<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): MAY 21, 1999
WEATHERFORD INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
DELAWARE 1-13086 04-2515019
(State of (Commission (I.R.S. Employer
Incorporation) File No.) Identification No.)
515 POST OAK BLVD., SUITE 600
HOUSTON, TEXAS 77027
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 693-4000
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PAGE 1
EXHIBIT INDEX APPEARS ON PAGE 9
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ITEM 5. OTHER EVENTS.
DAILEY ACQUISITION
On May 21, 1999, we entered into an agreement to acquire Dailey
International Inc. for total consideration of approximately $195 million. The
consideration that would be paid for Dailey would be in the form of our common
stock and be allocated $185 million for Dailey's Senior Notes, of which we
currently hold approximately $64.7 million principal amount, and $10 million for
Dailey's common stock. The acquisition of Dailey would be completed through a
pre-negotiated plan of reorganization in bankruptcy that has been approved by
the holders 82% of the outstanding principal amount of Dailey Senior Notes and
50% of Dailey's common stock. The plan of reorganization is expected to filed by
June 1, 1999.
Dailey is a worldwide provider of specialty services and
technologically advanced downhole tools to the oil and gas industry. It is the
leading supplier of drilling jars and other proprietary downhole tools and a
worldwide leader in air drilling services for underbalanced drilling
applications. Our acquisition of Dailey is subject to customary governmental
approvals, including bankruptcy court approval. Although there can be no
assurance that this transaction will close, we expect that the transaction will
close sometime in the third quarter of this year.
A copy of our press release announcing the acquisition of Dailey is
filed as Exhibit 99.1 and is incorporated herein by reference.
DAILEY FINANCIAL STATEMENTS
The financial statements of Dailey for the periods specified in Rule
3-05(b) of Regulation S-X are filed as Exhibits 99.2 and 99.3 and are
incorporated herein by reference.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following summary unaudited pro forma condensed consolidated
financial data of Weatherford is based on the historical financial data of
Weatherford and the historical financial data of Dailey. The Unaudited Pro
Forma Condensed Consolidated Statements of Operations for the year ended
December 31, 1998, and the three months ended March 31, 1999, give effect to
Weatherford's proposed acquisition of Dailey as if the transaction had occurred
on January 1, 1998. The Unaudited Pro Forma Condensed Consolidated Balance Sheet
gives effect to the proposed acquisition as if this transaction had occurred on
March 31, 1999.
The pro forma information set forth below is not necessarily indicative
of the results that actually would have been achieved had such transactions been
consummated as of the aforementioned dates, or that may be achieved in the
future. In particular, the pro forma financial statements do not give effect to
any cost savings or additional synergies that may be realized by us as a result
of the proposed acquisition. We currently expect to realize around $20 million
in annual cost savings and $8 million in additional annual margins from the
acquisition. These benefits are not reflected in the pro forma adjustments and
are subject to various uncertainties described below under "Forward Looking
Statements". As a result, while we currently expect to realize these benefits
from the acquisition, there can be no assurance that these benefits will be
fully realized.
All other acquisitions by Weatherford are not material individually or
in the aggregate; therefore, pro forma information is not reflected. Because
this pro forma information is a summary, it does not contain all information
that may be important to you. You should also read the following:
o Weatherford's Management's Discussion and Analysis of Financial
Condition and Results of Operations and its financial statements and
related notes thereto contained in its Annual Report on Form 10-K
for the year ended December 31, 1998.
o Weatherford's Quarterly Report on Form 10-Q for the period ended
March 31, 1999.
o Dailey's Management's Discussion and Analysis of Financial Condition
and Results of Operations and its financial statements and related
notes thereto contained in its Annual Report on Form 10-K for the
year ended December 31, 1998.
o Dailey's Quarterly Report on Form 10-Q for the period ended
March 31, 1999.
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WEATHERFORD INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
WEATHERFORD DAILEY PRO FORMA WEATHERFORD
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,736 $ 19,185 $ (17,667)(a)(b) $ 36,254
Accounts receivable, net 367,298 33,002 -- 400,300
Inventories 522,157 -- -- 522,157
Other current assets 144,873 3,142 (31,513)(b)(c) 116,502
---------- ---------- ----------- -----------
Total current assets 1,069,064 55,329 (49,180) 1,075,213
---------- ---------- ----------- -----------
Property, plant and equipment, net 1,008,014 149,674 (11,376)(d) 1,146,312
Goodwill, net 837,704 21,979 -- 859,683
Other assets 122,578 24,054 (7,640)(e) 138,992
---------- ---------- ----------- -----------
$3,037,360 $ 251,036 $ (68,196) $ 3,220,200
========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt $ 225,431 $ 736 $ -- $ 226,167
Accounts payable 108,174 12,426 -- 120,600
Other accrued liabilities 180,881 7,948 3,177 (f) 192,006
---------- ---------- ----------- -----------
Total current liabilities 514,486 21,110 3,177 538,773
---------- ---------- ----------- -----------
Long-term debt 230,111 275,067 (275,000)(e) 230,178
Minority interests 268,840 -- -- 268,840
Deferred income taxes and other 140,180 7,011 -- 147,191
5% Convertible Subordinated
Preferred Equivalent Debentures 402,500 -- -- 402,500
Stockholders' equity:
Common stock 107,949 106 4,493 (g)(h) 112,548
Capital in excess of par 1,122,694 53,062 93,814 (g)(h) 1,269,570
Treasury stock, at cost (268,460) (4,061) 4,061 (h) (268,460)
Retained earnings (deficit) 609,723 (100,190) 100,190 (h) 609,723
Accumulated other comprehensive
loss (90,663) (1,069) 1,069 (h) (90,663)
---------- ---------- ----------- -----------
Total stockholders' equity 1,481,243 (52,152) 203,627 1,632,718
---------- ---------- ----------- -----------
$3,037,360 $ 251,036 $ (68,196) $ 3,220,200
========== ========== =========== ===========
</TABLE>
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WEATHERFORD INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
WEATHERFORD DAILEY PRO FORMA WEATHERFORD
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 2,010,654 $ 132,317 $ (1,046)(i) $ 2,141,925
----------- ---------- ----------- -----------
Costs and expenses:
Cost of sales 1,426,785 108,896 (2,432)(i)(j) 1,533,249
Selling, general and administrative 293,403 39,058 -- 332,461
Merger costs and other charges 144,097 56,450 -- 200,547
Equity in earnings of unconsolidated affiliates (2,679) -- -- (2,679)
----------- ---------- ----------- -----------
1,861,606 204,404 (2,432) 2,063,578
----------- ---------- ----------- -----------
Operating income 149,048 (72,087) 1,386 78,347
----------- ---------- ----------- -----------
Other income (expense):
Interest expense (54,497) (24,429) 23,750 (k) (55,176)
Interest income 2,969 3,425 (521)(l) 5,873
Other income (expense), net 1,868 (42) -- 1,826
----------- ---------- ----------- -----------
(49,660) (21,046) 23,229 (47,477)
----------- ---------- ----------- -----------
Income (loss) before income taxes 99,388 (93,133) 24,615 30,870
Provision for income taxes 34,551 2,115 8,615 (m) 45,281
----------- ---------- ----------- -----------
Income (loss) from continuing operations $ 64,837 $ (95,248) $ 16,000 $ (14,411)
=========== ========== =========== ===========
Income (loss) from continuing operations per share:
Basic $ 0.67 $ (0.14)
=========== ===========
Diluted $ 0.66 $ (0.14)
=========== ===========
Weighted average shares outstanding:
Basic 97,065 101,664 (n)
=========== ===========
Diluted 97,757 101,664
=========== ===========
</TABLE>
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WEATHERFORD INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Weatherford Dailey Pro Forma Weatherford
Historical Historical Adjustments Pro Forma
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 353,834 $ 28,339 $ (525)(i) $ 381,648
---------- ---------- ----------- -----------
Costs and expenses:
Cost of sales 259,261 24,943 (702)(i)(j) 283,502
Selling, general and administrative 78,002 8,240 -- 86,242
Reorganization costs -- 1,239 -- 1,239
Equity in earnings of unconsolidated affiliates (454) (509) -- (963)
---------- ---------- ----------- -----------
336,809 33,913 (702) 370,020
---------- ---------- ----------- -----------
Operating income 17,025 (5,574) 177 11,628
---------- ---------- ----------- -----------
Other income (expense):
Interest expense (12,652) (6,900) 6,746 (k) (12,806)
Interest income 1,521 747 (1,122)(l) 1,146
Other income (expense), net (854) 272 -- (582)
---------- ---------- ----------- -----------
(11,985) (5,881) 5,624 (12,242)
---------- ---------- ----------- -----------
Income (loss) before income taxes and minority
interests 5,040 (11,455) 5,801 (614)
Provision for income taxes 1,764 1,081 2,030 (m) 4,875
---------- ---------- ----------- -----------
Income (loss) from continuing operations 3,276 (12,536) 3,771 (5,489)
Minority interest expense, net of taxes 738 -- -- 738
---------- ---------- ----------- -----------
Net income (loss) $ 2,538 $ (12,536) $ 3,771 $ (6,227)
========== ========== =========== ===========
Net income (loss) per share :
Basic $ 0.03 $ (0.06)
========== ===========
Diluted $ 0.03 $ (0.06)
========== ===========
Weighted average shares outstanding:
Basic 97,315 101,914 (n)
========== ===========
Diluted 98,007 101,914
========== ===========
</TABLE>
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NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
The following notes set forth the assumptions used in preparing the
unaudited pro forma financial statements. The pro forma adjustments are based on
estimates made by Weatherford's management using information currently
available.
PRO FORMA ADJUSTMENTS
The adjustments to the accompanying Unaudited Pro Forma Condensed
Consolidated Balance Sheet are described below:
(a) To record the cash payment of $15.0 million for transaction and
severance costs.
(b) To record Weatherford's May 24, 1999 purchase of Dailey's 9 1/2%
Senior Notes due 2008 (the "Senior Notes") for $2.7 million (face value of
$4.4 million).
(c) To reverse Weatherford's $34.2 million net investment (face value
$64.7 million) in the Senior Notes.
(d) To reflect the initial estimate of the write-down of Dailey's
property, plant, and equipment to fair market value.
(e) To reflect the retirement of the Senior Notes and the write-off of
related debt issuance costs.
(f) To reverse $3.3 million in accrued interest and the $1.1 million
income tax receivable related to the Senior Notes. To accrue $5.3 million
for litigation and other contingencies relating to Dailey.
(g) To reflect the issuance of $195.0 million in shares of Weatherford
common stock less $43.5 million in Weatherford common stock to be received
by Weatherford in respect of the Senior Notes held by Weatherford. The net
shares to be issued are approximately 4.6 million shares, valued at $32
15/16 per share, which was the closing market price on May 20, 1999. Of
this amount, the Dailey shareholders will receive shares valued at $10.0
million and the balance of the shares will be issued to the holders of the
Senior Notes other than Weatherford.
(h) To eliminate Dailey's equity, which consists of $0.1 million common
stock, $53.1 million capital in excess of par, $4.1 million of treasury
stock, $100.2 million of retained deficit, and $1.1 million of accumulated
other comprehensive loss.
The adjustments to the accompanying Unaudited Pro Forma Condensed
Consolidated Statements of Operations are described below:
(i) To eliminate revenues of $1.0 million and $0.5 million and related
costs of $0.2 million and $0.1 million for the year ended December 31, 1998
and the three months ended March 31, 1999, respectively, associated with
transactions between Dailey and Weatherford.
(j) To reverse depreciation expense of $2.2 million and $0.6 million for
the year ended December 31, 1998 and the three months ended March 31, 1999,
respectively, to reflect the write-down of property, plant, and equipment
to fair market value. Such property, plant and equipment is being
depreciated over five years.
(k) To eliminate interest expense to reflect the retirement of the Senior
Notes.
(l) To eliminate Weatherford's interest income related to its investment
in the Senior Notes.
(m) To record the income tax provision related to the effect of the pro
forma adjustments at the statutory rate.
(n) Weatherford's historical shares outstanding and basic weighted average
pro forma shares outstanding as of March 31, 1999, were 97,283,731 and
101,914,007, respectively. Weatherford's historical shares outstanding and
basic weighted average pro forma shares outstanding as of December 31,
1998, were 97,328,462 and 101,663,578, respectively.
PAGE 6
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements relating to our proposed
acquisition of Dailey. We believe these statements constitute "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Certain risks and uncertainties may cause actual results to be materially
different from projected results contained in forward-looking statements in this
report. In addition to the general market risks described in our Annual and
Quarterly Reports, there exist risks and uncertainties relating to the Dailey
acquisition, including, but not limited to, the following:
o BANKRUPTCY UNCERTAINTIES. Our acquisition of Dailey is subject to
bankruptcy court approval. Although we have received agreements from
the holders of more than two-thirds of the claims of Dailey's impaired
creditors, there can be no assurance that the acquisition will be
completed in a timely manner. Our pro forma financial statements
assume that the acquisition of Dailey will be completed between 60 and
120 days without any unexpected administrative costs and expenses or
unknown claims against Dailey. To the extent the bankruptcy process
takes longer than anticipated or claims, including severance, exceed
those currently projected the costs of the acquisition could be
greater than that set forth in the pro forma financial statements.
o COST SAVINGS. We currently expect that our acquisition of Dailey will
allow us to realize around $20 million in annual cost savings through
the elimination and reduction of overlapping costs. Our ability to
achieve these savings will be dependent on our ability to integrate
the operations of the acquired business, including personnel, systems
and facilities.
o SYNERGIES. We currently expect to realize around $8 million annually
in additional margins from the manufacture of our own drilling and
fishing jars. These savings will be dependent on the ultimate amount
of jar business conducted by us, which in turn will be dependent on
market conditions. Our ability to realize these benefits will also be
dependent on the timing of the conversion of our current jar lines to
the Dailey jar line.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
23.1 Consent of Ernst & Young LLP with respect to the financial
statements of Dailey International Inc.
99.1 Press release dated May 21, 1999, announcing the acquisition
of Dailey International Inc.
99.2 Consolidated Financial Statements of Dailey International
Inc. as of December 31, 1998 and 1997 and for the year
December 31, 1998, the eight month period ended December 31,
1997 and for each of two years in the period ended April 30,
1997.
99.3 Consolidated Financial Statements of Dailey International
Inc. for the quarterly period ended March 31, 1999.
PAGE 7
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WEATHERFORD INTERNATIONAL, INC.
Dated: May 25, 1999 /s/ Bruce F. Longaker, Jr.
------------------------------------
Bruce F. Longaker, Jr.
Senior Vice President
and Chief Financial Officer
PAGE 8
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INDEX TO EXHIBITS
NUMBER EXHIBIT
- ------ -------
23.1 Consent of Ernst & Young LLP with respect to the financial
statements of Dailey International Inc.
99.1 Press release dated May 21, 1999, announcing the acquisition
of Dailey International Inc.
99.2 Consolidated Financial Statements of Dailey International
Inc. as of December 31, 1998 and 1997 and for the year
December 31, 1998, the eight month period ended December 31,
1997 and for each of two years in the period ended April 30,
1997.
99.3 Consolidated Financial Statements of Dailey International
Inc. for the quarterly period ended March 31, 1999
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(File Nos. 33-31662, 33-56384, 33-56386, 33-65790, 33-64349, 333-13531,
333-39587, 333-44345, 333-45207 and 333-53633) of Weatherford International,
Inc. of our report dated March 29, 1999, with respect to the consolidated
balance sheets of Dailey International Inc. as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1998, the eight month period ended
December 31, 1997 and for each of the two years in the period ended April 30,
1997, included in Weatherford International, Inc.'s Form 8-K dated May 24, 1999.
/s/ Ernst & Young LLP
Houston, Texas
May 24, 1999
<PAGE> 1
EXHIBIT 99.1
WEATHERFORD TO ACQUIRE DAILEY INTERNATIONAL INC. FOR $195 MILLION
HOUSTON, May 21, 1999 - Weatherford International, Inc. (NYSE: WFT) today
announced that it has entered into an agreement to acquire Dailey International
Inc. for $195 million in Weatherford common stock. The acquisition will be
consummated pursuant to a pre-negotiated plan of reorganization in bankruptcy.
The plan, which is expected to be filed by June 1, 1999, has been agreed to by
the holders of approximately $225 million or 82% of the outstanding principal
amount of Dailey's 9 1/2% Senior Notes and more than 50% of Dailey's Common
Stock.
Under terms of the acquisition, the holders of the 9 1/2% Senior Notes will
receive $185 million in exchange for their claims relating to their $275
million principal amount of notes and accrued interest. The Dailey stockholders
will receive $10 million. The combined amount will be payable in Weatherford
common stock. Other claims, including trade and other debt, will not be
impaired. The transaction will be subject to normal and customary approval by
the bankruptcy court and other governmental authorities.
Dailey is a worldwide provider of specialty services and technologically
advanced downhole tools to the oil and gas industry. Dailey is a leading
supplier of drilling jars and other proprietary downhole tools, including
hydraulic fishing jars, coiled tubing jars and other drilling tools. Dailey is
also a worldwide leader in providing air drilling services for underbalanced
drilling applications. Additionally, Dailey provides installation services,
directional drilling services and electric wireline services to the oil and gas
industry.
Dailey's product lines are highly complementary to the Weatherford product and
service offering with substantial synergies in jars, underbalanced drilling and
installation services. Weatherford is the industry's largest user of jars.
Furthermore, Weatherford, with its patented foam technology, metal to metal
motor technology and specialized pressure equipment, is building an integrated
offering of underbalanced products and services covering the wellhead and
downhole. Underbalanced drilling is expected to grow substantially,
particularly in re-entry applications. Upon closing, Dailey's businesses will
be placed within Weatherford's Completion and Oilfield Services division.
Houston-based Weatherford International, Inc. is one of the largest global
providers of engineered products and services to the drilling and production
sectors of the oil and gas industry.
# # #
Contact: Weatherford
Bruce Longaker (713) 693-4161
Don Galletly (713) 693-4148
This press release may contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 concerning, among other
things, Weatherford's prospects for its operations and the integration of
recent acquisitions, all of which are subject to certain risks, uncertainties
and assumptions. These risks and uncertainties, which are more fully described
in Weatherford International, Inc.'s Annual, Quarterly and Current Reports
filed with the Securities and Exchange Commission, include the impact of oil
and natural gas prices and worldwide economic conditions on drilling activity,
the demand and pricing of Weatherford's products, as well as the ability to
achieve the anticipated synergies and savings from the proposed acquisition of
Dailey. Should one or more of these risks or uncertainties materialize, or
should the assumptions prove incorrect, actual results may vary in material
aspects from those currently anticipated.
<PAGE> 1
EXHIBIT 99.2
DAILEY INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Report of Independent Auditors......................................... 2
Consolidated Financial Statements:
Consolidated Balance Sheets............................................ 3
Consolidated Statements of Operations.................................. 4
Consolidated Statements of Stockholders' Equity........................ 5
Consolidated Statements of Cash Flows.................................. 6
Notes to Consolidated Financial Statements............................. 7
</TABLE>
1
<PAGE> 2
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Dailey International Inc.
We have audited the accompanying consolidated balance sheets of Dailey
International Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1998, the eight month period ended December 31, 1997
and for each of the two years in the period ended April 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dailey International Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the year ended December 31,
1998, eight month period ended December 31, 1997 and for each of the two years
in the period ended April 30, 1997, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred significant operating losses and negative operating cash
flows in recent periods and has a deficiency in stockholders' equity at December
31, 1998. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Houston, Texas
March 29, 1999
2
<PAGE> 3
DAILEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 32,843 $ 59,837
Accounts receivable, net ...................................... 32,803 34,601
Accounts receivable from affiliates ........................... 362 --
Deferred income taxes ......................................... -- 465
Prepaid expenses and other current assets ..................... 4,778 2,304
--------- ---------
Total current assets ................................... 70,786 97,207
Revenue-producing tools and inventory, net ...................... 141,524 79,056
Property and equipment, net ..................................... 13,255 8,181
Deferred income taxes ........................................... -- --
Accounts receivable from officer ................................ -- 250
Goodwill, net ................................................... 22,275 19,183
Investment in joint venture ..................................... 7,100 --
Other assets .................................................... 17,233 5,400
--------- ---------
Total assets ........................................... $ 272,173 $ 209,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ...................... $ 25,055 $ 23,804
Accounts payable to affiliate ................................. -- 483
Income taxes payable .......................................... 3,987 2,417
Current portion of long-term debt ............................. 1,048 146
--------- ---------
Total current liabilities .............................. 30,090 26,850
Long-term debt .................................................. 275,060 114,229
Deferred income taxes ........................................... 5,910 1,238
Other noncurrent liabilities .................................... 1,298 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
December 31, 1998 and 1997, respectively;
Class B, $0.01 par value: 10,000,000 shares
authorized, 5,000,000 shares issued and outstanding at
December 31, 1998 and 1997................................... 106 94
Treasury stock (568,151 and 144,000 shares at
December 31, 1998 and 1997, respectively) ................... (4,048) (1,047)
Paid-in capital ............................................... 52,437 41,335
Accumulated other comprehensive income ........................ (1,026) (154)
Retained earnings ............................................. (87,654) 25,173
--------- ---------
Total stockholders' equity ............................. (40,185) 65,401
--------- ---------
Total liabilities and stockholders' equity ............. $ 272,173 $ 209,277
========= =========
</TABLE>
See accompanying notes.
3
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DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED APRIL 30,
DECEMBER 31, -------------------------- --------------------------
1998 1997 1996 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income ............................... $ 61,255 $ 42,454 $ 33,761 $ 49,497 $ 42,987
Sales of products and
services ................................. 40,037 15,010 11,454 16,954 15,952
Underbalanced drilling ...................... 31,025 18,685 -- -- --
----------- ----------- ----------- ----------- -----------
132,317 76,149 45,215 66,451 58,939
Costs and expenses:
Cost of rentals ............................. 43,442 24,525 21,469 31,527 27,617
Cost of products and
services ................................. 24,443 9,142 6,131 8,775 7,857
Cost of underbalanced
drilling ................................. 19,559 10,098 -- -- --
Selling, general and
administrative ........................... 34,126 13,672 7,748 11,543 11,829
Depreciation and amortization ............... 24,481 8,106 4,197 6,593 5,726
Reorganization cost ......................... 3,413 2,453 -- -- --
Non-cash compensation ....................... 711 661 -- 2,807 --
Research and development .................... 1,192 190 549 850 728
Provision for asset impairment .............. 53,037 -- -- -- --
----------- ----------- ----------- ----------- -----------
204,404 68,847 40,094 62,095 53,757
----------- ----------- ----------- ----------- -----------
Operating income (loss)........................ (72,087) 7,302 5,121 4,356 5,182
Other (income) expense:
Interest income ............................. (3,425) (1,342) (410) (640) (104)
Interest expense-nonaffiliates .............. 24,429 5,252 486 671 785
Interest expense-affiliate .................. -- -- 172 162 182
Other, net .................................. 42 396 (149) 188 278
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item .......................... (93,133) 2,996 5,022 3,975 4,041
Provision for income taxes .................... 2,115 1,319 1,829 1,511 1,427
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item ....... (95,248) 1,677 3,193 2,464 2,614
Extraordinary item, net of taxes .............. (17,579) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................. $ (112,827) $ 1,677 $ 3,193 $ 2,464 $ 2,614
=========== =========== =========== =========== ===========
Earnings (loss) per share before
extraordinary item:
Basic ....................................... $ (9.67) $ 0.18 $ 0.42 $ 0.30 N/A
Diluted ..................................... $ (9.67) $ 0.18 $ 0.42 $ 0.30 N/A
Earnings (loss) per share:
Basic ....................................... $ (11.46) $ 0.18 $ 0.42 $ 0.30 N/A
Diluted ..................................... $ (11.46) $ 0.18 $ 0.42 $ 0.30 N/A
Pro forma earnings per share:
Basic ....................................... N/A N/A N/A N/A $ 0.40
Diluted ..................................... N/A N/A N/A N/A $ 0.40
Weighted average shares
outstanding:
Basic ....................................... 9,848,368 9,228,009 7,594,286 8,138,104 N/A
Diluted ..................................... 9,848,368 9,329,400 7,637,214 8,178,576 N/A
Pro forma weighted average shares
outstanding:
Basic ....................................... N/A N/A N/A N/A 6,610,000
Diluted ..................................... N/A N/A N/A N/A 6,610,000
</TABLE>
See accompanying notes.
4
<PAGE> 5
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS CLASS ACCUMULATED
A B OTHER TOTAL
PREFERRED COMMON COMMON TREASURY PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK STOCK CAPITAL INCOME EARNINGS EQUITY
--------- -------- -------- -------- -------- ------------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 ....... $-- $ -- $ 50 $ -- $ 4,559 $ -- $ 28,418 $ 33,027
Net income .................... -- -- -- -- -- -- 2,614 2,614
----- -------- -------- -------- -------- -------- -------- --------
Balance at April 30, 1996 ....... -- -- 50 -- 4,559 -- 31,032 35,641
----- -------- -------- -------- -------- -------- -------- --------
Net income .................... -- -- -- -- -- -- 2,464 2,464
Dividend ...................... -- -- -- -- -- -- (10,000) (10,000)
Net proceeds from sale of stock -- 39 -- -- 27,610 -- -- 27,649
Capital contribution .......... -- -- -- -- 5,000 -- -- 5,000
Purchases of treasury stock ... -- -- -- (234) -- -- -- (234)
Provision for stock awards .... -- 4 -- -- 2,803 -- -- 2,807
----- -------- -------- -------- -------- -------- -------- --------
Balance at April 30, 1997 ....... -- 43 50 (234) 39,972 -- 23,496 63,327
----- -------- -------- -------- -------- -------- -------- --------
Net income .................... -- -- -- -- -- -- 1,677 1,677
Translation adjustment ........ -- -- -- -- -- (154) -- (154)
--------
Comprehensive income .......... 1,523
--------
Purchases of treasury stock ... -- -- -- (813) -- -- -- (813)
Provision for stock awards .... -- -- -- -- 661 -- -- 661
Exercise of stock options ..... -- 1 -- -- 702 -- -- 703
----- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 .... -- 44 50 (1,047) 41,335 (154) 25,173 65,401
----- -------- -------- -------- -------- -------- -------- --------
Net loss ...................... -- -- -- -- -- -- (112,827) (112,827)
Translation adjustment ........ -- -- -- -- -- (1,080) -- (1,080)
Unrealized gain on cash
equivalent investments ..... -- -- -- -- -- 208 -- 208
--------
Comprehensive income (loss) ... (113,699)
--------
Stock issuance for
acquisition, including
returned shares ............ -- 11 -- (2,747) 9,437 -- -- 6,701
Provision for stock awards .... -- 1 -- 1,665 -- -- 1,666
Purchase of treasury stock .... -- -- -- (254) -- -- -- (254)
----- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 .... $-- $ 56 $ 50 $ (4,048) $ 52,437 $ (1,026) $(87,654) $(40,185)
===== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED APRIL 30,
DECEMBER 31, -------------------------- --------------------------
1998 1997 1996 1997 1996
------------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .............................. $ (112,827) $ 1,677 $ 3,193 $ 2,464 $ 2,614
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Extraordinary loss on repurchase of notes .... 17,579
Depreciation ................................. 20,432 7,339 4,157 6,530 5,689
Amortization ................................. 4,049 767 40 63 37
Deferred income taxes ........................ 2,437 100 511 (783) (816)
Write-off/amortization of debt
issuance costs............................. 806 -- -- -- --
Provision for asset impairment............... 53,037 -- -- -- --
Provision for doubtful accounts ................ 2,176 561 208 305 256
(Gain) loss on sale and disposition of
property and equipment .................... (311) 10 (11) 159 6
Provision for stock awards ..................... 1,665 661 -- 2,807 --
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable trade .................... 9,058 (9,497) (5,960) (2,605) (2,498)
Accounts receivable from/payable to
officers and affiliates ................... 4,780 41 (4,570) 628 (538)
Prepaid expenses and other ................... (9,677) (171) (1,716) (972) 347
Accounts payable and accrued liabilities ..... (3,261) 10,526 4,823 1,575 (932)
Income taxes payable ......................... 570 (1,322) 690 1,492 741
------------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities ................................... (9,487) 10,692 1,365 11,663 4,906
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory .................................... (47,473) (22,792) (15,696) (21,825) (12,173)
Inventory transferred to cost of rentals ....... 7,138 6,386 4,311 5,913 5,521
Revenue-producing tools lost in hole,
abandoned and sold ........................... 2,364 1,976 1,419 1,983 2,551
Additions to property and equipment ............ (9,382) (8,394) (509) (660) (883)
Proceeds from sale of property and equipment ... 1,923 617 94 126 916
Investment in joint venture..................... (7,100) -- -- -- --
Acquisitions ................................... (96,884) (46,226) -- (1,584) --
Unrealized gain on cash equivalent investments . 208 -- -- -- --
------------- ----------- ----------- ----------- -----------
Net cash used in investing activities .......... (149,206) (68,433) (10,381) (16,047) (4,068)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ............. 268,125 159,597 400 400 1,300
Payments on outstanding debt ................... (122,442) (52,826) (4,628) (5,198) (1,967)
Extraordinary loss on repurchase of notes ...... (12,650)
Financing costs ................................ -- (4,129) -- -- --
Payment of promissory note ..................... -- -- (5,000) (5,000) --
Purchase of treasury stock ..................... (254) (813) -- (234) --
Exercise of stock options ...................... -- 703 -- -- --
Net proceeds from sale of common stock ......... -- -- 27,834 27,649 --
------------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities ................................... 132,779 102,532 18,606 17,617 (667)
Effect of foreign exchange rate changes
on cash....................................... (1,080) (154) -- -- --
------------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents .................................. (26,994) 44,637 9,590 13,233 171
Cash and cash equivalents at beginning of
period ....................................... 59,837 15,200 1,967 1,967 1,796
------------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ..... $ 32,843 $ 59,837 $ 11,557 $ 15,200 $ 1,967
============= =========== =========== =========== ===========
</TABLE>
See accompanying notes.
6
<PAGE> 7
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. GOING CONCERN
In response to adverse industry conditions, the Company began during the
third quarter of 1998 to review and implement cost saving strategies to reduce
its cost structure to bring it more in line with then current industry
conditions, including consolidating or eliminating operations and reducing
overhead. As a result of these efforts, the Company recorded a reorganization
charge during 1998 of $3.4 million. (See Note 17). The Company has continued to
review methods in which it can reduce its cost structure and reduce overhead;
however, the Company believes that its ability to further reduce costs is
severely limited due to unfavorable terms in employment agreements, which
require an aggregate of approximately $9.8 million in severance costs in the
event of early termination.
In addition, the Company retained an investment bank to advise the Company
on alternatives to enhance shareholder value, including acquisitions and/or
divestitures of certain businesses. Although the Company will continue to review
opportunities presented to it for the sale or divestiture of businesses, the
Company currently does not have any intent of disposing of any of its assets or
businesses.
Assuming no further deterioration in market conditions and demand for the
Company's products and services, the Company believes its existing cash as well
as its capacity to obtain additional financing from third parties will allow it
to continue to finance its operations through 1999. In this regard, the Company
currently has no outstanding debt other than under the Senior Notes (see Note
10) and debt assumed in the IDS acquisition (see Note 4), and believes that it
has capacity, utilizing all or part of its assets as security, to borrow
additional funds from a bank or other lender, that will be sufficient to allow
the Company to fund its operations through 1999. However, the Company currently
does not have any commitment or other indication from any third party of its
willingness to lend the Company such additional funds and no assurance can be
given that such a financing transaction can be completed on terms acceptable to
the Company. In the event the Company is unable to obtain such third party
financing, the Company does not believe its cash on hand and current level of
operations will be sufficient to fund its operations during 1999, in which case
the Company will be required to sell assets, negotiate a restructuring of debt
obligations with the holders of its Senior Notes or seek protection under the
United States bankruptcy code. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
may result from the outcome of this uncertainty.
2. ORGANIZATION AND PUBLIC OFFERING
The accompanying consolidated financial statements reflect the operations of
Dailey International Inc. (formerly Dailey Petroleum Services Corp.), a Delaware
corporation. In June 1996, Dailey Petroleum Services Corp. was merged with
Dailey Corporation (which changed its name to Dailey Petroleum Services Corp.).
In October 1997, Dailey Petroleum Services Corp. changed its name to Dailey
International Inc., hereinafter referred to as the "Company" or "Dailey."
In October 1997, the Company changed its fiscal year end to December 31,
effective December 31, 1997. For purposes of this financial statement
presentation, the eight month period ended December 31, 1997 represents the
transition period from May 1, 1997 (April 30, 1997 being the last fiscal year
end) through December 31, 1997. The unaudited results for the eight months ended
December 31, 1996 have been presented for comparative purposes.
The Company currently manages its operations in two business segments: (1)
downhole products and services and (2) underbalanced drilling services. Downhole
products and services are comprised of the Company's directional drilling
services, electric wireline services, tubing conveyed perforating services and
downhole tool rentals. The Company's underbalanced drilling services were
acquired through the Company's acquisition of Air Drilling International, Inc.
("ADI") in June 1997. 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 ADI and, as a result, became a leading provider
worldwide of air drilling services for underbalanced drilling applications. The
Company operates in one business segment. 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. In December 1998 Dailey, through
its subsidiary Air Drilling Services, Inc., acquired 51% of International
Nitrogen Services, Inc. ("INS"), a joint venture with MG Generon, Inc. The
company, headquartered in Houston, Texas, provides non-cryogenic nitrogen
generators and production units for use in the on-site production of nitrogen
for injection in downhole drilling of oil and gas.
Prior to June 1996, Dailey was a wholly-owned subsidiary of Lawrence
Industries, Inc. ("Lawrence"). In June 1996, in preparation for the initial
public offering of Class A Common Stock of Dailey, Lawrence reorganized its
ownership of the Company into a holding company structure through a forward
triangular merger of Dailey Petroleum Services Corp., into a newly-formed,
wholly-owned indirect subsidiary of Lawrence called Dailey Corporation (the
"Reorganization"), which is now Dailey International Inc. The effect of the
forward triangular merger has been reflected retroactively in the accompanying
financial statements. In August 1996, the Company completed its initial public
offering of 3,910,000 shares of Class A Common Stock (the "1996 IPO").
Dailey's Restated Certificate of Incorporation provides for three classes of
stock: Class A Common Stock, Class B Common Stock and Preferred Stock. The Board
of Directors is empowered to authorize the issuance of Preferred Stock in one or
more series and to fix the rights, powers, preferences and limitations of each
series. A holder of Class B Common Stock may convert its Class B Common Stock
into Class A Common Stock at any time at the ratio of one share of Class A
Common Stock for each share of Class B Common Stock. In the event of
liquidation, holders of Class A Common Stock and Class B Common Stock share with
each other on a ratable basis as a single class in the net assets of the Company
available for distribution. In addition, shares of Class B Common Stock convert
automatically into a like number of shares of Class A Common Stock upon the sale
or transfer of such shares to a person or entity that is not a member of the
Lawrence Group (as defined in the Company's Restated Certificate of
Incorporation).
Net proceeds from the sale of the stock in the 1996 IPO were $27.6 million.
The Company used $5.0 million of the proceeds from the 1996 IPO to repay the
outstanding balance of a $10.0 million promissory note, which was incurred in
connection with a dividend declared on June 27, 1996 (the "Dividend"). Prior to
commencement of the IPO, the Company's sole stockholder contributed to the
capital of the Company $5.0 million of the outstanding principal of such note.
The statement of operations for the year ended April 30,
7
<PAGE> 8
1996 includes pro forma per share data which gives effect to the number of
shares from which proceeds would have been used to pay the Dividend (an
additional 1,250,000 shares assuming a per share offering price of $8.00, thus
earnings per share for the year ended April 30, 1996, were based on 6,610,000
shares of Common Stock outstanding). Historical earnings per share excluding the
pro forma effect of the dividend was $0.49 per share for the year ended April
30, 1996.
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances are eliminated in consolidation.
The Company has historically had significant transactions with Lawrence and
its affiliates which are reflected in the accompanying consolidated financial
statements on the basis established between the Company and Lawrence. See Notes
9 and 13.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all investments with maturities of three months or
less when purchased to be cash and cash equivalents.
Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts of $4.4
million and $1.8 million at December 31, 1998 and 1997,respectively.
Revenue-Producing Tools and Inventory
Revenue-producing tools and inventory are stated at cost utilizing the
first-in, first-out method. Revenue-producing tools are depreciated on the
straight-line method over their estimated useful lives of 5 to 7 years. Tools
lost in hole and billed to customers and tools abandoned are included in sales
of products and services and the related write-off of the tools' net book values
are included in costs of products and services in the accompanying consolidated
statements of operations.
Tools manufactured and assembled are transferred to revenue-producing tools
as completed at the total cost of components, subassemblies, expendable parts,
direct labor and indirect costs of each tool. For U.S. and certain international
locations, components, subassemblies and expendable parts are capitalized as
inventory and expensed as tools are repaired and maintained. Components,
subassemblies and expendable parts are expensed when shipped to certain
international locations.
Capitalized Interest
Interest costs for the construction of revenue-producing tools are
capitalized. The Company capitalized interest costs of $1.2 million and $396,000
on work in progress for the twelve months ended December 31, 1998 and eight
months ended December 31, 1997, respectively. Such amounts were not significant
in other prior periods.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
primarily on the straight-line method over the estimated useful lives of 5 to 30
years for buildings and improvements, 3 to 10 years for machinery and equipment,
4 to 10 years for furniture and fixtures and 3 to 7 years for other property and
equipment.
8
<PAGE> 9
Maintenance and repairs are charged to expense as incurred. Major repairs
and improvements are capitalized and depreciated. The cost and accumulated
depreciation of property and equipment retired or otherwise disposed of are
removed from the related accounts and any gain or loss is recognized in
operations.
Investment in Joint Venture
The Company accounts for its 51% investment in INS using the equity method
of accounting. The equity method is utilized due to the participating rights of
the minority shareholder.
Intangible Assets
Patents and other intangibles are amortized over 5 to 17 years and goodwill
is amortized over 20 to 40 years. Accumulated amortization, including goodwill
amortization, was $4.0 million and $1.2 million, as of December 31, 1998 and
December 31, 1997, respectively. (See Note 18).
Impairment of Long-Lived Assets
The carrying value of long-lived assets, principally revenue-producing
tools, goodwill and property and equipment, is reviewed for potential impairment
when events or changes in circumstance indicate that the carrying amount of such
assets may not be recoverable. The determination of recoverability is made based
upon the estimated undiscounted future net cash flows of the related asset. The
amount of impairment, if any, is determined by comparing the carrying value of
the related asset to its determined current fair value. (See Note 18).
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") establishes alternative methods of
accounting and disclosure for employee stock-based compensation arrangements.
The Company has elected to use the "intrinsic value based method" of accounting
for its stock option plans. This method does not result in the recognition of
compensation expense at the time employee stock options are granted, if the
exercise price of the option equals or exceeds the fair market value of the
stock at the date of grant. (See Note 16).
Income Taxes
The Company was included in the consolidated U.S. federal income tax return
of Lawrence for taxable periods ending on the closing of the 1996 IPO. The
Company and Lawrence are jointly and severally liable with respect to taxes
related to periods prior to the 1996 IPO. The Company and its subsidiaries
currently file separate income tax returns. The accompanying consolidated
financial statements reflect the income tax provisions of the Company on a
separate return basis for all years with no U.S. federal tax operating loss, tax
credit, or foreign credit carryforwards generated prior to May 1, 1988 allocated
to the Company by Lawrence.
Pursuant to the Tax Allocation Agreement entered into by the Company and
Lawrence, the Company paid to Lawrence an amount equal to the federal income tax
computed on the Company's (and its subsidiaries) taxable income less any tax
credits generated by the Company or its subsidiaries. The Tax Allocation
Agreement applies to the Company for all years in which the Company (or any
predecessor) is or was included in the Lawrence consolidated federal income tax
return. To the extent a state or other taxing jurisdiction requires or permits a
consolidated, combined or unitary tax return to be filed by Lawrence and its
affiliates and such return includes the Company, the principles expressed with
respect to the consolidated federal tax allocation will apply.
Foreign Currency Exchange
The U.S. dollar is the functional currency for the majority of the Company's
operations. Foreign exchange gain (loss) for the twelve months ended December
31, 1998 was $256,000, and for the eight months ended December 31, 1997 and 1996
was $296,000 and ($135,000), respectively, and for the fiscal years ended April
30, 1997 and 1996 was $19,000 and $239,000, respectively.
Earnings Per Share
The Company has reported earnings per share for all periods in accordance
with Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). Under
the new requirements for calculating basic earnings per share, the dilutive
effect of stock options has been excluded. The method of calculating diluted
earnings
9
<PAGE> 10
per share is similar to fully diluted earnings per share which was previously
not required to be reported if the effect of the dilution was less than three
percent. Earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the SFAS No. 128 requirements. SFAS
No. 128 resulted in no change in restated basic earnings per share for the years
ended April 30, 1997 and 1996.
Reclassifications
Certain reclassifications have been made to the eight months ended December
31, 1997 and years ended April 30, 1997 and 1996 financial statements to conform
to the current year presentation.
New Accounting Pronouncements
SFAS No. 130. In June 1997, the Financial Accounting Standards Board ("the
FASB") issued SFAS No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its components.
SFAS No. 130 requires that all items that are recognized under accounting
standards as components of comprehensive income be reported in a financial
statement displayed in equal prominence with the other financial statements.
SFAS No. 130 is effective for both interim and annual periods beginning after
December 15, 1997. The Company adopted the provisions on January 1, 1998.
SFAS No. 131. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted the new requirements at December 31, 1998.
SFAS NO. 133. In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards for the
recognition and measurement of derivatives and hedging activities. SFAS No. 133
requires all derivatives to be recorded on the balance sheet at fair value and
establishes "special accounting" for the following three different types of
hedges: hedges of changes in the fair value of assets, liabilities, or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. Changes in fair
value of derivatives that do not meet the criteria of one of these three
categories of hedges are included in income. SFAS No. 133 is effective for years
beginning after June 15, 1999, at which time the Company will adopt this
provision. The Company does not expect SFAS No. 133 to have a material effect on
the Company's financial statements.
4. ACQUISITIONS
ADI Acquisition: In June 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: In January 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 $32.5 million relating to the
excess of the purchase price over the fair market value of the assets, which
was to be amortized over 25 years and result in approximately $1.2 million in
amortization expense per year. Based on the Company's review of long-lived
assets, including goodwill, the remaining unamortized goodwill balance of $31.3
million at December 31, 1998 was deemed to be fully impaired. (See Note 18).
IDS Acquisition: The Company acquired the outstanding capital stock of IDS
in March 1998 (with additional consideration paid in July 1998 in connection
with the resolution of certain contingencies) for approximately $18.8 million in
cash and 1,064,000 shares of Class A Common Stock (309,516 shares were returned
in July 1998), 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 $20.3
million in goodwill, representing the excess of the purchase price over the
estimated fair market value of the IDS assets, which was to be amortized over 25
years and result in additional annual amortization expense of $788,000. Based on
the Company's review of long-lived assets, including goodwill, the remaining
unamortized goodwill of $19.7 million at December 31, 1998 was deemed to be
fully impaired. (See Note 18).
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 purchase price allocation was
based on preliminary estimates and may be revised at a later date.
INS Acquisition: In December 1998, the Company acquired 51% of INS for
approximately $7.1 million cash, subject to a purchase price adjustment of up to
$500,000 based on future earnings. INS, a joint venture with MG Generon,
provides non-cryogenic nitrogen generators and production units for use in the
on-site production of nitrogen for injection in downhole drilling of oil and gas
wells. The joint venture is accounted for using the equity method of
accounting.
10
<PAGE> 11
The pro forma unaudited results of operations for the years ended December
31, 1998 and April 30, 1997 and the eight months ended December 31, 1997 and
1996, 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>
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED
DECEMBER 31, --------------------------- APRIL 30,
1998 1997 1996(a) 1997(a)
------------- ------------ ------------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues ............................. $ 134,534 $ 80,364 $ 60,129 $ 92,592
Income (loss) before
extraordinary item.................. (95,225) 1,755 (686) 1,964
Net income (loss) .................... (112,804) 1,755 (686) 1,964
Basic earnings (loss) per share ...... (11.45) 0.19 (0.09) 0.24
Diluted earnings (loss) per share .... (11.45) 0.19 (0.09) 0.24
</TABLE>
(a) Before extraordinary item related to ADI.
The pro forma information 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 under the
credit facility as if they were incurred at the beginning of the period and
related adjustments for income taxes. The pro forma information is not
necessarily indicative of the results of operations had the acquisition been
effected on the assumed dates or the results of operations for any future
period. The IDS Acquisition, Transocean Acquisition and the INS joint venture
were not significant acquisitions and have not been included in the pro forma
unaudited results above.
5. REVENUE-PRODUCING TOOLS AND INVENTORY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Revenue-producing tools ............................ $ 159,993 $ 95,266
Accumulated depreciation ........................... (53,325) (37,284)
------------ ------------
106,668 57,982
Inventory:
Components, subassemblies and expendable parts ... 30,711 17,748
Rental tools and expendable parts under
production .................................... 2,247 2,100
Raw materials .................................... 1,898 1,226
------------ ------------
34,856 21,074
------------ ------------
Revenue-Producing Tools and Inventory ..... $ 141,524 $ 79,056
============ ============
</TABLE>
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land ........................................ $ 2,305 $ 1,072
Buildings and improvements .................. 7,363 6,624
Machinery and equipment ..................... 16,960 15,312
Furniture and fixtures ...................... 1,736 1,825
Other ....................................... 2,031 1,421
---------- ----------
30,395 26,254
Accumulated Depreciation .................... (17,140) (18,073)
---------- ----------
Property and Equipment ............ $ 13,255 $ 8,181
========== ==========
</TABLE>
7. OTHER ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Debt issuance costs.................................... $ 8,768 $ 4,443
Patents................................................ 4,566 460
Convenants not to compete.............................. 2,050 50
----------- ----------
15,384 4,953
Other.................................................. 4,655 2,021
Accumulated amortization............................... (2,806) (1,574)
----------- ----------
Other Assets......................................... $ 17,233 $ 5,400
=========== ==========
</TABLE>
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable ................................ $ 3,549 $ 9,637
Accrued salaries and vacation ......................... 5,194 3,451
Agent commissions payable ............................. 237 1,256
Accrued expenses and other ............................ 16,075 9,460
--------- ---------
Accounts Payable and Accrued Liabilities .... $ 25,055 $ 23,804
========= =========
</TABLE>
11
<PAGE> 12
9. RELATED PARTY TRANSACTIONS
The accompanying consolidated statements of operations include annual rental
charges from Lawrence and from Company executives for office facilities and
manufacturing and service center facilities. See Note 13.
The affiliate balances are non-interest bearing and have no fixed repayment
terms.
During 1998 the Company paid an aggregate of $167,000 to relatives of, and
entities controlled by, the Company's Chairman of the Board relating to
miscellaneous goods and services.
The Company provided Lawrence and certain of its affiliates with various
administrative and management services including cash management, accounting,
tax, data processing, human resources and legal services in all periods
presented. During the year ended April 30, 1996, the Company also utilized from
time to time the aircraft owned by a Lawrence subsidiary. The effect of the
estimated fair values of these services rendered less services received was not
significant to the results of operations.
The Company participates in the "Lawrence Companies Retirement Plan", a
defined contribution benefit plan, covering all Dailey employees. Contributions
are determined as 50% of the employee's contribution up to 3% of the employee's
total compensation. Amounts charged to benefit costs and contributed to the plan
for the years ended December 31, 1998 and April 30, 1997 and 1996 totaled
$527,000, $203,000 and $178,000, respectively and for the eight months ended
December 31, 1997 and 1996 were $212,000 and $142,000, respectively.
10. BORROWING ARRANGEMENTS AND EXTRAORDINARY ITEM
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
9 1/2% Senior Notes ......................... $ 275,000 $ --
9 3/4% Senior Notes ......................... -- 114,223
Loans payable to a bank ..................... 1,102 --
Other ....................................... 6 152
----------- -----------
276,108 114,375
Less current portion of long-term debt ...... (1,048) 146
----------- -----------
Total long-term debt .............. $ 275,060 $ 114,229
=========== ===========
</TABLE>
Interest paid during the years ended December 31, 1998 and April 30, 1997
and 1996 was $24,429,000, $858,000 and $956,000, respectively. Interest paid for
the eight months ended December 31, 1997 and 1996 was $683,000 and $658,000,
respectively.
At December 31, 1998, the Company had term loans of $1.1 million with a
bank, approximately $1 million of which mature in 1999. The term loans were
assumed in the IDS Acquisition and bear interest at various rates ranging from
8.75% to 10.50%.
On August 19, 1997, the Company issued $115.0 million of 9 3/4% Senior Notes
due 2007 at a discount of 0.785%, and a portion of the proceeds was used to
repay the outstanding note payable to a bank.
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 $1.79 per diluted
share, with no related
12
<PAGE> 13
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.
The Company had two letters of credit outstanding totaling $281,000 and
$384,000 at December 31, 1998 and 1997, respectively.
11. INCOME TAXES
<TABLE>
<CAPTION> EIGHT MONTHS ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, APRIL 30,
DECEMBER 31, -------------------------- --------------------------
1998 1997 1996 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes and
extraordinary item:
U.S. operations ........................... $ (66,043) $ 2,135 $ 4,583 $ 3,858 $ 4,072
Foreign operations ........................ (27,090) 861 439 117 (31)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item ............... $ (93,133) $ 2,996 $ 5,022 $ 3,975 $ 4,041
=========== =========== =========== =========== ===========
Income tax provision (benefit):
U.S. current .............................. $ (357) $ (987) $ 857 $ 679 $ 941
Foreign current ........................... 2,267 1,222 1,716 1,358 1,302
U.S. deferred ............................. 183 978 (1,069) (783) (816)
State and local current ................... 22 106 325 257 --
----------- ----------- ----------- ----------- -----------
Income tax provision ................... $ 2,115 $ 1,319 $ 1,829 $ 1,511 $ 1,427
=========== =========== =========== =========== ===========
</TABLE>
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements. A summary of the components of deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION> DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Revenue-producing tools and property and
equipment ................................... $ 8,237 $ 3,840
---------- ----------
Deferred tax assets:
Stock award salary expense ..................... 399 62
Net operating loss carryforward ................ 21,362 1,510
Provision for doubtful accounts ................ 1,250 900
Uniform capitalization costs and inventory
reserve ..................................... 1,176 640
Vacation and workers' compensation accruals .... 1,137 248
Foreign tax credit carryforward ................ -- --
Intangibles .................................... 10,318 --
Other .......................................... 562 260
---------- ----------
Total deferred tax assets ................... 36,204 3,620
Valuation allowance for deferred tax assets ...... (33,877) (553)
---------- ----------
2,327 3,067
---------- ----------
Net deferred tax assets (liabilities) ............ $ (5,910) $ (773)
========== ==========
</TABLE>
The difference between the United States statutory rate and the Company's
effective income tax rate is reconciled as follows:
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, APRIL 30,
DECEMBER 31, ---------------------- ----------------------
1998 1997 1996 1997 1996
------------ --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States statutory rate ................ (34.0%) 34.0% 34.0% 34.0% 34.0%
Increases (reductions) in tax rate
resulting from:
Meals and entertainment ................... .2 4.3 2.7 2.7 2.2
State taxes, net of federal benefit ....... -- 2.3 4.2 4.2 --
Dissolution of partnership ................ -- -- -- -- 20.0
Benefit of net operating loss
carryforward ........................... -- (31.4) -- -- (23.2)
Foreign income and withholding,
net of federal benefit ................. 4.7 25.5 3.1 3.1 2.6
Nondeductible goodwill amortization ....... .4 6.4 -- -- --
Increase in valuation allowance ........... 23.7 -- -- -- --
Goodwill impairment ....................... 7.1 -- -- -- --
Other ..................................... .2 2.9 (7.6) (6.0) (.3)
------------ --------- ---------- --------- ---------
Effective income tax rate............ 2.3% 44.0% 36.4% 38.0% 35.3%
============ ========= ========== ========= =========
</TABLE>
At December 31, 1998, the Company had foreign net operating loss
carryforwards of approximately $9.1 million which can be carried forward
indefinitely. A valuation allowance in the amount of $1.9 million has been
recorded as the Company believes the corresponding deferred tax asset will not
be realized. The Company also had approximately $54.5 million of domestic net
operating loss carryforwards which
13
<PAGE> 14
will begin to expire in 2011. Approximately $1.6 million of the domestic net
operating loss carryforwards are subject to certain separate return and change
in ownership limitations. Accordingly, the Company has recorded a valuation
allowance of $553,000 against these net operating loss carryforwards as the
Company believes that the corresponding deferred tax asset may not be
realizable. In addition, the Company has recorded a valuation allowance of $31.5
million against the remaining domestic net operating loss carryforward as the
Company believes the corresponding deferred tax asset may not be realizable.
The valuation allowance increased from $553,000 to $33.9 million at December
31, 1998 due to foreign and domestic operating losses generated during the year,
which the Company believes may not be realizable. The valuation allowance
decreased from $1.1 million to $553,000 at December 31, 1997. In connection with
the Company's decision to change its fiscal year end to December 31, the Company
determined that the net foreign tax credit carryforward could not be utilized
and was therefore written off resulting in a $1.1 million decrease in the
valuation allowance. In addition, the Company recorded a $553,000 valuation
allowance against its domestic net operating loss carryforwards.
There was no income tax expense or benefits associated with the components
of accumulated other comprehensive income for the year ended December 31, 1998
and the eight month period ended December 31, 1997.
No provision is made for U.S. income and foreign withholding taxes
applicable to undistributed earnings of foreign subsidiaries as those earnings
are considered to be permanently reinvested.
The Company is currently engaged in tax audits and appeals in various tax
jurisdictions. The years covered by each audit or appeal vary considerably among
legal entities. Assessments, if any, are not expected to have a material adverse
effect on the financial statements.
Income taxes paid during the year ended December 31, 1998 and April 30, 1997
and 1996 were $ 785,000, $608,000 and $538,000, respectively. Income taxes paid
for the eight months ended December 31, 1997 and 1996 were $2.0 million and
$461,000, respectively.
12. ROYALTIES
In 1986, the Company purchased the design, patents and rights to certain
hydraulic tools and entered into a royalty agreement with the seller which
expires in 1999 and 2003. Royalty agreements were executed between the Company
and the royalty owner in 1993 and 1994 on patents related to a double-acting
drilling accelerator and improvements to hydraulic drilling jars. In March 1994,
the royalty agreements were amended to cap royalties through December 1999, with
the royalty percentage decreasing from January 2000 to expiration of the
applicable patents. Upon expiration of the patents, no royalties will be
required. For the years ended December 31, 1998 and April 30, 1997 and 1996,
royalty expense was $1,068,000 $879,000 and $843,000, respectively. For the
eight months ended December 31, 1997 and 1996 royalty expense was $742,000 and
$608,000, respectively. The owner of the royalty was an officer of the Company
until October 1994.
13. COMMITMENTS AND CONTINGENCIES
The Company leases office space, transportation equipment and other property
under noncancelable operating leases with third parties and office facilities
and manufacturing and service center facilities with related parties. See Note
9. Future minimum lease commitments under noncancelable operating leases at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
THIRD
PARTIES AFFILIATES TOTAL
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1999 .................... $ 1,194 $ 1,123 $ 2,317
2000 .................... 528 1,142 1,670
2001 .................... 312 464 776
2002 .................... 149 109 258
2003 .................... 105 109 214
---------- ------------ ----------
$ 2,288 $ 2,947 $ 5,235
========== ============ ==========
</TABLE>
Rental expense under operating leases with third parties, inclusive of
month-to-month rentals, totaled $4.7 million, $2.2 million and $2.4 million for
the years ended December 31, 1998, and April 30, 1997 and 1996, respectively,
and, with related parties, totaled $1.1 million, $915,000, and $1.3 million for
the years ended December 31, 1998 and April 30, 1997 and 1996, respectively. For
the eight months ended December 31, 1997 and 1996, rental expense under
operating leases with third parties, inclusive of month-to-month rentals,
totaled $2.7 million and $2.0 million respectively, and, with related parties,
totaled $671,000 and $593,000, respectively. Rental expense is included in
selling, general and administrative expenses and cost of rentals.
The Company is the defendant in various legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the consolidated financial statements of the Company. The Company is also
the plaintiff in certain actions defending its patents and proprietary designs.
The Company has employment agreements with several of its employees. The
aggregate amount of these employment agreements is approximately $9.8 million
at December 31, 1998. The average remaining length of these agreements is
approximately 1.5 years.
14
<PAGE> 15
14. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company is subject to credit risk and other risks inherent in
international operations. Generally, in excess of 50% of the Company's
receivables are due from oil and gas exploration companies and drilling
contractors operating in countries other than the United States and from the
Company's international agents. United States receivables are generally due from
major oil and gas exploration and drilling contractors throughout the oil field
areas of the United States. The Company routinely monitors its cash and
receivable positions with customers and international agents.
Carrying amount and fair values: The carrying amount and estimated fair
values of financial instruments are as follows:
<TABLE>
<CAPTION> CARRYING AMOUNT FAIR VALUE
------------------------ -----------------------
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1998 1997 1998 1997
----------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
financial assets ..... $ 32,843 $ 59,837 $ 32,843 $ 59,837
Financial liabilities:
Senior Notes ............ 275,000 114,223 129,250 120,750
Bank notes and other .... 1,108 152 1,108 152
</TABLE>
Fair value methods: The following methods and assumptions were used in
estimating fair values:
For cash and short-term financial assets, the carrying amount is a
reasonable estimate of fair value due to the short maturity of those
instruments.
For Senior Notes, estimated fair value is based on information provided by
an investment bank at year end. The fair values of the Company's long-term bank
notes and other debt are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for similar types of borrowing
arrangements.
15. EARNINGS PER SHARE
The reconciliation of the numerator and denominator used for the computation
of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED APRIL 30,
DECEMBER 31, ----------------------- -----------------------
1998 1997 1996 1997 1996
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Income (loss) before extraordinary item for
basic and diluted earnings per share ............. $ (95,248) $ 1,677 $ 3,193 $ 2,464 $ 2,614
========== ========== ========== ========== ==========
Weighted average shares for basic earnings per
share .......................................... 9,848,368 9,228,009 7,594,286 8,138,104 N/A
Pro forma average shares for basic earnings per
share .......................................... N/A N/A N/A N/A 6,610,000
Effect of dilutive securities:
Stock options and unvested stock grants ........ -- 101,391 42,928 40,472 --
---------- ---------- ---------- ---------- ----------
Adjusted weighted average shares and assumed
conversions for diluted earnings per share ..... 9,848,368 9,329,400 7,637,214 8,178,576 6,610,000
========== ========== ========== ========== ==========
Earnings (loss) per share before
extraordinary item:
Basic .......................................... $ (9.67) $ 0.18 $ 0.42 $ 0.30 N/A
Diluted ........................................ $ (9.67) $ 0.18 $ 0.42 $ 0.30 N/A
Pro forma earnings per share:
Basic ........................................ N/A N/A N/A N/A $ 0.40
Diluted ...................................... N/A N/A N/A N/A $ 0.40
</TABLE>
Options to purchase 976,031 shares of common stock at prices from $2.06 to
$13.25 per share were outstanding during the year ended December 31,1998 but
were not included in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the common shares,
and therefore, the effect would be antidilutive.
Restricted stock grants of 130,000 shares of common stock were unvested at
December 31, 1998, but were not included in the computation of diluted earnings
per share because their inclusion would be antidilutive.
15
<PAGE> 16
16. STOCK OPTIONS AND AWARDS
Prior to the 1996 IPO, the Company established the 1996 Key Employee Stock
Plan (the "1996 Plan") and the 1996 Non-Employee Director Stock Option Plan (the
"1996 Director Plan"). Pursuant to the 1996 Plan, the Board of Directors of the
Company is authorized to issue up to 900,000 shares of the Company's Class A
Common Stock. On October 7, 1997, the Board of Directors approved the 1997
Long-Term Incentive Plan (the "1997 Plan"). Pursuant to the 1997 Plan, the Board
of Directors of the Company is authorized to issue up to 720,000 shares of the
Company's Class A Common Stock.
The Company applied Accounting Principals Board Opinion No. 25 ("APB No.
25") and related interpretations in accounting for these plans. Accordingly, no
compensation cost has been recognized during the year ended December 31, 1998,
eight months ended December 31,1997 and the year ended April 30, 1997 for these
plans. Based on information available at the grant date, the Company estimated a
five to eight year expected life for options granted during the year, volatility
of .84 and risk free interest rates ranging from 4.30% to 4.78%. The Company
does not presently anticipate issuing dividends in the future. Had compensation
cost for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method available under SFAS No. 123, the Company's net income and earnings
per share for the year ended December 31, 1998, eight months ended December
31,1997 and the year ended April 30, 1997 would have been reduced to the pro
forma amounts listed below. There were no options issued in the year ended
April 30, 1996.
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED
DECEMBER 31, --------------------------- APRIL 30,
1998 1997 1996 1997
------------ ----------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Income (Loss):
As reported .............. $ (112,827) $ 1,677 $ 3,193 $ 2,464
Pro forma ................ (113,169) 1,397 2,459 1,325
Earnings (loss) per share:
As reported:
Basic ................. (11.46) 0.18 0.42 0.30
Diluted ............... (11.46) 0.18 0.42 0.30
Pro forma:
Basic ................. (11.49) 0.15 0.32 0.16
Diluted ............... (11.49) 0.15 0.32 0.16
</TABLE>
Stock options under the Plans are for Class A Common Stock and have exercise
prices equal to fair market values at dates of grant. Options issued under the
1996 Plan may not be exercised within six months of, nor after ten years from,
the date of grant. Options issued under the 1996 Director Plan may not be
exercised within one year of, nor after ten years from, the date of grant.
Options issued under the 1997 plan may not be exercised after ten years from the
date of grant. The average remaining contractual life of options outstanding is
approximately nine years. Effective August 12, 1998, all options outstanding
with employees which had an option price above $6.00 were repriced to $6.00.
Option activity for the year ended December 31, 1998, the eight months ended
December 31, 1997 and year ended April 30, 1997 was as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at April 30, 1996 .............................. 0 $ 0.00
Granted
1996 Plan -- at fair values from $8.00 to $10.75 ...... 513,328 8.36
1996 Director Plan at fair value of $6.50 and $8.88 ... 40,000 7.69
Forfeiture
1996 Plan-- at fair value of $8.00 .................... (19,199) 8.00
----------
Outstanding at April 30, 1997 .............................. 534,129 8.32
----------
Granted
1997 Plan -- at fair values from $6.38 to $13.25 ...... 150,000 6.84
1996 Director Plan -- at fair value of $13.25 ......... 20,000 13.25
Forfeiture
1996 Plan-- at fair value of $10.75 ................... (3,000) 10.75
Exercised 1996 Plan-- at fair values from
$8.00 to $10.75 ....................................... (82,598) 8.51
----------
Outstanding at December 31, 1997 ........................... 618,531 8.08
----------
Granted
1996 Director Plan - at fair values from $2.06 to $9.00 30,000 5.94
1997 Plan - at fair values from $3.75 to $6.00 ..... 327,500 4.42
----------
Outstanding at December 31, 1998 ........................... 976,031 5.68
==========
</TABLE>
At December 31, 1998, 515,200 of the 976,031 options outstanding were
exercisable.
16
<PAGE> 17
Immediately following the 1996 IPO, restricted stock awards totaling 360,000
shares of Class A Common Stock were granted to key officers. In October 1996, a
restricted stock award of 45,000 shares of Class A Common Stock was granted to
an executive officer. Awards do not require any payment by the executive
officers and were to vest over a three year period. Subsequently, the Board
approved accelerated vesting of the restricted stock awards which resulted in
the Company recognizing $2.8 million and $478,000 in non-cash compensation
expense for the year ended April 30, 1997 and the eight months ended December
31, 1997, respectively. In October 1997, restricted stock awards totaling
230,000 shares of Class A Common Stock were granted to certain officers. The
awards do not require any payment by the officers and vest over a four year
period. During the eight months ended December 31, 1997, the Company recognized
$183,000 of non-cash compensation expense related to these awards. During 1998,
the Board approved accelerated vesting of 100,000 shares of the 230,000 shares
that were granted as restricted stock awards in October 1997. The non-cash
compensation expense recognized by the Company for the year ended December 31,
1998 was $711,000. Restricted stock activity for the year ended December 31,
1998, the eight months ended December 31, 1997 and the year ended April 30, 1997
was as follows:
<TABLE>
<CAPTION>
NUMBER OF
RESTRICTED SHARES
-----------------
<S> <C>
Outstanding at April 30, 1996 .................. 0
Granted at fair values of $8.00 and $9.00... 405,000
Forfeiture ................................... 0
Vested ....................................... (349,803)
------------
Outstanding at April 30, 1997 .................. 55,197
------------
Granted at fair value of $12.75 .............. 230,000
Forfeiture ................................... 0
Vested ....................................... (55,197)
------------
Outstanding at December 31, 1997 ............... 230,000
------------
Granted at fair value of $8.50 ............... 6,000
Forfeiture ................................... 0
Vested ....................................... (100,000)
------------
Outstanding at December 31, 1998 ............... 136,000
============
</TABLE>
17. REORGANIZATION
Reorganization costs of $3.4 million incurred in 1998 were primarily related
to the resignation of the former chief executive officer and to the
consolidation of corporate leased facilities, termination of aircraft lease and
other employee severance costs.
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.
18. IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 121 and Accounting Principles Board Opinion No. 17 ("APB 17")
require that long-lived assets, including goodwill, be reviewed for impairment
whenever events or changes in circumstances indicate the carrying value of the
long-lived assets may not be recoverable. Based upon depressed market conditions
and the size and level of activities at each of the businesses acquired by the
Company during the past two years, the Company performed an impairment review to
determine whether any long-lived assets that had been recorded by it should be
impaired. In performing this review, the Company considered its estimates of
future undiscounted net cash flows from each of these businesses as of December
31, 1998, which estimates were based upon market conditions existing at December
31, 1998 and the size and level of activities at these business as of December
31, 1998. The Company also considered offers and indications of interest that it
had received during its review of strategic alternatives.
Based upon this review, the Company recorded an impairment charge of $53.0
million to reflect the impairment of unamortized goodwill and other long-lived
assets. Of this amount, $31.3 million related to the full impairment of
unamortized goodwill associated with the DWS/DAMCO acquisition, $19.4 million
related to the full impairment of unamortized goodwill associated with the IDS
acquisition, and $2.3 million related to the impairment of capitalized
information technology costs and other assets. No impairment charge was recorded
with respect to goodwill recorded in connection with the ADI or Transocean
acquisitions. In determining to fully impair goodwill associated with the
DWS/DAMCO acquisition, the Company determined that due to reductions in revenues
caused by depressed industry conditions as well as losses of market share, which
it had not been able to recover as of December 31, 1998, its estimates of future
undiscounted net cash flows as of December 31, 1998 and offers and indications
of interest from third parties with respect to the purchase of DWS/DAMCO did not
support the goodwill amortization related to DWS/DAMCO's operations over the
remaining amortization period. In determining to fully impair goodwill
associated with the IDS acquisition, the Company determined that the revenues
and cash flows that could be generated from IDS' operations could not support
the goodwill amortization relating to the acquired business over the remaining
amortization period. Based on the estimated undiscounted future net cash flows
as of December 31, 1998 for the businesses acquired in the ADI and Transocean
acquisitions, as well as offers and indications of interest from third parties
with respect to the purchase of such businesses, the Company determined that the
goodwill associated with such acquisitions had not been impaired; however, there
can be no assurance that, if depressed industry conditions continue or other
events occur that cause the operations of these acquired businesses to further
decline, a partial or complete impairment of goodwill associated with these
acquisitions will not be required. In assessing the impairment of capitalized
information technology costs and other assets, the Company determined these
costs were not likely to provide future economic benefit to the Company. Assets
have been written down to estimated fair values based on current estimates and
market conditions. The Company's estimates of future cash flows and estimated
fair values are based on reasonable and supportable assumptions.
17
<PAGE> 18
19. 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 December 31, 1998 and 1997, and the related condensed
consolidating statements of operations and cash flows for the twelve months
ended December 31, 1998, and for the eight months ended December 31, 1997 and
1996, and the years ended April 30, 1997 and 1996 have been provided. The
condensed consolidating financial statements herein are followed by notes which
are an integral part of these statements.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ------------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 31,149 $ 370 $ 1,324 $ -- $ 32,843
Accounts receivable, net........ 15,504 6,854 10,445 -- 32,803
Accounts receivable from
affiliates .................. 69,625 (24,254) (45,009) -- 362
Other current assets............ 1,353 2,067 1,358 -- 4,778
-------------- ------------------ ----------- ------------- -------------
Total current assets.... 117,631 (14,963) (31,882) -- 70,786
Revenue producing tools and
inventory, net............... 73,021 41,304 27,199 -- 141,524
Property and equipment, net..... 7,721 2,755 2,779 -- 13,255
Investments in subsidiaries..... 41,957 -- -- (41,957) --
Goodwill, net................... 1,483 20,606 186 -- 22,275
Investment in joint venture..... -- 7,100 -- -- 7,100
Intangibles and other assets.... 10,029 2,075 5,129 -- 17,233
-------------- ------------------ ----------- ------------- -------------
Total assets............ $ 251,842 $ 58,877 $ 3,411 $ (41,957) $ 272,173
============== ================== =========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.................. $ 16,707 $ 4,517 $ 3,831 $ -- $ 25,055
Income taxes payable............ 1,030 750 2,207 -- 3,987
Current portion of long-term
debt......................... 24 11 1,013 -- 1,048
-------------- ------------------ ----------- ------------- -------------
Total current
liabilities........... 17,761 5,278 7,051 -- 30,090
Long-term debt.................... 275,001 24 35 -- 275,060
Deferred income taxes............. (2,299) 3,811 4,398 -- 5,910
Other noncurrent liabilities...... 371 108 819 -- 1,298
Stockholders' equity:
Common stock.................... 106 8 1,723 (1,731) 106
Treasury stock.................. (4,048) -- -- -- (4,048)
Paid in capital................. 52,437 23,786 23,549 (47,335) 52,437
Accumulated other comprehensive
income..................... 167 (1) (1,192) -- (1,026)
Retained earnings............... (87,654) 25,863 (32,972) 7,109 (87,654)
-------------- ------------------ ----------- ------------- -------------
Total stockholders'
equity................ (38,992) 49,656 (8,892) (41,957) (40,185)
-------------- ------------------ ----------- ------------ -------------
Total liabilities and
stockholders' equity.. $ 251,842 $ 58,877 $ 3,411 $ (41,957) $ 272,173
============== ================== =========== ============ =============
</TABLE>
See accompanying notes.
18
<PAGE> 19
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
NON-
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) --
Goodwill, net .............................. 803 18,157 223 -- 19,183
Intangibles and other assets ............... 5,345 146 159 -- 5,650
-------------- ------------ -------------- ----------- --------------
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
Accumulated other comprehensive
income .................................. -- -- (154) -- (154)
Retained earnings .......................... 25,019 27,730 (2,871) (24,705) 25,173
------------- ------------ -------------- ----------- --------------
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.
19
<PAGE> 20
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income .................. $ 46,236 $ 7,391 $ 7,628 $ -- $ 61,255
Sales of products and services . 30,046 3,210 6,781 -- 40,037
Underbalanced drilling services 532 14,376 16,117 -- 31,025
--------------- --------------- ------------- ------------- -------------
76,814 24,977 30,526 -- 132,317
Cost and expenses:
Cost of rentals ................ 32,735 4,654 6,211 (158) 43,442
Cost of products and services .. 18,093 1,756 4,594 -- 24,443
Cost of underbalanced drilling . 974 6,809 11,776 -- 19,559
Selling, general and
administrative .............. 19,475 5,913 9,072 (334) 34,126
Depreciation and amortization .. 9,483 7,563 7,435 -- 24,481
Reorganization costs ........... 3,298 -- 115 -- 3,413
Non-cash compensation .......... 711 -- -- -- 711
Research and development ....... 336 1 855 -- 1,192
Provision for asset impairment.. 33,646 -- 19,391 -- 53,037
--------------- --------------- ------------- ------------- -------------
118,751 26,696 59,449 (492) 204,404
--------------- --------------- ------------- ------------- -------------
Operating income (loss)........... (41,937) (1,719) (28,923) 492 (72,087)
Other (income) expense:
Interest income ................ (3,376) (9) (40) -- (3,425)
Interest expense-nonaffiliates . 23,988 77 364 -- 24,429
Equity in subsidiaries, net
of taxes .................... 31,967 -- -- (31,967) --
Other, net ..................... 88 (776) 238 492 42
--------------- --------------- ------------- ------------- -------------
Income (loss) before taxes ....... (94,604) (1,011) (29,485) 31,967 (93,133)
Income tax provision (benefit) ... 644 858 613 -- 2,115
--------------- --------------- ------------- ------------- -------------
Income (loss) before extraordinary
item .......................... (95,248) (1,869) (30,098) 31,967 (95,248)
Extraordinary item ............... (17,579) -- -- -- (17,579)
--------------- --------------- ------------- ------------- -------------
Net income (loss) ................ $ (112,827) $ (1,869) $ (30,098) $ 31,967 $ (112,827)
=============== =============== ============= ============= =============
</TABLE>
See accompanying notes.
20
<PAGE> 21
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income .................. $ 32,563 $ 5,046 $ 4,845 $ -- $ 42,454
Sales of products and services . 11,081 1,013 2,916 -- 15,010
Underbalanced drilling services -- 8,666 10,019 -- 18,685
---------------- ---------------- ------------- ------------- -------------
43,644 14,725 17,780 -- 76,149
Cost and expenses:
Cost of rentals ................ 18,431 2,965 3,427 (298) 24,525
Cost of products and services .. 7,116 189 1,837 -- 9,142
Cost of underbalanced drilling . -- 2,446 7,652 -- 10,098
Selling, general and
administrative .............. 7,880 3,339 2,877 (424) 13,672
Depreciation and amortization... 4,309 3,085 712 -- 8,106
Reorganization costs ........... 2,453 -- -- -- 2,453
Non-cash compensation .......... 661 -- -- -- 661
Research and development ....... 190 -- -- -- 190
---------------- ---------------- ------------- ------------- -------------
41,040 12,024 16,505 (722) 68,847
---------------- ---------------- ------------- ------------- -------------
Operating income ................. 2,604 2,701 1,275 722 7,302
Other (income) expense:
Interest income ................ (1,320) (19) (3) -- (1,342)
Interest expense-nonaffiliates . 5,165 44 43 -- 5,252
Equity in subsidiaries, net
of taxes .................... (2,790) -- -- 2,790 --
Other, net ..................... 108 (642) 208 722 396
---------------- ---------------- ------------- ------------- -------------
Income (loss) before taxes........ 1,441 3,318 1,027 (2,790) 2,996
Income tax provision (benefit) ... (236) 916 639 -- 1,319
---------------- ---------------- ------------- ------------- -------------
Net income (loss) ................ $ 1,677 $ 2,402 $ 388 $ (2,790) $ 1,677
================ ================ ============= ============= =============
</TABLE>
See accompanying notes.
21
<PAGE> 22
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income .................... $ 24,919 $ 4,451 $ 4,391 $ -- $ 33,761
Sales of products and services ... 9,043 1,487 941 (17) 11,454
---------------- ---------------- ------------- ------------- -------------
33,962 5,938 5,332 (17) 45,215
Cost and expenses:
Cost of rentals .................. 15,366 2,324 6,590 (2,811) 21,469
Cost of products and services .... 5,944 151 43 (7) 6,131
Selling, general and
administrative ................ 7,020 345 383 -- 7,748
Depreciation and amortization..... 3,103 1,017 77 -- 4,197
Research and development ......... 549 -- -- -- 549
---------------- ---------------- ------------- ------------- -------------
31,982 3,837 7,093 (2,818) 40,094
---------------- ---------------- ------------- ------------- -------------
Operating income (loss) ............ 1,980 2,101 (1,761) 2,801 5,121
Other (income) expense:
Interest income .................. (401) (9) -- -- (410)
Interest expense-nonaffiliates ... 480 6 -- -- 486
Interest expense-affiliates ...... 172 -- -- -- 172
Equity in subsidiaries, net
of taxes ...................... (1,071) -- -- 1,071 --
Other, net ....................... (1,731) (789) (430) 2,801 (149)
---------------- ---------------- ------------- ------------- -------------
Income (loss) before taxes ......... 4,531 2,893 (1,331) (1,071) 5,022
Income tax provision ............... 1,338 218 273 -- 1,829
---------------- ---------------- ------------- ------------- -------------
Net income (loss) .................. $ 3,193 $ 2,675 $ (1,604) $ (1,071) $ 3,193
================ ================ ============= ============= =============
</TABLE>
See accompanying notes.
22
<PAGE> 23
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income ................... $ 36,603 $ 6,470 $ 6,424 $ -- $ 49,497
Sales of products and services ... 13,385 2,188 1,397 (16) 16,954
--------------- --------------- ------------- ------------- -------------
49,988 8,658 7,821 (16) 66,451
Cost and expenses:
Cost of rentals .................. 21,961 3,729 10,193 (4,356) 31,527
Cost of products and services .... 8,546 191 45 (7) 8,775
Selling, general and
administrative ................ 10,257 594 692 -- 11,543
Depreciation and amortization..... 4,926 1,545 122 -- 6,593
Non-cash compensation ............ 2,807 -- -- -- 2,807
Research and development ......... 850 -- -- -- 850
--------------- --------------- ------------- ------------- -------------
49,347 6,059 11,052 (4,363) 62,095
--------------- --------------- ------------- ------------- -------------
Operating income (loss) ............ 641 2,599 (3,231) 4,347 4,356
Other (income) expense:
Interest income .................. (624) (16) -- -- (640)
Interest expense ................. 824 9 -- -- 833
Equity in subsidiaries, net
of taxes ...................... (960) -- -- 960 --
Other, net ....................... (2,406) (1,080) (673) 4,347 188
--------------- --------------- ------------- ------------- -------------
Income (loss) before taxes ......... 3,807 3,686 (2,558) (960) 3,975
Income tax provision ............... 816 292 403 -- 1,511
--------------- --------------- ------------- ------------- -------------
Net income (loss) .................. $ 2,991 $ 3,394 $ (2,961) $ (960) $ 2,464
=============== =============== ============= ============= =============
</TABLE>
See accompanying notes.
23
<PAGE> 24
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income .................... $ 31,391 $ 4,948 $ 6,648 $ -- $ 42,987
Sales of products and services ... 13,486 1,166 1,500 (200) 15,952
--------------- --------------- ------------- ------------- -------------
44,877 6,114 8,148 (200) 58,939
Cost and expenses:
Cost of rentals .................. 19,780 4,355 6,455 (2,973) 27,617
Cost of products and services .... 7,434 381 89 (47) 7,857
Selling, general and
administrative ................ 10,946 497 426 (40) 11,829
Depreciation and amortization .... 4,324 1,345 57 -- 5,726
Research and development ......... 728 -- -- -- 728
--------------- --------------- ------------- ------------- -------------
43,212 6,578 7,027 (3,060) 53,757
--------------- --------------- ------------- ------------- -------------
Operating income (loss) ............ 1,665 (464) 1,121 2,860 5,182
Other (income) expense:
Interest income .................. (89) (13) (2) -- (104)
Interest expense ................. 959 8 -- -- 967
Equity in subsidiaries, net
of taxes ...................... (1,018) -- -- 1,018 --
Other, net ....................... (2,048) (731) 197 2,860 278
--------------- --------------- ------------- ------------- -------------
Income (loss) before taxes ......... 3,861 272 926 (1,018) 4,041
Income tax provision ............... 764 404 259 -- 1,427
--------------- --------------- ------------- ------------- -------------
Net income (loss) .................. $ 3,097 $ (132) $ 667 $ (1,018) $ 2,614
=============== =============== ============= ============= =============
</TABLE>
See accompanying notes.
24
<PAGE> 25
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) .................................. $ (112,827) $ (1,869) $ (30,098) $ 31,967 $ (112,827)
Adjustments to reconcile net (loss) to
net cash provided by (used in) operating
activities:
Extraordinary loss on repurchase of notes.. 17,579 -- -- -- 17,579
Equity in earnings of subsidiaries ........ 31,967 -- -- (31,967) --
Depreciation and amortization ............. 9,483 7,563 7,435 -- 24,481
Provision for asset impairment ............ 33,646 -- 19,391 -- 53,037
Deferred income taxes ..................... (402) 2,957 (118) -- 2,437
Write off/amortization debt issuance
costs ................................... 806 -- -- -- 806
Provision for doubtful accounts
receivable .............................. 119 1,025 1,032 -- 2,176
Provision for stock awards ................ 1,676 (11) -- -- 1,665
(Gain) loss on sale and disposition of
property and equipment .................. 141 (312) (140) -- (311)
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable-- trade ............. 7,739 (324) 1,643 -- 9,058
Accounts receivable from/payable to
officers and affiliates ............... (36,541) 22,296 19,025 -- 4,780
Prepaid expenses and other .............. (1,214) (4,853) (3,610) -- (9,677)
Accounts payable and accrued
liabilities ........................... (303) (375) (2,583) -- (3,261)
Income taxes payable .................... (18) 536 52 -- 570
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in) operating .... (48,149) 26,633 12,029 -- (9,487)
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory ................................. (33,444) (6,698) (7,331) -- (47,473)
Inventory transferred to cost of rentals .... 4,876 1,763 499 -- 7,138
Revenue-producing tools lost in hole,
abandoned, and sold ....................... 5,856 (1,308) (2,184) -- 2,364
Additions to property and equipment ......... (6,016) (1,491) (1,875) -- (9,382)
Proceeds from sale of property and
equipment ................................. 345 1,061 517 -- 1,923
Investment in joint venture ................. -- (7,100) -- -- (7,100)
Acquisition ................................. (83,365) (13,519) -- -- (96,884)
Unrealized gain on cash equivalent
investments ................................ 208 -- -- -- 208
--------------- --------------- ------------ ------------ ------------
Net cash used in investing activities ....... (111,540) (27,292) (10,374) -- (149,206)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt .......... 268,125 -- -- -- 268,125
Payments on outstanding debt ................ (121,055) (7) (1,380) -- (122,442)
Extraordinary loss of notes ................. (12,650) (12,650)
Financing costs ............................. -- -- -- -- --
Exercise of stock options ................... -- -- -- -- --
Purchase of treasury stock .................. (254) -- -- -- (254)
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities ................................ 134,166 (7) (1,380) -- 132,779
--------------- --------------- ------------ ------------ ------------
Effect of foreign exchange rate changes
on cash ................................... -- 176 (1,256) -- (1,080)
--------------- --------------- ------------ ------------ ------------
Decrease in cash and cash equivalents ....... (25,523) (490) (981) -- (26,994)
Cash and cash equivalents at beginning
of period ................................. 56,672 860 2,305 -- 59,837
--------------- --------------- ------------ ------------ ------------
Cash and cash equivalents at end
of period ................................. $ 31,149 $ 370 $ 1,324 $ -- $ 32,843
=============== =============== ============ ============ ============
</TABLE>
See accompanying notes.
25
<PAGE> 26
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................ $ 1,677 $ 2,402 $ 388 $ (2,790) $ 1,677
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Equity in earnings of subsidiaries ..... (2,790) -- -- 2,790 --
Depreciation and amortization .......... 4,303 3,126 677 -- 8,106
Deferred income taxes .................. 42 123 (65) -- 100
Provision for doubtful accounts
receivable ........................... 231 97 233 -- 561
Provision for stock awards ............. 661 -- -- -- 661
Loss on sale and disposition of
property and equipment ............... 9 1 -- -- 10
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable-- trade .......... (5,124) 505 (4,878) -- (9,497)
Accounts receivable from/payable to
officers and affiliates ............ (27,741) 19,533 8,249 -- 41
Prepaid expenses and other ........... (301) 767 (637) -- (171)
Accounts payable and accrued
liabilities ........................ 9,265 515 746 -- 10,526
Income taxes payable ................. (942) 487 (867) -- (1,322)
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in) operating . (20,710) 27,556 3,846 -- 10,692
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory .............................. (18,575) (668) (3,549) -- (22,792)
Inventory transferred to cost of rentals . 3,906 1,840 640 -- 6,386
Revenue-producing tools lost in hole,
abandoned, and sold .................... 3,565 (1,518) (71) -- 1,976
Additions to property and equipment ...... (2,044) (6,132) (218) -- (8,394)
Proceeds from sale of property and
equipment .............................. 626 (45) 36 -- 617
Acquisition .............................. (27,629) (18,535) (62) -- (46,226)
--------------- --------------- ------------ ------------ ------------
Net cash used in investing activities .... (40,151) (25,058) (3,224) -- (68,433)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ....... 159,597 -- -- -- 159,597
Payments on outstanding debt ............. (52,300) (1,958) 1,432 -- (52,826)
Financing costs .......................... (4,129) -- -- -- (4,129)
Exercise of stock options ................ 703 -- -- -- 703
Purchase of treasury stock ............... (813) -- -- -- (813)
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities ............................. 103,058 (1,958) 1,432 -- 102,532
--------------- --------------- ------------ ------------ ------------
Effect of foreign exchange rate changes
on cash ................................ -- -- (154) -- (154)
--------------- --------------- ------------ ------------ ------------
Increase in cash and cash equivalents .... 42,197 540 1,900 -- 44,637
Cash and cash equivalents at beginning
of period .............................. 14,475 320 405 -- 15,200
--------------- --------------- ------------ ------------ ------------
Cash and cash equivalents at end
of period .............................. $ 56,672 $ 860 $ 2,305 $ -- $ 59,837
=============== =============== ============ ============ ============
</TABLE>
See accompanying notes.
26
<PAGE> 27
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................... $ 3,193 $ 2,675 $ (1,604) $ (1,071) $ 3,193
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Equity in earnings of subsidiaries . (1,071) -- -- 1,071 --
Depreciation and amortization ...... 3,102 1,018 77 -- 4,197
Deferred income taxes .............. 511 -- -- -- 511
Provision for doubtful accounts
receivable ....................... 155 29 24 -- 208
(Gain) on sale and disposition of
property and equipment ........... (11) -- -- -- (11)
Changes in operating assets and
liabilities:
Accounts receivable-- trade ...... (3,095) 158 (3,023) -- (5,960)
Accounts receivable from/payable
to affiliates .................. (5,527) (2,594) 3,551 -- (4,570)
Prepaid expenses and other ....... (795) (550) (371) -- (1,716)
Accounts payable and accrued
liabilities .................... 3,296 490 1,037 -- 4,823
Income taxes payable ............. 357 67 266 -- 690
--------------- --------------- ------------ ------------ ------------
Net cash provided by (used in)
operating activities ............... 115 1,293 (43) -- 1,365
INVESTING ACTIVITIES:
Additions to revenue-producing tools
and inventory ...................... (13,954) (1,295) (447) -- (15,696)
Inventory transferred to cost of
rentals ............................ 3,197 613 501 -- 4,311
Revenue-producing tools lost in hole,
abandoned and sold ................. 1,869 (450) -- -- 1,419
Additions to property and equipment .. (467) 31 (73) -- (509)
Proceeds from sale of property and
equipment .......................... 20 (2) 76 -- 94
--------------- --------------- ------------ ------------ ------------
Net cash provided (used in) investing
activities ......................... (9,335) (1,103) 57 -- (10,381)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ... 400 -- -- -- 400
Payments on outstanding debt ......... (4,628) -- -- -- (4,628)
Payment of promissory note ........... (5,000) -- -- -- (5,000)
Proceeds from sale of common stock,
net ................................ 27,834 -- -- -- 27,834
--------------- --------------- ------------ ------------ ------------
Net cash provided by financing
activities ......................... 18,606 -- -- -- 18,606
--------------- --------------- ------------ ------------ ------------
Increase in cash and cash equivalents 9,386 190 14 -- 9,590
Cash and cash equivalents at beginning
of period .......................... 1,428 363 176 -- 1,967
--------------- --------------- ------------ ------------ ------------
Cash and cash equivalents at end of
period ............................. $ 10,814 $ 553 $ 190 $ -- $ 11,557
=============== =============== ============ ============ ============
</TABLE>
See accompanying notes.
27
<PAGE> 28
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR YEAR ENDED APRIL 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................... $ 2,991 $ 3,394 $ (2,961) $ (960) $ 2,464
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Equity in earnings of subsidiaries . (960) -- -- 960 --
Depreciation and amortization ...... 4,926 1,545 122 -- 6,593
Deferred income taxes .............. (783) -- -- -- (783)
Provision for doubtful accounts
receivable ....................... 229 40 36 -- 305
Provision for stock awards ......... 2,807 -- -- -- 2,807
Loss on sale and disposition of
property and equipment ........... 21 138 -- -- 159
Changes in operating assets and
liabilities:
Accounts receivable-- trade ...... (2,110) 264 (759) -- (2,605)
Accounts receivable from/payable
to affiliates .................. 722 (3,872) 3,778 -- 628
Prepaid expenses and other ....... (617) (25) (330) -- (972)
Accounts payable and accrued
liabilities .................... 1,130 48 397 -- 1,575
Income taxes payable ............. 975 114 403 -- 1,492
--------------- --------------- ------------- ------------- -------------
Net cash provided by operating
activities ......................... 9,331 1,646 686 -- 11,663
INVESTING ACTIVITIES:
Additions to revenue-producing tools
and inventory ...................... (18,474) (2,099) (1,252) -- (21,825)
Inventory transferred to cost of
rentals ............................ 3,805 1,207 901 -- 5,913
Revenue-producing tools lost in hole,
abandoned and sold ................. 2,622 (639) -- -- 1,983
Additions to property and equipment .. (547) (22) (91) -- (660)
Proceeds from sale of property and
equipment .......................... 277 (136) (15) -- 126
Acquisition .......................... (1,584) -- -- -- (1,584)
--------------- --------------- ------------- ------------- -------------
Net cash used in investing activities (13,901) (1,689) (457) -- (16,047)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ... 400 -- -- -- 400
Payments on outstanding debt ......... (5,198) -- -- -- (5,198)
Payment of promissory note ........... (5,000) -- -- -- (5,000)
Net proceeds from sale of common
stock .............................. 27,649 -- -- -- 27,649
Purchase of treasury stock ........... (234) -- -- -- (234)
--------------- --------------- ------------- ------------- -------------
Net cash provided by financing
activities ......................... 17,617 -- -- -- 17,617
--------------- --------------- ------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents ........................ 13,047 (43) 229 -- 13,233
Cash and cash equivalents at beginning
of period .......................... 1,428 363 176 -- 1,967
--------------- --------------- ------------- ------------- -------------
Cash and cash equivalents at end of
period ............................. $ 14,475 $ 320 $ 405 $ -- $ 15,200
=============== =============== ============= ============= =============
</TABLE>
See accompanying notes.
28
<PAGE> 29
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR YEAR ENDED APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ..................... $ 3,097 $ (132) $ 667 $ (1,018) $ 2,614
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Equity in earnings of subsidiaries .. (1,018) -- -- 1,018 --
Depreciation and amortization ....... 4,324 1,344 58 -- 5,726
Deferred income taxes ............... (816) -- -- -- (816)
Provision for doubtful accounts
receivable ........................ 204 52 -- -- 256
Loss on sale and disposition of
property and equipment ............ 6 -- -- -- 6
Changes in operating assets and
liabilities:
Accounts receivable-- trade ....... (278) (437) (1,783) -- (2,498)
Accounts receivable from/payable to
affiliates ...................... (3,251) 1,644 1,069 -- (538)
Prepaid expenses and other ........ 332 2 13 -- 347
Accounts payable and accrued
liabilities ..................... (1,138) 105 101 -- (932)
Income taxes payable .............. 338 92 311 -- 741
--------------- --------------- ------------- ------------- -------------
Net cash provided by operating
activities .......................... 1,800 2,670 436 -- 4,906
INVESTING ACTIVITIES:
Additions to revenue-producing tools
and inventory ....................... (9,267) (2,576) (330) -- (12,173)
Inventory transferred to cost of
rentals ............................. 4,078 1,107 336 -- 5,521
Revenue-producing tools lost in hole,
abandoned and sold .................. 3,988 (1,437) -- -- 2,551
Additions to property and equipment ... (870) 320 (333) -- (883)
Proceeds from sale of property and
equipment ........................... 1,247 (307) (24) -- 916
--------------- --------------- ------------- ------------- -------------
Net cash used in investing activities . (824) (2,893) (351) -- (4,068)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt .... 1,300 -- -- -- 1,300
Payments on outstanding debt .......... (1,967) -- -- -- (1,967)
--------------- --------------- ------------- ------------- -------------
Net cash provided by financing
activities .......................... (667) -- -- -- (667)
--------------- --------------- ------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents ......................... 309 (223) 85 -- 171
Cash and cash equivalents at beginning
of period ........................... 1,119 586 91 -- 1,796
--------------- --------------- ------------- ------------- -------------
Cash and cash equivalents at end of
period .............................. $ 1,428 $ 363 $ 176 $ -- $ 1,967
=============== =============== ============= ============= =============
</TABLE>
See accompanying notes.
29
<PAGE> 30
A. SIGNIFICANT ACCOUNTING POLICIES
Elimination Entries
Revenues and related cost of sales have been presented net of intercompany
transactions.
B. OTHER
Notes 1 through 18 should be read in conjunction with the Condensed
Consolidating Financial Statements.
20. REPORTABLE SEGMENTS
The Company has two reportable segments: Downhole Products and Services and
Underbalanced Drilling. The Downhole Products and Services segment primarily
provides downhole hole tools for rental, directional drilling services,electric
wireline and tubing conveyed perforating services and tubular testing and
handling services. The Underbalanced Drilling segment provides air drilling
services and underbalanced drilling equipment packages. The accounting policies
used to determine the segment information are the same as those described
in Note 3.
Export sales to unaffiliated customers included in domestic revenues were
$406,000, $977,000 and $1.8 million in the years ended December 31, 1998 and
April 30, 1997 and 1996, respectively. $430,000 for the eight month period ended
December 31, 1997.
<TABLE>
<CAPTION>
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Downhole Products & Services
Rental Revenue $ 61,255 $ 42,454 $ 49,497 $ 42,987
Products & Services 37,483 13,519 16,954 15,952
------------- ------------- ------------- -------------
Total 98,738 55,973 66,451 58,939
Underbalanced Drilling
Products & Services 2,554 1,491 -- --
Underbalanced Drilling 31,025 18,685 -- --
------------- ------------- ------------- -------------
Total 33,579 20,176 -- --
------------- ------------- ------------- -------------
Total Reportable Segment Revenue $ 132,317 $ 76,149 $ 66,451 $ 58,939
============= ============= ============= =============
Interest Expense
Downhole Products & Services $ -- $ 966 $ 833 $ 967
Underbalanced Drilling 144 81 -- --
------------- ------------- ------------- -------------
Total Reportable Segment Interest $ 144 $ 1,047 $ 833 $ 967
============= ============= ============= =============
Depreciation and Amortization Expense:
Downhole Products & Services $ 10,249 $ 5,020 $ 6,289 $ 5,522
Underbalanced Drilling 6,395 2,554 -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Depreciation and Amortization $ 16,644 $ 7,574 $ 6,289 $ 5,522
============= ============= ============= =============
Reorganization Costs:
Downhole Products & Services $ 406 $ 2,449 $ -- $ --
Underbalanced Drilling -- -- -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Reorganization Costs $ 406 $ 2,449 $ -- $ --
============= ============= ============= =============
Provision for Asset Impairment:
Downhole Products & Services $ 50,681 $ -- $ -- $ --
Underbalanced Drilling -- -- -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Asset Impairment $ 50,681 $ -- $ -- $ --
============= ============= ============= =============
Operating Income:
Downhole Products & Services
Underbalanced Drilling $ (54,163) $ 6,360 $ 13,852 $ 11,910
7,148 7,255 -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Operating Income $ (47,015) $ 13,615 $ 13,852 $ 11,910
============= ============= ============= =============
Segment Assets:
Downhole Products & Services $ 143,084 $ 77,580 $ 61,820 $ 52,684
Underbalanced Drilling 79,578 66,017 -- --
------------- ------------- ------------- -------------
Total Reportable Segment
Assets $ 222,662 $ 143,597 $ 61,820 $ 52,684
============= ============= ============= =============
Underbalanced drilling segment assets include the Company's investment in joint venture.
Expenditure for Long-Lived Assets:
Downhole Products & Services $ 38,541 $ 16,917 $ 15,968 $ 6,840
Underbalanced Drilling 8,722 7,382 -- --
------------- ------------- ------------- -------------
Total Reportable Segment Expenditures $ 47,263 $ 24,299 $ 15,968 $ 6,840
============= ============= ============= =============
A reconciliation of operating income from segments to consolidated total operating income is as follows:
</TABLE>
<TABLE>
<CAPTION>
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating Income (Loss)
Total Operating Income/Loss for
Reportable Segments $(47,015) $13,615 $13,852 $11,910
Non-Operating Segments
Selling, General and Administrative 13,649 6,163 7,218 7,491
Depreciation & Amortization 7,837 532 304 204
Reorganization Costs 3,007 4 -- --
Non-Cash Compensation Expense 711 661 2,807 --
Provision for Asset Impairment 12 -- -- --
Interest Expense 24,285 4,205 -- --
Other Income/Expense (3,383) (946) (452) 174
-------- ------- ------ ------
Consolidated Income (Loss) Before
Taxes and Extraordinary Item $(93,133) $ 2,996 $ 3,975 $ 4,041
======== ======= ======= =======
A reconciliation of segment assets to consolidated assets impairment is as follows:
</TABLE>
<TABLE>
<CAPTION>
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Total Assets Impairment for
Reportable Segments $50,681 $ -- $ -- $ --
Total Assets Impairment for
Non-Operating Segment 2,376 -- -- --
------- ------- ------- -------
Total Asset Impairment 53,057 -- -- --
======= ======= ======= =======
A reconciliation of segment assets to consolidated total assets is as follows:
</TABLE>
<TABLE>
<CAPTION>
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Total Assets for Reportable Segments 222,662 143,597 61,820 52,013
Non-Operating Segment Assets 49,511 65,680 20,538 3,865
------- ------- ------ ------
Consolidated Assets 272,173 209,277 82,358 55,878
======= ======= ====== ======
Non-operating segment assets primarily consists of cash and cash equivalents,
corporate property and equipment and certain deferred costs.
A reconciliation of expenditures for reportable segments to consolidated
expenditures is as follows:
</TABLE>
<TABLE>
<CAPTION>
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Total Expenditures for Reportable
Segments 47,263 24,299 15,968 6,840
Total Expenditures for Non-Operating
Segments 2,454 501 604 695
------- ------- ------ ------
Total Consolidated Expenditures 49,717 24,800 16,572 7,535
======= ======= ====== =====
Operating revenues for reportable segments by geographic area are as follows:
</TABLE>
<TABLE>
<CAPTION>
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Domestic 68,833 36,555 40,223 34,370
Canada 10,203 5,167 -- --
Europe 10,970 4,979 7,297 7,349
West Africa 6,530 1,879 2,559 2,059
Latin America 21,790 18,337 11,670 11,032
Middle East 5,440 2,204 1,036 563
Southeast Asia 8,551 7,028 3,666 3,566
------- ------- ------ ------
Total 132,317 76,149 66,451 58,939
======= ======= ====== ======
Long-lived assets by geographic area are as follows:
</TABLE>
<TABLE>
<CAPTION>
8 MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 APRIL 30, 1997 APRIL 30, 1996
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Domestic 147,180 88,989 35,371 26,425
Canada 12,671 10,082 -- --
Europe 25,473 6,248 5,884 5,119
West Africa 4,182 122 178 221
Latin America 5,502 4,063 3,434 3,205
Middle East 3,375 1,147 307 121
Southeast Asia 3,004 1,419 1,529 1,114
------- ------- ------ ------
Total 201,387 112,070 46,703 36,205
======= ======= ====== ======
</TABLE>
30
<PAGE> 31
21. QUARTERLY INFORMATION
Selected unaudited quarterly data for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- -------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND COMMON STOCK PRICE)
<S> <C> <C> <C> <C>
Year Ending December 31,
1998
Operating revenues..... $ 38,020 $ 33,779 $ 31,220 $ 29,298
Operating income (loss) 3,412 (1,989) (8,195)(d) (65,315)(b),(c),(d)
Loss before
extraordinary item... (1,705) (7,709) (15,043)(d) (70,791)(b),(c),(d)
Net loss .............. (19,284) (7,709) (15,043)(d) (70,791)(b),(c),(d)
Dividends.............. 0.00 0.00 0.00 0.00
Loss per share before
extraordinary item:
Basic................ (0.18) (0.77) (1.50) (7.05)
Diluted.............. (0.18) (0.77) (1.50) (7.05)
Loss per share:
Basic................ (2.08) (0.77) (1.50) (7.05)
Diluted.............. (2.07) (0.77) (1.50) (7.05)
Common stock price:
High................. 10.50 9.88 6.38 2.06
Low.................. 7.38 5.75 2.00 .38
Year Ending December 31,
1997
Operating revenues..... $ 16,177 $ 18,896 $ 29,801 $ 32,511
Operating income (loss) 578 (1,387) 3,395 3,950
Net income (loss)...... 221 (1,526) 1,243 1,010(a)
Dividends.............. 0.00 0.00 0.00 0.00
Earnings (loss) per
share:.................
Basic................ 0.02 (0.16) 0.14 0.11
Diluted.............. 0.02 (0.16) 0.13 0.11
Common stock price:
High................. 11.00 7.25 12.38 14.75
Low.................. 6.75 5.38 6.25 10.25
</TABLE>
- ----------
(a) Reflects the impact of non-cash compensation expense during the period
of $894,000 pretax and $572,000 after tax in the third quarter and $1.9
million pretax and $1.3 million after tax in the fourth quarter.
(b) Reflects the impact of non-cash compensation expensed during the
period of $185,000, $286,000, $133,000, and $107,000 pretax in the
first, second, third and fourth quarters, respectively.
(c) Reflects the impact of the provision for asset impairment of $53.0
million incurred in the fourth quarter.
(d) Reflects the impact of reorganization costs of $2.4 million and $1.0
million in the third and fourth quarters, respectively.
31
<PAGE> 32
DAILEY INTERNATIONAL INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ----------------------
AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
------------------ ---------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal year ended April
30, 1996................. Allowance for
doubtful accounts $1,356,000 $ 256,000 $ 0 $(287,000) $1,325,000
========== ========= ========= ========= ==========
Inventory reserve $ 892,000 $ 0 $ 0 $ (88,000) $ 804,000
========== ========= ========= ========= ==========
Fiscal year ended April
30, 1997................. Allowance for
doubtful accounts $1,325,000 $ 305,000 $ 0 $(154,000) $1,476,000
========== ========= ========= ========= ==========
Inventory reserve $ 804,000 $ 0 $ 0 $(242,000) $ 562,000
========== ========= ========= ========= ==========
Eight months ended
December 31, 1997........ Allowance for
doubtful accounts $1,476,000 $ 490,000 $ 0 $(182,000) $1,784,000
========== ========= ========= ========= ==========
Inventory reserve $ 562,000 $ 46,000 $ 0 $ (2,000) $ 606,000
========== ========= ========= ========= ==========
Fiscal year ended
December 31, 1998........ Allowance for
doubtful accounts $1,784,000 $2,783,000 $ (15,000) $(126,000) $4,426,000
========== ========== ========== ========== ==========
Inventory reserve $ 606,000 $ 676,000 $ 0 $(158,000) $1,124,000
========== ========= ========= ========== ==========
</TABLE>
32
<PAGE> 1
EXHIBIT 99.3
DAILEY INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Consolidated balance sheets - March 31, 1999 and December 31, 1998 2
Consolidated statements of operations - Three months ended March 31, 1999 and 1998 3
Consolidated statements of cash flows - Three months ended March 31, 1999 and 1998 4
Notes to consolidated financial statements - March 31, 1999 5-8
</TABLE>
1
<PAGE> 2
DAILEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 19,185 $ 32,843
Accounts receivable, net.............................. 32,634 32,803
Accounts receivable from affiliates................... 368 362
Prepaid expenses and other current assets............. 3,142 4,778
--------- ---------
Total current assets........................... 55,329 70,786
Revenue-producing tools and inventory, net.............. 136,655 141,524
Property and equipment, net............................. 13,019 13,255
Goodwill, net........................................... 21,979 22,275
Investment in joint venture............................. 7,609 7,100
Other assets............................................ 16,445 17,233
--------- ---------
Total assets................................... $ 251,036 $ 272,173
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities............... $ 12,426 $ 15,258
Accrued interest on senior notes....................... 3,266 9,797
Income taxes payable................................... 4,682 3,987
Current portion of long-term debt...................... 736 1,048
--------- ---------
Total current liabilities....................... 21,110 30,090
Long-term debt........................................... 275,067 275,060
Deferred income taxes.................................... 5,946 5,910
Other noncurrent liabilities............................. 1,065 1,298
Stockholders' equity (deficit):
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 5,703,655 issued
and 5,129,004 and 5,135,504 outstanding at
March 31, 1999 and December 31, 1998, respectively;
Class B, $0.01 par value: 10,000,000 shares
authorized, 5,000,000 shares issued and outstanding
at March 31, 1999 and December 31, 1998,
respectively........................................ 106 106
Treasury stock (574,651 and 568,151 shares at
March 31, 1999 and December 31, 1998,
respectively)....................................... (4,061) (4,048)
Paid-in capital....................................... 53,062 52,437
Accumulated other comprehensive income................ (1,069) (1,026)
Retained earnings (deficit)........................... (100,190) (87,654)
--------- ---------
Total stockholders' equity (deficit)........... (52,152) (40,185)
--------- ---------
Total liabilities and stockholders' equity
(deficit).................................... $ 251,036 $ 272,173
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 3
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Rental income..................................... $ 9,736 $ 15,691
Sales of products and services ................... 10,993 11,749
Underbalanced drilling services .................. 7,610 10,580
------------ ------------
28,339 38,020
Costs and expenses:
Cost of rentals................................... 8,493 10,055
Cost of products and services..................... 5,666 6,368
Cost of underbalanced drilling services........ 4,864 5,765
Selling, general and administrative............... 7,463 7,528
Depreciation and amortization .................... 6,410 4,628
Reorganization costs.............................. 1,239 --
Non-cash compensation ............................ 55 185
Research and development ......................... 232 79
------------ ------------
34,422 34,608
------------ ------------
Operating income (loss)............................. (6,083) 3,412
Other (income) expense:
Interest income................................... (747) (962)
Interest expense.................................. 6,900 4,494
Equity in earnings of joint venture............... (509) --
Other, net........................................ (272) 125
------------ ------------
Loss before income taxes and
extraordinary item ............................... (11,455) (245)
Provision for income taxes ......................... 1,081 1,460
------------ ------------
Loss before extraordinary item ..................... (12,536) (1,705)
Extraordinary item, net of taxes ................... -- (17,579)
------------ ------------
Net loss............................................ $ (12,536) $ (19,284)
============ ============
Loss per share before extraordinary item:
Basic .......................................... $ (1.24) $ (.18)
============ ============
Diluted ........................................ $ (1.24) $ (.18)
============ ============
Loss per share:
Basic........................................... $ (1.24) $ (2.08)
============ ============
Diluted ........................................ $ (1.24) $ (2.08)
============ ============
Weighted average shares outstanding:
Basic........................................... 10,077,321 9,253,598
============ ============
Diluted ........................................ 10,077,321 9,253,598
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ...................................... $ (12,536) $ (19,284)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary loss on repurchase of notes.... -- 17,579
Depreciation and amortization ............... 6,410 4,628
Deferred income taxes ....................... (6) 173
Amortization of debt issuance costs ......... 216 --
Provision for doubtful accounts ............. (47) 220
Provision for stock awards .................. 625 185
Equity income of unconsolidated subsidiary... (509) --
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable trade ................... 147 (4,812)
Accounts receivable from/payable to
officers and affiliates .................. (137) (112)
Prepaid expenses and other .................. 1,560 (4,233)
Accounts payable and accrued liabilities .... (9,014) 3,749
Income taxes payable ........................ 693 821
---------- ----------
Net cash used in operating activities ......... (12,598) (1,086)
INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory ................................... (3,207) (17,056)
Inventory transferred to cost of rentals ...... 1,334 2,317
Revenue-producing tools lost in hole,
abandoned and sold .......................... 1,291 645
Additions to property and equipment ........... (671) (1,824)
Proceeds from sale of property and equipment .. 458 1,293
Acquisitions .................................. -- (76,903)
Unrealized loss on cash equivalent
investments............................... (59) --
---------- ----------
Net cash used in investing activities ......... (854) (91,528)
FINANCING ACTIVITIES:
Proceeds from the issuance of debt ............ -- 268,125
Payments on outstanding debt .................. (355) (120,874)
Extraordinary loss on repurchase of notes...... -- (12,650)
Purchase of treasury stock..................... (13) --
---------- ----------
Net cash provided by (used in) financing
activities .................................. (368) 134,601
---------- ----------
Effect of foreign exchange rate changes
on cash ..................................... 162 (92)
---------- ----------
Increase (decrease) in cash and cash
equivalents ................................. (13,658) 41,895
Cash and cash equivalents at beginning of
period ...................................... 32,843 59,836
---------- ----------
Cash and cash equivalents at end of period .... $ 19,185 $ 101,731
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
DAILEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. SUBSEQUENT EVENTS AND GOING CONCERN
In response to adverse industry conditions, the Company began during the
third quarter of 1998 to review and implement cost saving strategies to reduce
its cost structure to bring it more in line with then current industry
conditions, including consolidating or eliminating operations and reducing
overhead. As a result of these efforts, the Company recorded a reorganization
charge during 1998 of $3.4 million and $1.2 million in 1999. The Company has
continued to review methods in which it can reduce its cost structure and reduce
overhead.
In April 1999, the Company retained an investment banking firm as financial
advisor to advise the Company on its strategic and financial alternatives,
including sales and divestitures of assets, a capital infusion, or a sale of the
Company.
The Company currently has no outstanding debt other than under the Senior
Notes (see Note 7) and debt assumed in the IDS acquisition (see Note 4).
However, the Company currently does not have any commitment from any third party
to lend the Company additional funds and no assurance can be given that such a
financing transaction can be completed on terms acceptable to the Company or at
all. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classifications of liabilities that may result from the outcome
of this uncertainty.
On May 21, 1999, the Company announced that it and certain of its
subsidiaries had entered into an agreement to be acquired by Weatherford
International, Inc.("Weatherford"), a Houston-based oilfield products and
services company. The terms of the acquisition contemplate the issuance of
shares of Weatherford common stock having a market value of $195 million. The
terms of the acquisition are set forth in an acquisition agreement between the
Company and Weatherford May 21, 1999. Under the agreement, the Company's
outstanding $275 million Senior Note indebtedness would be exchanged pro rata
for $185 million in Weatherford stock. All outstanding equity securities held by
the Company's equity security holders would be exchanged for $10 million in
Weatherford stock that would be shared pro rata based on share ownership. The
value of the Weatherford common stock would be fixed as of the date of the
consummation of the acquisition, and will be based on an average closing sales
price calculation over a 10 trading-day period preceding the date of
consummation. The acquisition agreement contemplates the filing by Dailey and
eight of its domestic subsidiaries in the United States Bankruptcy Court for the
District of Delaware of petitions for relief under Chapter 11 of the Bankruptcy
Code, along with a plan of reorganization and a disclosure statement, in order
to implement a financial restructuring of its 9 1/2% Senior Notes due 2008. The
closing of the acquisition is subject to a number of conditions, including
confirmation of the plan of reorganization by September 30, 1999, bankruptcy
court approvals, requisite regulatory approvals, and filing of the petitions in
bankruptcy along with the plan of reorganization and disclosure statement by
June 1, 1999. The agreement provides that the plan of reorganization will
contemplate the payment of all trade creditors' claims as and when they come due
in the ordinary course of business or in full on the effective date of the plan.
In May 1999, the Company implemented an incentive plan to retain certain key
personnel through December 31, 1999. The cost of the incentive plan is
approximately $800,000.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's recent losses from operations and the acquisition agreement and
proposed bankruptcy filing raise substantial doubt about its ability to continue
as a going concern. The appropriateness of using the going concern basis is
dependent upon, among other things, (i) confirmation of the plan of
reorganization by the bankruptcy court, and (ii) consummation of the
transactions contemplated by the acquisition agreement with Weatherford.
The plan of reorganization could materially change the amounts currently
recorded in the financial statements. The financial statements do not give
effect to any adjustment to the carrying value of assets, or amounts and
classifications of liabilities that might be necessary as a consequence of this
matter.
2. 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 and such adjustments are of a normal, recurring nature. Operating
results for the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999. 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 April 1, 1999.
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 immediate
impact on the Company's net loss or stockholders' equity. SFAS No. 130 requires
the Company's foreign currency translation adjustments and unrealized gains/loss
on investments to be included in comprehensive income. For the three months
ended March 31, 1999 and 1998, the total comprehensive loss was $12,579,000 and
$19,377,000, respectively.
Certain reclassifications have been made to the March 31,1998 financial
statements to conform to the 1999 presentation.
5
<PAGE> 6
3. ORGANIZATION
The accompanying consolidated financial statements reflect the operations of
Dailey International Inc. (formerly Dailey Petroleum Services Corp.), a Delaware
corporation, hereinafter referred to as the "Company" or "Dailey."
The Company currently manages its operations in two business segments: (1)
downhole products and services and (2) underbalanced drilling services. Downhole
products and services are comprised of the Company's directional drilling
services, electric wireline services, tubing conveyed perforating services and
downhole tool rentals. The Company's underbalanced drilling services were
acquired through the Company's acquisition of Air Drilling International, Inc.
("ADI") in June 1997. 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 ADI 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. In December
1998 Dailey, through its subsidiary Air Drilling Services, Inc., acquired 51% of
International Nitrogen Services, Inc. ("INS"), a joint venture with MG Generon,
Inc. The company, headquartered in Houston, Texas, provides non-cryogenic
nitrogen generators and production units for use in the on-site production of
nitrogen for injection in downhole drilling of oil and gas.
4. ACQUISITIONS
DWS/DAMCO Acquisition: In January 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 $32.5 million relating to the excess of the
purchase price over the fair market value of the assets, which was to be
amortized over 25 years and result in approximately $1.2 million in amortization
expense per year. Based on the Company's review of long-lived assets, including
goodwill, the remaining unamortized goodwill balance of $31.3 million at
December 31, 1998 was deemed to be fully impaired.
IDS Acquisition: The Company acquired the outstanding capital stock of IDS
in March 1998 (with additional consideration paid in July 1998 in connection
with the resolution of certain contingencies) for approximately $18.8 million in
cash and 1,064,000 shares of Class A Common Stock (309,516 shares were returned
in July 1998), 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 $20.3
million in goodwill, representing the excess of the purchase price over the
estimated fair market value of the IDS assets, which was to be amortized over 25
years and result in additional annual amortization expense of $788,000. Based on
the Company's review of long-lived assets, including goodwill, the remaining
unamortized goodwill of $19.7 million at December 31, 1998 was deemed to be
fully impaired.
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 purchase price allocation was
based on preliminary estimates and may be revised at a later date.
6
<PAGE> 7
INS Acquisition: In December 1998, the Company acquired 51% of INS for
approximately $7.1 million cash, subject to a purchase price adjustment of up to
$500,000 based on future earnings. INS, a joint venture with MG Generon,
provides non-cryogenic nitrogen generators and production units for use in the
on-site production of nitrogen for injection in downhole drilling of oil and gas
wells. The joint venture is accounted for using the equity method of accounting.
5. REORGANIZATION COST
Reorganization costs of $1.2 million incurred in 1999 were primarily
related to the resignation of the former chief financial officer and other
employees, and the accelerated vesting of restricted stock awards.
6. REVENUE-PRODUCING TOOLS AND INVENTORY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue-producing tools..................... $ 161,530 $159,993
Accumulated depreciation.................... (58,196) (53,325)
--------- --------
103,334 106,668
Inventory:
Components, subassemblies and expendable
parts.................................. 29,333 30,711
Rental tools and expendable parts under
production............................. 2,088 2,247
Raw materials............................. 1,900 1,898
--------- --------
33,321 34,856
--------- --------
Revenue-Producing Tools and
Inventory...................... $ 136,655 $141,524
========= ========
</TABLE>
7. BORROWING ARRANGEMENTS AND EXTRAORDINARY ITEM
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
9 1/2% Senior Notes............... $ 275,000 $275,000
Loans payable to a bank........... 796 1,102
Other............................. 7 6
--------- --------
275,803 276,108
Less current portion of long-term
debt........................... (736) (1,048)
--------- --------
Total long-term debt.... $ 275,067 $275,060
========= ========
</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 $1.79 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.
7
<PAGE> 8
9. REPORTABLE SEGMENTS
The Company has two reportable segments: Downhole Products and Services and
Underbalanced Drilling. The Downhole Products and Services segment primarily
provides downhole tools for rental, directional drilling services, electric
wireline and tubing conveyed perforating services and tubular testing and
handling services. The Underbalanced Drilling segment provides air drilling
services and underbalanced drilling equipment packages.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Downhole Products & Services
Rental Revenue ........................ $ 9,736 $ 15,691
Products & Services ................... 9,628 9,988
---------- ----------
Total ............................. 19,364 25,679
Underbalanced Drilling
Products & Services .................... 1,365 1,761
Underbalanced Drilling ................. 7,610 10,580
---------- ----------
Total ............................. 8,975 12,341
---------- ----------
Total Reportable Segment Revenue ............ $ 28,339 $ 38,020
========== ==========
Operating Income (Loss):
Downhole Products & Services ................ $ (4,683) $ 1,939
Underbalanced Drilling ...................... 2,845 4,449
---------- ----------
Total Reportable Segment
Operating Income (Loss) ................... $ (1,838) $ 6,388
========== ==========
</TABLE>
A RECONCILIATION OF OPERATING INCOME (LOSS) FROM SEGMENTS TO CONSOLIDATED
TOTAL OPERATING LOSS IS AS FOLLOWS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Operating Income (Loss)
Total Operating Income (Loss) for
Reportable Segments ....................... $ (1,838) $ 6,388
Non-Operating Segments
Selling, General and Administrative ....... 2,401 2,882
Depreciation & Amortization ............... 243 203
Reorganization Costs ...................... 1,075 --
Non-Cash Compensation Expense ............. 55 185
Interest Expense .......................... 6,862 4,200
Other Income ................................ (1,019) (837)
---------- ----------
Consolidated Loss Before
Taxes and Extraordinary Item ........ $ (11,455) $ (245)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEGMENT ASSETS:
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Downhole Products & Services ................ $ 194,631 $ 143,084
Underbalanced Drilling ...................... 32,513 79,578
---------- ----------
Total Assets for Reportable Segments ........ 227,144 222,662
Non-Operating Segment Assets ................ 23,892 49,511
---------- ----------
Consolidated Assets ......................... $ 251,036 $ 272,173
========== ==========
</TABLE>
Non-operating segment assets primarily consist of cash and cash equivalents,
corporate property and equipment and certain deferred costs.
8
