all options outstanding with
employees which had an option price above $6.00 were repriced
to $6.00.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE> 26
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAILEY INTERNATIONAL INC.
-------------------------
(Registrant)
Date: November 16, 1998 */s/DAVID T. TIGHE
------------------
David T. Tighe
Senior Vice President &
Chief Financial Officer
and authorized to sign on behalf
of the Registrant
* Also signing on behalf of the Additional Registrants.
23
<PAGE> 27
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 44,368
<SECURITIES> 0
<RECEIVABLES> 38,833
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 88,155
<PP&E> 14,851
<DEPRECIATION> 0
<TOTAL-ASSETS> 339,763
<CURRENT-LIABILITIES> 26,262
<BONDS> 275,321
0
0
<COMMON> 106
<OTHER-SE> 30,287
<TOTAL-LIABILITY-AND-EQUITY> 339,763
<SALES> 0
<TOTAL-REVENUES> 103,019
<CGS> 0
<TOTAL-COSTS> 64,545
<OTHER-EXPENSES> 45,246
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,808
<INCOME-PRETAX> (22,204)
<INCOME-TAX> 2,253
<INCOME-CONTINUING> (24,457)
<DISCONTINUED> 0
<EXTRAORDINARY> (17,579)
<CHANGES> 0
<NET-INCOME> (42,036)
<EPS-PRIMARY> (4.30)
<EPS-DILUTED> (4.30)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 61,411
<SECURITIES> 0
<RECEIVABLES> 38,538
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 103,068
<PP&E> 6,227
<DEPRECIATION> 0
<TOTAL-ASSETS> 205,231
<CURRENT-LIABILITIES> 24,876
<BONDS> 114,167
0
0
<COMMON> 95
<OTHER-SE> 64,206
<TOTAL-LIABILITY-AND-EQUITY> 205,231
<SALES> 0
<TOTAL-REVENUES> 64,874
<CGS> 0
<TOTAL-COSTS> 38,072
<OTHER-EXPENSES> 24,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,328
<INCOME-PRETAX> 483
<INCOME-TAX> 545
<INCOME-CONTINUING> (62)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (62)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
