-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LWYpc2Rbk716sHRkdJMnnA35v5hRI5ZEFbVaLsWGF5NouPbHF5S+NKgoiAMjFgNL MQBL+1GNCid5uIWO6Bzt9g== 0000899243-97-000500.txt : 19970329 0000899243-97-000500.hdr.sgml : 19970329 ACCESSION NUMBER: 0000899243-97-000500 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRILEX INTERNATIONAL INC CENTRAL INDEX KEY: 0001013036 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 760438889 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20689 FILM NUMBER: 97567351 BUSINESS ADDRESS: STREET 1: 15151 SOMMERMEYER STREET 2: 15151 SOMMERMEYER CITY: HOUSTON STATE: TX ZIP: 77041 BUSINESS PHONE: 7139378888 MAIL ADDRESS: STREET 1: 15151 SOMMERMEYER CITY: HOUSTON STATE: TX ZIP: 77041 FORMER COMPANY: FORMER CONFORMED NAME: DRILEX CORP DATE OF NAME CHANGE: 19960428 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (Mark one) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-20689 DRILEX INTERNATIONAL INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0438889 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 15151 SOMMERMEYER HOUSTON, TEXAS 77041 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) (713) 937-8888 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS Common Stock, par value $.01 per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of February 27, 1997, there were 6,663,356 shares of Drilex International Inc. Common Stock, $.01 par value, issued and outstanding, 2,450,264 of which, having an aggregate market value of $27,718,612, were held by non-affiliates of the Registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement related to the Registrant's 1997 Annual Stockholders Meeting are incorporated by reference in Items 10, 11, 12 and 13 of Part III of this report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business....................................................... 1 Item 2. Properties..................................................... 9 Item 3. Legal Proceedings.............................................. 9 Item 4. Submission of Matters to a Vote of Security Holders............ 9 Executive Officers of the Registrant........................... 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................................... 11 Item 6. Selected Financial Data........................................ 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 13 Item 8. Financial Statements and Supplementary Data.................... 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................... 38 PART III Item 10. Directors and Executive Officers of Registrant................. 38 Item 11. Executive Compensation......................................... 38 Item 12. Security Ownership of Certain Beneficial Owners and Management. 38 Item 13. Certain Relationships and Related Transactions................. 38 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- K............................................................. 38
* * * * The statements regarding the industry outlook, the Company's expectations regarding growth in the precision drilling segment, the Company's expectations regarding the future performance of its businesses, and other statements which are not historical facts contained in this report are forward-looking statements. The words "expect," "project," "estimate," "predict" and similar expressions are also intended to identify forward-looking statements. Such statements are subject to numerous risks and uncertainties, including but not limited to the uncertainties relating to the exploration and development decisions to be made in the future by oil and gas exploration and development companies, market factors, market prices of natural gas and oil, future operations and costs, unanticipated technological changes and other factors detailed herein and in the Company's other Securities and Exchange Commission filings. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. PART I ITEM 1. BUSINESS. GENERAL Drilex International Inc. ("Drilex" or the "Company") is a leading provider of products and services used in directional, horizontal and other precision drilling of oil and gas wells, oilfield workover operations, environmental remediation applications, and trenchless pipeline and cable laying applications. The Company's products and services include comprehensive computerized well planning and engineering services, supervision of drilling operations and project management, a full range of high performance downhole positive displacement motor systems, guidance systems (such as measurement- while-drilling (MWD) instrument systems and steering tools), and other related downhole tools. Drilex was one of the pioneers in the development of downhole drilling motors in the early 1980s and is now a leader in the design and manufacture of high-performance, multi-lobed positive displacement drilling motors. The Company employs its drilling motors in its own service operations and also provides motors for sale or rent under the internationally recognized "Drilex" brand name to oil and gas exploration and development companies and oilfield service contractors. The Company currently operates from 19 locations around the world and has approximately 380 employees. In addition, the Company has a number of agencies around the world which are all authorized by the Company for sales and service. Oilfield applications accounted for approximately 84% of the Company's revenues in 1996. The Company's predecessor, Drilex Systems, Inc. ("DSI"), was formed in Scotland in 1981 and was subsequently acquired by MascoTech, Inc. ("MascoTech") in 1984. In March 1994, DRLX Partners, L.P. and John Forrest (a founder of DSI and the current President and Chief Executive Officer of the Company) purchased DSI from MascoTech following MascoTech's decision to exit the oilfield services business (the "DSI Acquisition"). On September 30, 1994, the Company acquired substantially all of the fixed assets of Cobb Directional Drilling Company, Inc. and its affiliate, Posi-Trak Mud Motors, Inc. (the "Cobb Acquisition"), an independent directional drilling contractor and provider of drilling motors for the U.S. Gulf of Mexico region. On May 5, 1995, the Company acquired the stock of Sharewell, Inc. (the "Sharewell Acquisition"), a leading provider of guidance services and equipment to the trenchless drilling market worldwide and a significant supplier of guidance and survey instruments to the oilfield precision drilling industry. On September 30, 1995, the Company acquired substantially all of the net assets of ENSCO Technology Company (the "ENSCO Technology Acquisition"), a wholly owned subsidiary of ENSCO International Incorporated. ENSCO Technology Company was an independent provider of precision drilling services, with special emphasis on horizontal drilling and was among the largest precision drilling service companies in the Austin Chalk formation. The Company completed the initial public offering (the "Offering") of its common stock, par value $.01 per share (the "Common Stock"), in July 1996. During the third and fourth quarters of 1996, the Company substantially completed the consolidation of facilities and operations in Texas, Louisiana and the United Kingdom. During 1996, the Company also substantially completed the combination of its guidance instrumentation support services into a single Houston facility which is expected to reduce costs, enhance guidance instrument performance and improve service delivery. Unless the context otherwise requires, references herein to the "Company" or "Drilex" refer to Drilex International Inc. and its consolidated subsidiaries viewed as a single entity and include its predecessors. The Company's principal executive offices are located at 15151 Sommermeyer, Houston, Texas 77041, and its telephone number at such address is (713) 937-8888. BUSINESS STRATEGY The Company's business strategy is built upon Drilex's premier line of downhole positive displacement drilling motors and emphasizes (i) providing the highest quality oilfield precision drilling and related customer support services in key geographic markets where demand for precision drilling services is concentrated, (ii) maximizing delivery of its core products, either through sales, rentals or alliance arrangements, into other geographic markets where the Company does not focus its service efforts, and (iii) capitalizing on its technical strengths by developing opportunities to deliver its core products and services into emerging oilfield and 1 nonoilfield markets where the Company's technical expertise can provide significant advantages. The Company also intends to explore additional opportunities for external growth through acquisitions of businesses to complement the Company's existing operations. Drilex intends to continue its emphasis on delivering responsive, reliable and high quality oilfield precision drilling services in key geographic markets. The Company currently operates both onshore and offshore and concentrates its activities in the United States (Texas, Louisiana, Mid Continent, Rocky Mountains, California and Alaska), Venezuela, the European Continental Shelf, Canada and the Far East. Each of these markets is characterized by substantial oilfield development activity (as opposed to new exploration activity) and a relatively high number of technically challenging situations that require high quality precision drilling operations. The Company concentrates its service activities in its key geographic markets in order to develop and capitalize on the Company's local knowledge and to take advantage of the regional experience and expertise of its drilling supervisors and other technical field personnel, as well as to achieve scale operating efficiencies. Furthermore, the high level of activity conducted by the Company in concentrated geographic areas permits a focused application engineering effort, which allows the Company to refine its products and services to meet the needs of its customers on a more effective basis. The Company also utilizes other distribution channels to maximize delivery of its products to areas outside of its key geographic markets. Since its inception, the Company has successfully marketed its drilling motors on a sale and rental basis to oil and gas exploration and development companies and other oilfield service contractors. The Company intends to continue strengthening its existing distribution channels and to expand its product distribution in those markets where the Company is not a significant service competitor. In particular, the Company is seeking to establish alliance arrangements with several large oilfield service companies, which would permit these companies to include Drilex motors in their comprehensive offerings of oilfield products and services in certain markets. These alliances do not, in general, constitute long-term purchase commitments by the other party. The Company plans to continue to build upon its technical drilling capabilities by further developing opportunities in emerging markets where the Company's expertise can provide competitive advantages. In particular, the Company believes that the development and rapid growth in the use of coiled tubing for oilfield workover, redrilling and recompletion operations has provided a significant opportunity for growth in the use of precision drilling technology for slim-hole applications. The Company has become a leading supplier of smaller diameter drilling motors and related equipment for coiled tubing operations and intends to maintain this leadership position as coiled tubing operations increasingly become a substitute for conventional drilling operations. Drilex has also been successful in developing opportunities for precision drilling in the environmental remediation and trenchless services markets, which the Company believes offer significant opportunities for growth. The Company continually reviews opportunities for growth through the acquisition of other businesses to complement its existing operations. Since the DSI Acquisition, the Company has expanded its presence in certain of its key geographic markets for oilfield precision drilling services and obtained additional opportunities to expand its distribution of Drilex-manufactured motors to replace third-party motors. In addition, the Company's MWD/Guidance equipment fleet has been substantially expanded. The Company will continue to explore opportunities involving acquisitions of other businesses to expand distribution of the Company's products and services, to add key technologies, to gain access to attractive industry niches, and to otherwise enhance its market presence. 2 PRODUCTS AND SERVICES OILFIELD PRECISION DRILLING APPLICATIONS Precision Drilling Services. The Company provides comprehensive precision drilling services for oil and gas drilling and workover applications, including computerized well planning, on-site drilling supervision, maintenance and support, and post-well analysis. In many oilfield applications, precision drilling techniques offer significant economic advantages over conventional vertical drilling techniques, such as reduced drilling time and expense, increased well production and enhanced reservoir recovery. The high torque, speed and performance offered by current-generation downhole drilling motors permit the use of precision drilling techniques as a practical alternative to conventional drilling even for vertically drilled wells. Customers for oilfield precision drilling services are concentrated primarily among major and large independent oil and gas companies. Because of the complexity involved in precision drilling, these customers typically rely on specialized precision drilling service contractors to manage the entire process of drilling the horizontal or directional portion of a well. Precision drilling services require high performance drilling motors, sophisticated guidance systems and analytical tools, and an experienced staff of wellsite and technical support personnel. The Company's drilling motors operate in conjunction with various guidance systems (including MWD instrument systems and steering tools) provided by the Company or other oilfield service companies. While the Company has its own line of steering instruments, which it assembles from sub-assemblies obtained from various third parties, Drilex currently obtains all its MWD instrument systems from two third-party manufacturers. See "--Dependence on Certain Third-Party Suppliers." Drilex has applied its technical drilling expertise to the development of services for slim-hole production service, workover applications, coiled tubing systems and "extended-reach" drilling. Production services typically involve running small-diameter (3 1/2 inches or less) drilling motors on either coiled tubing or workover strings for remedial work in existing wells, for cleaning, deepening and recompleting a well or drilling a sidetrack well. Workover applications involving the Company's services frequently entail re- entering a well and replacing its existing completion with horizontal drain holes to increase the well's product performance and extend the life of the well. Other workover services provided by the Company include drilling out cement and removing fill, scale or heavy wax; cleaning production tubing and casing; milling casings, packers, junk and plugs; fishing; and well deepening. Coiled tubing systems require specialized services, which utilize small diameter drilling motors to develop mechanical power downhole. With the power generated by the downhole drilling motor, coiled tubing systems can be used for a variety of drilling operations, including conventional open-hole drilling, coring, under-reaming, well deepening, medium-radius drilling, horizontal drilling, setting whipstocks and milling. Extended-reach development projects typically involve the drilling of numerous wells from a single, stationary drilling location. This technology can provide substantial reductions in capital requirements for development drilling, particularly in offshore locations. Precision Drilling Products. Drilex was one of the pioneers in the development of downhole drilling motors in the early 1980s and is now a worldwide leader in the design and manufacture of high-performance, multi- lobed positive displacement drilling motors. Drilex was the first manufacturer to produce a high-torque downhole motor designed to drive a rock bit at its optimal (relatively low) speed, thereby increasing the life of the bit and reducing the risk of the bit breaking apart in the wellbore. Through its manufacturing operations, Drilex is able to maintain close control over the performance and quality characteristics and pricing of the drilling motors used in its service operations. The Company's drilling motors have the ability to generate power from a wide range of drilling fluids (both oil-based and water-based fluids and compressed air) and to operate at both high and low speeds. Downhole positive displacement drilling motors consist of four basic elements: the power section, the transmission section, the output shaft assembly and the motor casing. The Company's positive displacement motors utilize a multi-lobed power section consisting of a rotor/stator combination that is attached directly to the drillstring and is driven by drilling fluid pumped down the drillstring to turn the drill bit. The power section operates without lubrication (other than from the drilling fluid itself) and is designed to withstand the highly abrasive drilling fluids being passed through it. The stator and rotor comprising the power section act together as 3 a system of gears--one inside the other. The outer gear (the stator) consists of a molded elastomer with at least three gears (or lobes), and is enclosed by a metal tube. Positioned inside the stator is an internal gear called the rotor, which is made of steel and has one fewer lobe than the stator. The difference between the rotor/stator lobe configuration creates a spiral series of gaps, which, during drilling operations, are filled with drilling fluid. Under pressure, the fluid within this spiral acts as a wedge. Hydraulic force applied to the top of the wedge applies a force on the rotor. Due to the helical shape of the rotor, this application of fluid force onto the rotor causes rotation. The rotation from the power section is applied to the transmission section, which is a drive shaft that converts the complex eccentric rotary motion from inside the power section to transmit high downward thrusts and torque to the output shaft assembly at varying rotational speeds. The transmission section can be configured in a variety of forms to meet differing drilling objectives. The output shaft assembly provides the drive to the drill bit. The complex, multi-stack ball track bearing design mounted on this element must be able to tolerate the maximum bit thrust as well as high levels of vibration and the reactive force of the weight on the bit, which operates in an upward direction. The motor casing is a precision-manufactured shell that encases the other elements of the motor. While the motor casings are thin-walled, they are designed to maximize the structural integrity of the motor. Drilex has designed its drilling motors to optimize flexibility, power and reliability. Drilex motors have demonstrated high performance capabilities and reliability even in arctic locations and in severe downhole environments, both onshore and offshore, where the motors encounter extremely high temperatures, hard rock, sour gas, high sand content formations, highly abrasive muds and environmentally sensitive fluids. The Company's motors are used for a wide variety of wellbore drilling applications, including initial spudding of wells, vertical drilling, directional drilling, horizontal drilling, tangent drilling, under-reaming, casing cutting, coring, conductor drill down and fishing. In addition, the Company's motors are used in a variety of production services, workover applications and coiled tubing operations. Drilex maintains an inventory of drilling motors in sizes ranging from 1 11/16 to 9 1/2 inches in outside diameter, which are capable of drilling holes in sizes ranging from 6 inches to 36 inches in diameter, depending on the application. Approximately 31% of the Company's drilling motor inventory is designed for slim-hole applications, such as workover, redrilling and recompletion tasks. The Company's slim-hole product line has increased substantially over the past four years, primarily reflecting the Company's product development efforts to meet the substantial growth in coiled tubing operations since 1993. The Company's wide range of drilling motors permits the selection of the precise combination of size, torque, speed and bearing configuration to meet the anticipated drilling conditions for a specified project. Drilex uses its motors as a service tool, a rental tool and a direct sale product, although rentals and sales have become a less significant part of the Company's business in recent years. Motor rental involves renting the equipment directly to oil and gas companies or oilfield service contractors for use in the drilling of vertical, horizontal and directional wells. The Company believes that its wide range of motor types and reputation for high reliability and service gives it a distinct competitive advantage in the drilling motor rental market. The Company's drilling motors operate in conjunction with various guidance systems (including MWD instrument systems and steering tool systems) provided by the Company or other oilfield service companies. The Company's drilling motors are also sometimes operated together with logging-while-drilling equipment, which the Company does not provide. While the Company has its own line of steering instruments, which it assembles from sub-assemblies obtained from various third parties, it obtains its MWD instrument systems from third- party manufacturers. The Company's MWD instrument systems and steering tools are modular and readily transportable. 4 ENVIRONMENTAL REMEDIATION AND TRENCHLESS APPLICATIONS The Company has applied its technical drilling capabilities for use in shallow well horizontal drilling for environmental remediation applications and trenchless pipeline and cable installations. In its environmental remediation operations, Drilex focuses on groundwater remediation activities. The Company uses its drilling systems to drill horizontal wellbores beneath contaminated sites, so that extraction and remediation of the contamination can take place at a much improved rate. Horizontal drilling provides total cost and performance advantages to conventional vertical drilling of sampling and treatment wells, primarily because horizontal drilling requires fewer wells and surface installation facilities and allows contaminants beneath fixed structures to be reached. The Company attempts to provide its environmental remediation services in a manner so as to minimize its handling of materials that may be classified as hazardous substances or wastes. In addition, the Company generally obtains indemnity agreements from its environmental remediation services customers requiring such customers to indemnify the Company against any liability that may arise from the Company's handling of such materials in the course of performing a contract for these services. There is no assurance, however, that such contractual indemnity will, in all instances, be effective or sufficient to protect the Company from liability for claims arising from its handling of hazardous materials in connection with its environmental services operations. Through its Sharewell subsidiary, the Company also provides precision drilling services and equipment for trenchless pipeline and cable laying applications, which primarily involve horizontal boring underneath city streets and structures to enable the "trenchless" delivery of conduits in densely built areas, as well as subsurface crossings of rivers, streams and other bodies of water. Sharewell is a leading provider of guidance systems to the trenchless drilling industry worldwide. Applications for trenchless services include subsurface installations of fiber optics lines, cable systems and utility pipelines and wiring. The Company provides complete horizontal drilling services for environmental remediation and trenchless services using two specialized mobile slant drilling rigs that it designed and built. The rigs utilize a closed-loop circulation system that captures, cleans and recirculates the drilling fluid, eliminating the need for earthen mud pits at the well site. The rigs are compact, requiring an area as small as 50 feet x 100 feet for four trailer-mounted rig components. Surface rotary power and downhole motors may be used to advance the drillstring. This equipment provides the Company with the capability to drill a six-inch diameter hole approximately 30 feet below surface and hit a two-feet in diameter target point 1,500 feet away. During 1996, the Company completed two significant environmental remediation projects. The Company's environmental remediation and trenchless services operations accounted for approximately 16% of the Company's revenues in 1996. CUSTOMERS The Company's customers for oilfield precision drilling services and products are concentrated primarily among major and large independent oil and gas companies, conventional drilling contractors and certain other oilfield service contractors. Customers for the Company's environmental remediation services include environmental service contractors, engineering consulting firms, petrochemical companies, hydrocarbon transportation companies and military and other governmental organizations. Customers for trenchless services include telephone and other utilities, as well as general contractors. For the year ended December 31, 1996, two customers each accounted for approximately 10% of the Company's revenues. While the Company is not dependent on any one customer, the loss of one of its significant customers could, at least on a short-term basis, have an adverse effect on the Company's results of operations. MARKETING AND SALES The Company markets and sells its services and products directly through its sales force and operating managers, utilizing the Company's 12 domestic and 7 international locations. In addition, in certain foreign markets where the Company does not maintain offices, the Company utilizes sales representatives and local agents to enhance its marketing and sales efforts. The Company also places print advertising in trade and technical publications targeted to the Company's customer base and publishes technical papers, which it presents 5 at technical conferences and seminars. The Company is a qualified supplier or an approved vendor to many oil and gas production companies. The Company's jobs are generally on a per-well basis, which the Company believes is representative of current industry practices. The Company does not have a significant number of long-term service contracts. The Company's marketing and sales resources are generally focused in the United States (Texas, Louisiana, Mid Continent, Rocky Mountains, California and Alaska), Venezuela, the European Continental Shelf, Canada and the Far East, which comprise the largest segments of the worldwide market for precision drilling services. Controlled purchasing from external manufacturing vendors, combined with the focused scope of the Company's in-house manufacturing function results in a relatively short manufacturing lead time for production of the Company's drilling motors; therefore, backlog is generally not significant to the Company. RELIANCE ON THE OIL AND GAS INDUSTRY The Company's business is substantially dependent upon the condition of the oil and gas industry and the industry's willingness to spend capital on drilling operations. The level of expenditures on such activities is generally dependent on the prevailing view of future hydrocarbon product prices, which are affected by the numerous factors affecting the supply and demand for oil and gas, including worldwide economic activity, interest rates and the cost of capital, environmental regulation, tax policies, political requirements of national governments, coordination by the Organization of Petroleum Exporting Countries ("OPEC"), the cost of producing oil and gas and technological advances. Oil and gas prices and drilling activity have been characterized by significant volatility in recent years. RELIANCE ON NEW PRODUCT DEVELOPMENT AND POSSIBLE TECHNOLOGICAL OBSOLESCENCE The market for the Company's products and services is characterized by changing technology. As a result, the Company's success is dependent upon its ability to develop new products and services on a cost-effective basis and to introduce them into the marketplace in a timely manner. Drilex intends to continue committing financial resources and effort to the development of new products and services. PATENTS AND OTHER INTELLECTUAL PROPERTY The Company currently holds 17 U.S. patents and has one U.S. patent application pending (and 32 foreign patents covering many of the same inventions), most of which relate to the Company's positive displacement drilling motors. Although in the aggregate these patents are important to the Company, the Company generally depends on technological capabilities, manufacturing quality control and the application of know-how rather than patents in the conduct of its business. The Company does benefit from service and product name brand recognition, principally through its Drilex trademark, and considers such trademark to be important. In general, the Company will seek to protect its intellectual property rights in all jurisdictions where the Company believes the cost of such protection is warranted. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its intellectual property rights or independent development by others of competitive products or services. In addition, the laws of certain foreign countries may not protect such rights to the same extent as to the laws of the United States. DEPENDENCE ON CERTAIN THIRD-PARTY SUPPLIERS The Company's two independent suppliers for MWD instrument systems are essentially the only sources for such equipment available to the Company. The Company's reliance on these limited sources subjects it to the risks of, among other things, delays in the receipt of desired quantities of MWD equipment (as a result of manufacturing delays or other reasons) and increases in prices for such equipment. The Company also relies on single suppliers for the stator molding and the thrust bearings used in the manufacture of its downhole positive displacement motors. While the Company does not anticipate any difficulties in continuing to obtain product from these single suppliers, the Company believes that adequate alternative sources are available should the need arise. Such alternative sources may, however, involve increased costs to the Company and shipment delays. 6 COMPETITION The industry in which the Company operates is highly competitive. The Company's ability to compete successfully depends on elements both within and outside of its control, including successful and timely development of new products and services, performance and quality, customer service, pricing, industry trends, and general economic trends. Several of the Company's competitors are divisions or subsidiaries of companies that are substantially larger and have greater financial and other resources than the Company. Competition in the oilfield services market is primarily on the basis of service quality, experience of personnel and equipment reliability, although price competition is also a significant factor. The Company believes that, in selecting from among qualified contractors for a particular precision drilling service contract, customers also consider, among other things, bidding responsiveness, the availability and technical capabilities of equipment and personnel, and the flexibility of equipment to work within the technical constraints imposed by other aspects of the drilling project (such as drill bit sizes and types, hydraulics limitations, and differing drilling fluids and borehole sizes). OPERATIONAL HAZARDS AND INSURANCE The Company's operations are subject to many hazards inherent in the drilling and workover of oil and gas wells (including explosions, blow-outs, reservoir damage, loss of well control, cratering and fires), the occurrence of which could result in the suspension of drilling operations, damage to or destruction of equipment and injury or death to field personnel. Damage to the environment could also result from operations that may involve the Company or its products. The Company maintains insurance coverage in such amounts and against such risks as it believes to be in accordance with normal industry practice, and there can be no assurance that such insurance will be adequate to cover all losses or liabilities that may be incurred by the Company in its operations. INTERNATIONAL OPERATIONS Drilex maintains facilities in five countries and, from time to time, conducts operations in numerous other countries. The Company's non-U.S. operations accounted for approximately 28% of the Company's revenues during the year ended December 31, 1996 (and the Company's operations in Venezuela accounted for approximately 43% of these foreign-sourced revenues). Certain information concerning the Company's operations by geographic areas is set forth in Note 15 to the Consolidated Financial Statements of the Company included elsewhere herein. The Company's business outside the United States is subject to various risks of international operations that are beyond its control, such as instability of foreign economies and governments, currency fluctuations, overlap of different tax structures, risks of expropriation, and changes in laws and policies affecting trade and investment. The Company attempts to limit its exposure to foreign currency fluctuations by limiting the amount by which its foreign contracts are denominated in a currency other than U.S. dollars to an amount generally equal to expenses expected to be incurred in such foreign currency. The Company has not historically engaged in and does not currently intend to engage in any significant hedging or currency trading transactions designed to compensate for adverse currency fluctuations. SEASONALITY The Company's business is somewhat seasonal, since domestic oil and gas drilling activities are generally lower in the first and second quarters. In addition, adverse weather conditions can curtail operations in certain regions during different parts of the year. EMPLOYEES As of December 31, 1996, the Company had approximately 380 employees. The Company's future success will depend, in part, on its ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel. The Company is not a party to any collective bargaining agreements and has not experienced any strikes or work stoppages, and management believes that the Company's employee relations are good. 7 GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS Many aspects of the Company's operations are affected by political developments and are subject to both domestic and foreign governmental regulations, including those relating to oilfield operations, worker safety and the protection of the environment. In addition, the Company depends on the demand for its services from the oil and gas industry and, therefore, is generally affected by changing taxes, price controls and other laws and regulations relating to the oil and gas industry. The Company's operations are affected by numerous foreign, federal, state and local environmental laws and regulations. The technical requirements of these laws and regulations are becoming increasingly expensive, complex and stringent. These laws may provide for "strict liability" for damages to natural resources or threats to public health and safety, rendering a party liable for the environmental damage without regard to negligence or fault on the part of such party. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties, and criminal prosecution. Certain environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as well as damage to natural resources. Such laws and regulations may also expose the Company to liability for the conduct of or conditions caused by others, or for acts of the Company that were in compliance with all applicable laws at the time such acts were performed. Compliance with environmental laws and regulations may require the Company to obtain permits or other authorizations for certain activities and to comply with various standards or procedural requirements. The Company believes that its facilities are in substantial compliance with current regulatory standards. Capital expenditures for property, plant and equipment for environmental control facilities during 1996 were not material. Based on the Company's experience to date, it does not currently anticipate any material adverse effect on its business or consolidated financial position as a result of future compliance with existing environmental laws and regulations controlling the discharge of materials into the environment. 8 ITEM 2. PROPERTIES. The Company's manufacturing and principal sales and service operations are conducted using the following facilities:
FLOOR SPACE LOCATION OWNED/LEASED (SQUARE FEET) DESCRIPTION -------- ------------ ------------- ----------- UNITED STATES: Anchorage, Alaska Leased 685 Sales and Service Bakersfield, California Leased 7,500 Sales and Service Casper, Wyoming Leased 9,500 Sales and Service Denver, Colorado Leased 200 Sales Fort Worth, Texas Leased 200 Sales Houston, Texas Leased 53,750 Executive Offices, Manufacturing, Engineering, Sales and Service Houston, Texas Leased 41,366 Sales and Service Lafayette, Louisiana Owned 20,000 Sales and Service New Orleans, Louisiana Leased 1,055 Sales Oklahoma City, Oklahoma Leased 10,500 Sales and Service Prudhoe Bay, Alaska Leased 500 Repair and Maintenance Youngsville, Louisiana Owned 10,516 Sales and Service INTERNATIONAL: Aberdeen, Scotland Leased 17,523 Sales and Service Anaco, Venezuela Leased 10,500 Sales and Service Calgary, Alberta Leased 100 Sales Ciudad Ojeda, Venezuela Leased 16,666 Sales and Service Edmonton, Alberta Leased 6,896 Sales and Service Maturin, Venezuela Leased 2,000 Sales North Freemantle, West Leased 500 Sales and Service Australia
The foregoing reflects the consolidation of certain facilities in Texas, which was completed in January 1997. ITEM 3. LEGAL PROCEEDINGS. The Company is involved from time to time in routine litigation incidental to its business. Drilex is not currently involved in any legal proceedings that the Company believes will have a material adverse effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 9 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information regarding the executive officers of the Company as of March 31, 1997.
NAME AGE POSITION ---- --- -------- John Forrest................. 58 President and Chief Executive Officer G. Bruce Broussard........... 53 Vice President--Finance and Administration and Secretary Lee F. Hardin................ 49 Vice President--Engineering and Manufacturing David M. Henry............... 45 Vice President--Business Development Charles Denton Kerr II....... 41 President--Drilex Energy Services Division of Drilex Systems, Inc.
John Forrest has served as President, Chief Executive Officer and a director of Drilex International Inc. since its acquisition of DSI in March 1994. Mr. Forrest was a founder of the Company and served as its chief executive officer from 1981 to March 1994. G. Bruce Broussard was appointed to his current position in connection with the DSI Acquisition. Prior thereto, Mr. Broussard served as Controller of DSI for more than ten years. Lee F. Hardin was appointed to his current position in October 1995, after serving as the Company's Director of Engineering and Manufacturing since he joined the Company in August 1995. Mr. Hardin was a focus factory manager for the Drilling Systems Business Unit of Halliburton Company from April 1993 to August 1995. Prior thereto, he served as a manufacturing manager for the Directional Drilling Business Unit of Smith International, Inc. where he oversaw the production of MWD equipment and positive displacement motors. David M. Henry was appointed to his current position in May 1996. Prior to joining the Company, he served as Global Operations Manager of the Drilling Systems Business Unit of Halliburton Energy Services from March 1995 to May 1996. Prior thereto, he served in various positions, including Director of Engineering and Marketing, and Vice President of Operations, for the Drilling Division of Baker Hughes Incorporated from December 1980 to March 1995. Charles Denton Kerr II was appointed to his current position in December 1995. Prior thereto, he served as DSI's Vice President--Sales and Operations from July 1994 to December 1995, Manager, Worldwide Sales and Operations from August 1991 to July 1994, and Western Hemisphere Manager from August 1989 to August 1991. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since July 3, 1996, the Company's common stock, $.01 par value (the "Common Stock"), has been traded on the Nasdaq Stock Market under the symbol "DRLX." As of February 27, 1997, there were 6,663,356 shares of Common Stock outstanding, held by approximately 22 stockholders of record. The number of record holders does not bear any relationship to the number of beneficial owners of the Common Stock. The following table sets forth the range of high and low sale prices for the Common Stock on the Nasdaq Stock Market for the periods indicated:
HIGH LOW ------ ------ Year ending December 31, 1996: 3rd quarter (July 3 to September 30)..................... $17.00 $12.50 4th quarter.............................................. 18.00 $10.75
Drilex has not paid dividends on its Common Stock since its inception and does not anticipate paying dividends on the Common Stock in the foreseeable future. The Company expects that it will retain funds generated by the Company's operations for the development and growth of its business. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including, among other things, the Company's financial condition, cash flows from operations, the level of its capital expenditures, its future business prospects, the requirements of Delaware law, and any restrictions imposed by the Company's current or future credit facilities and promissory notes. Provisions contained in the Company's bank credit facility (the "Credit Facility") currently prohibit the payment of dividends on the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 11 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected historical financial and other data for the Company. The information presented as of and for the periods ended December 31, 1996, 1995 and 1994, March 30, 1994 and December 31, 1993 is derived from the audited consolidated financial statements of the Company and its predecessor company, DSI. The information presented as of and for the year ended December 31, 1992 is derived from the unaudited consolidated financial statements of DSI. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operation" and the Consolidated Financial Statements of the Company, including the Notes thereto, included elsewhere herein.
THE COMPANY PREDECESSOR COMPANY(C) ---------------------------------- --------------------------- MARCH 30, 1994 YEARS ENDED (INCEPTION) JANUARY 1, YEARS ENDED DECEMBER 31, TO 1994 TO DECEMBER 31, ------------------ DECEMBER 31, MARCH 30, ---------------- 1996 1995(A) 1994(B) 1994 1993 1992 ------- ------- ------------ ---------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF INCOME DATA: Net revenues............ $76,147 $57,526 $25,209 $ 6,357 $25,871 $24,349 Costs of sales and operations............. 45,696 34,606 12,924 3,364 14,093 14,326 Selling, general and administrative expenses............... 16,945 13,448 6,711 2,029 8,286 10,573 Depreciation and amortization........... 6,575(d) 4,492(d) 1,855 775 3,107 2,942 ------- ------- ------- ------- ------- ------- Operating income (loss). 6,931 4,980 3,719 189 385 (3,492) Interest expense........ (2,079) (1,935) (478) (481) (1,893) (1,667) ------- ------- ------- ------- ------- ------- Income (loss) before income taxes and minority interests..... 4,852 3,045 3,241 (292) (1,508) (5,159) Provision for income taxes.................. (1,727) (1,097) (1,166) (3) (152) (84) Minority interests...... (83) (164) (66) -- -- -- ------- ------- ------- ------- ------- ------- Net income (loss)....... $ 3,042 $ 1,784 $ 2,009 $ (295) $(1,660) $(5,243) ======= ======= ======= ======= ======= ======= Net income per common and common equivalent share.................. $ .53 $ .40 $ .57 ======= ======= ======= Weighted average common and equivalent shares outstanding............ 5,712 4,411 3,507 ======= ======= ======= OTHER DATA: Capital expenditures.... $ 9,876 $ 5,408 $ 707 $ 195 $ 252 $ 1,364 EBITDA (e).............. 13,506 9,472 5,574 964 3,492 (550) Summary cash flow information: Net cash provided by (used for) operating activities........... 812 (185) 877 663 277 (3,752) Net cash used for investing activities. (6,036) (19,360) (22,893) (195) (252) (1,364) Net cash provided by financing activities (c).................. 6,957 19,415 22,965 28 503 5,379 BALANCE SHEET DATA: Working capital......... $22,164 $13,365 $ 9,511 $10,533 $10,717 $10,581 Total assets............ 86,770 77,754 36,292 24,965 26,196 26,793 Long-term debt, less current maturities..... 11,883 32,467 7,633 -- -- -- Total stockholders' equity (c)(f).......... 57,680 23,682 19,557 22,794 22,990 24,459
- -------- (a) Results for the year are not comparable to prior periods due to the ENSCO Technology and Sharewell Acquisitions. (b) Results for the period are not comparable to prior years due to the Cobb Acquisition. (c) The predecessor company, DSI, was a wholly owned subsidiary of MascoTech prior to its acquisition by the Company on March 30, 1994. As a wholly owned subsidiary of MascoTech, DSI was allocated interest and other expenses by its parent, and had no long-term indebtedness since its financing requirements were met through advances from MascoTech. For purposes of this presentation, such advances from MascoTech are reflected in stockholders' equity. Earnings per share are not presented for periods during which DSI was wholly owned by MascoTech. (d) Effective April 1, 1995, the Company changed its estimated useful life for certain drilling motor components from five to seven years. This change was made to better reflect the estimated period during which these assets will remain in 12 service. The effect of this change was an increase in net income of $248,000, or $.06 per share, for the year ended December 31, 1995, and $378,000, or $.07 per share, for the year ended December 31, 1996. (e) EBITDA means operating income (loss) plus depreciation and amortization and is a supplemental financial measurement used by the Company in the evaluation of its business. EBITDA is not intended to represent cash flow, an alternative to net income or any other measure of performance in accordance with generally accepted accounting principles. Reference is made to the Consolidated Statement of Cash Flows contained in the Consolidated Financial Statements of the Company included elsewhere herein for a complete presentation of cash flows from operating, investing and financing activities prepared in accordance with generally accepted accounting principles. (f) No cash dividends were declared or paid on Common Stock during any of the periods presented. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company and related notes thereto and "Selected Financial Data" appearing elsewhere herein. The following discussion is intended to assist in understanding the Company's financial condition and results of operations as of and for each year in the three-year period ended December 31, 1996. The statements in this discussion regarding the industry outlook, the Company's expectations regarding growth in the precision drilling segment, the Company's expectations regarding the future performance of its businesses, and other statements which are not historical facts in this discussion are forward-looking statements. The words "expect," "project," "estimate," "predict" and similar expressions are also intended to identify forward-looking statements. Such statements are subject to numerous risks and uncertainties, including but not limited to the uncertainties relating to the exploration and development decisions to be made in the future by oil and gas exploration and development companies, market factors, market prices of natural gas and oil, future operations and costs, unanticipated technological changes and other factors detailed herein and in the Company's other Securities and Exchange Commission filings. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. OVERVIEW The Company's business is substantially dependent upon the condition of the oil and gas industry and the willingness of oil and gas companies to spend capital on drilling and workover operations, which is generally dependent on the prevailing view of future hydrocarbon product prices. This is particularly the case in the United States, where the Company generates approximately 72% of its revenues. Expectations relative to such future prices are affected by numerous factors affecting the supply and demand for oil and natural gas, including worldwide economic activity, interest rates and the cost of capital, environmental regulation, tax policies, political requirements of national governments, coordination by OPEC, the cost of producing oil and gas, and technological advances. Oil and gas prices and exploration and development activity have been characterized by significant volatility in recent years. Although overall oil and gas drilling activity as measured by the rotary rig count has declined significantly over the past 15 years, rapid increases in precision drilling technology, enhanced geological prospecting technologies (such as 3-D seismic technologies and CAEX techniques), and the demands of exploration and development companies for more precise and less costly drilling systems have driven growth in the precision drilling segment of the oilfield drilling market. Based on industry sources, the number of oil and gas wells drilled in the United States using precision drilling technology and the proportion of oil and gas wells drilled in the United States employing precision drilling technology have each increased significantly over the past five years. Drilex anticipates continued growth in the market for precision drilling services and expects the number of oilfield jobs employing precision drilling techniques to grow at a higher rate than the number of jobs in the overall drilling market. Moreover, with respect to jobs employing precision drilling techniques, the Company expects continued increases in the average number of feet per well drilled using a downhole drilling motor, 13 particularly in slim-hole applications. The Company believes the growth in the number of precision drilling jobs and the increase in the utilization of precision drilling technology per job will be driven by the requirements of exploration and production companies for more precision and cost efficiency in their drilling operations, as well as the greater acceptance of precision drilling technology in the drilling industry, which has resulted from technological advancements, product improvements (which have extended equipment lives and increased penetration rates), and the expansion of downhole drilling motor technology to a wide variety of slim-hole applications. The Company also believes that, over time, the demand for hydrocarbon products will grow and that exploration and development activity will increase. The Company expects this increase in activity to be primarily driven by lower oil and gas company cost structures, technological advances and the interest of foreign countries in maintaining or expanding their production. Drilex International Inc. was organized by DRLX Partners L.P. and John Forrest (a founder of DSI and the current President and Chief Executive Officer of the Company) to acquire DSI (also referred to herein as the "Predecessor") from MascoTech on March 30, 1994. The Company's predecessor was originally formed in 1981. Since the DSI Acquisition, the Company has grown substantially through the expansion of its product and service offerings and acquisitions of complementary businesses. The Cobb and ENSCO Technology Acquisitions (completed on September 30, 1994 and 1995, respectively) expanded the Company's presence in certain of its key geographic markets for oilfield precision drilling services and provided the Company with significant opportunities to expand its distribution of Drilex-manufactured motors by employing them in the newly acquired operations. In addition, the ENSCO Technology Acquisition significantly expanded the Company's MWD capabilities, providing the Company additional opportunities to deploy its products and services. The Sharewell Acquisition (completed on May 5, 1995) also provided the opportunity to expand the Company's product distribution and significantly increased the Company's service capabilities in the emerging environmental remediation and trenchless services markets. During the third and fourth quarters of 1996, the Company substantially completed the consolidation of facilities and operations in Texas, Louisiana and the United Kingdom. During 1996, the Company also combined its guidance instrumentation support services into a single Houston facility which is expected to reduce costs, enhance guidance instrument performance and improve service delivery. In July 1996, the Company completed the Offering. The net proceeds to the Company of $28.3 million were used to repay debt incurred primarily in connection with the Cobb, Sharewell and ENSCO Technology Acquisitions. As an important part of its business strategy, the Company will continue to seek acquisitions of other businesses to expand distribution of the Company's products and services, to add key technologies, to gain access to industry niches, and to otherwise enhance its market presence. 14 RESULTS OF OPERATIONS Drilex International Inc. began operations on March 30, 1994, the effective date of the DSI Acquisition. As a result, for purposes of the following discussion, the amounts from the consolidated statement of income of Drilex International Inc. from March 30, 1994 through December 31, 1994 have been combined with the statement of income for the Predecessor for the three months ended March 31, 1994 (adjusted to a pro forma basis as if the DSI Acquisition had occurred as of January 1, 1994). The following discussion presents an analysis of such combined results for 1994 compared to the results of operations of Drilex International Inc. for each of 1995 and 1996.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 ----------------- ----------------- ----------------- PERCENT PERCENT PERCENT OF NET OF NET OF NET AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES ------- -------- ------- -------- ------- -------- (DOLLARS IN THOUSANDS) Net revenues............. $76,147 100.0% $57,526 100.0% $31,566 100.0% Operating expenses: Costs of sales and operations............ 45,696 60.0 34,606 60.1 16,288 51.6 Selling, general and administrative expenses.............. 16,945 22.3 13,448 23.4 8,605 27.2 Depreciation and amortization.......... 6,575 8.6 4,492 7.8 2,324 7.4 ------- ----- ------- ----- ------- ----- Operating income......... 6,931 9.1 4,980 8.7 4,349 13.8 Interest expense......... (2,079) (2.7) (1,935) (3.4) (567) (1.8) ------- ----- ------- ----- ------- ----- Income before income taxes and minority interests............... 4,852 6.4 3,045 5.3 3,782 12.0 Provision for income taxes................... (1,727) (2.3) (1,097) (1.9) (1,362) (4.3) Minority interests....... (83) (0.1) (164) (0.3) (66) (0.2) ------- ----- ------- ----- ------- ----- Net income............... $ 3,042 4.0% $ 1,784 3.1% $ 2,354 7.5% ======= ===== ======= ===== ======= =====
Comparison of 1996 and 1995 Consolidated revenues for 1996 were $76.1 million, an increase of 32% from revenues of $57.5 million for the prior year. Of the $18.6 million increase, $11.8 million was attributable to a full year's activity for the operations acquired in the ENSCO Technology Acquisition as compared to the inclusion of only three months of such operations in 1995 (following the September 1995 effective date of the ENSCO Acquisition) and $2.4 million was attributable to a full year's activity for the operations acquired in the Sharewell Acquisition as compared to the inclusion of eight months of such operations in 1995 (following the May 1995 effective date of the Sharewell Acquisition). The remaining increases in revenues resulted from higher drilling service revenues due primarily to an increase in revenues from operations in Latin America, a $2 million product sale and associated service work in the Far East in the third quarter and increased revenues associated with the Company's United States land operations. These increases in revenue were partially offset by decreased revenues from the Company's European Continental Shelf and environmental remediation operations. The 1996 revenues were less than expected during the third and fourth quarters due to MWD equipment performance failures in the Austin Chalk, MWD delivery delays in Venezuela, the consolidation of operations in Louisiana and lower than anticipated equipment sales in the Far East. Cost of sales and operations increased from $34.6 million in 1995 to $45.7 million in 1996. As a percent of revenues, cost of sales and operations decreased slightly from 60.1% in 1995 to 60.0% in 1996. The margins for operations acquired in the ENSCO Technology and Sharewell Acquisitions have historically been less than the Company's pre-existing oilfield drilling services (excluding such acquisitions) due to the sale and use of third-party equipment by such acquired operations. Lower margins associated with such operations in 1996 were partially offset by higher margins associated with Far East sales in the third quarter of 1996. Of the 15 $11.1 million increase in cost of sales and operations, $9.2 million was due to the full year effect of the ENSCO Technology and Sharewell Acquisitions. The remaining increase of $1.9 million primarily reflects increased expenses related to higher drilling services revenues and higher engineering expenses relating to replacement of third-party drilling motors used by the operations acquired in the ENSCO and Sharewell Acquisitions. In 1995 there was a nonrecurring $0.6 million charge resulting from a trenchless business unit operational dispute. Selling, general and administrative expenses increased from $13.4 million in 1995 to $16.9 million in 1996. As a percent of revenues, selling, general and administrative expenses decreased from 23.4% in 1995 to 22.3% in 1996. Of the $3.5 million increase, $3.2 million was due to the full year effect of the ENSCO Technology and Sharewell Acquisitions. The remaining $0.3 million increase is attributable to increased expenses associated with becoming a publicly held company. Depreciation and amortization increased from $4.5 million in 1995 to $6.6 million in 1996. Of the $2.1 million increase, $1.3 million was due to the full year effect of the Sharewell and ENSCO Technology Acquisitions. The remainder of the increase is attributable to increased depreciation resulting from the capital expenditures in 1996. Interest expense increased from $1.9 million in 1995 to $2.1 million in 1996, primarily due to the effect of notes issued in connection with the ENSCO Technology Acquisition and the full year effect of notes issued in connection with the Sharewell Acquisition. Increases in interest expense were partially offset by the retirement of debt, including the notes issued in connection with the ENSCO Technology Acquisition, in connection with the Offering in July 1996. Comparison of 1995 and 1994 Consolidated revenues for 1995 were $57.5 million, an increase of 82% from revenues of $31.6 million for the prior year. Of the $25.9 million increase, $7.9 million was attributable to the Sharewell Acquisition, $5.3 million was attributable to the ENSCO Technology Acquisition, and $5.2 million resulted from the effect of a full year's activity for the operations acquired in the Cobb Acquisition, as compared to the inclusion of only three months of such operations in 1994 (following the September 1994 effective date of the Cobb Acquisition). The remaining increase in revenues resulted from an increase in the Company's drilling services revenues, due primarily to increased operations in Texas, Europe (including the North Sea) and Eastern Venezuela. The increase in activity in Texas was a result of increased drilling activity by several major customers. Increased revenues attributable to the European markets were due to greater small motor activity, including motor sales to the Commonwealth of Independent States, and expanded market penetration. Revenues in Eastern Venezuela more than doubled to $6.2 million from 1994 levels, as drilling activity significantly expanded in this area. Costs of sales and operations increased from $16.3 million in 1994 to $34.6 million in 1995. As a percent of revenues, costs of sales and operations increased from 51.6% in 1994 to 60.1% in 1995. Of the $18.3 million increase, $12.0 million was due to the ENSCO Technology and Sharewell Acquisitions and the effect of a full year's activity for the operations acquired in the Cobb Acquisition. Margins for the operations acquired in the Cobb Acquisition decreased in 1995 due to increased field expenses, a greater proportion of lower-margin onshore activity than higher-margin offshore activity compared to the prior year, and increased costs associated with third-party motor rentals. Sharewell's margins were adversely affected in 1995 due to a greater proportion of lower-margin sales of third-party equipment compared to higher- margin service billings, as compared to the prior year. The margins for the operations acquired in the ENSCO Technology Acquisition were lower than the Company's other drilling operations due to low utilization of MWD equipment and the expenses associated with rentals of third-party motors. Costs of sales and operations related to the Company's pre-existing oilfield drilling services (excluding the Sharewell and ENSCO Technology Acquisitions) were adversely impacted in 1995 by increased engineering and manufacturing costs of approximately $0.6 million. These increases resulted from costs incurred in 1995 for development of newly designed small-diameter motors, a new concept power section for the Company's primary 16 line of drilling motors, and equipment for slim-hole reentry drilling and workover applications. The Company began operations in Western Venezuela in 1995 and incurred $0.3 million in startup expenses for staffing personnel, freight and duties on imported equipment and facilities. Operations in this location generated only minimal revenues in 1995. In 1995, the Company's trenchless business unit absorbed a $0.6 million charge related to an operational dispute, which was settled in full in May 1996. Selling, general and administrative expenses increased from $8.6 million in 1994 to $13.4 million in 1995. As a percentage of revenues, selling, general and administrative expenses decreased from 27.2% in 1994 to 23.4% in 1995. Of the $4.8 million increase, $3.1 million was due to the ENSCO Technology, Sharewell and Cobb Acquisitions. Corporate overhead increased $0.8 million due to additional advertising, marketing and personnel costs associated with the support of these three acquisitions, in particular the ENSCO Technology Acquisition because of its size and complexity. Depreciation and amortization increased from $2.3 million in 1994 to $4.5 million in 1995. This increase was primarily due to the ENSCO Technology, Sharewell and Cobb Acquisitions, partially offset by a $0.4 million decrease resulting from an increase in the estimated useful lives for certain drilling equipment effective April 1, 1995. Interest expense increased from $0.6 million in 1994 to $1.9 million in 1995 due to an increase in debt to $38.4 million at December 31, 1995. Substantially all of this increase in debt was due to the ENSCO Technology, Sharewell and Cobb Acquisitions. LIQUIDITY AND CAPITAL RESOURCES Prior to the Offering, the Company generally funded its activities (other than its acquisitions) through cash generated from operations and short-term borrowings. The cash portion of the purchase price for each of the Cobb, Sharewell and ENSCO Technology Acquisitions was funded through borrowings under the Credit Agreement and, in the case of the Cobb and ENSCO Technology Acquisitions, from the issuance of capital stock. In July 1996, the Company sold 2,000,000 shares of Common Stock in the Offering and received net proceeds of $28.3 million. The Company used approximately $24.7 million of the net proceeds of the Offering to repay all of the $14.8 million in borrowings under the term loan portion and $9.9 million of the borrowings under the revolving loan portion of its then-current bank credit facility. The Company used approximately $3.6 million of the proceeds from the Offering to repay a promissory note issued to ENSCO Technology in connection with the ENSCO Technology Acquisition. At December 31, 1996, the Company had working capital of $22.2 million, compared to working capital of $13.4 million at December 31, 1995 and $9.5 million at December 31, 1994. The increase of $8.8 million from 1995 to 1996 primarily reflects increases in cash and inventory and decreases in current maturities of long-term debt. Inventories increased due to higher production in response to increased slim-hole opportunities and the replacement of third- party motors with Drilex motors in the operations acquired in the ENSCO Technology Acquisition. The Company's current maturities of debt were lower due to the repayment of debt from the proceeds of the Offering. Capital expenditures for 1996 were $9.9 million, as compared to $5.4 million for the prior year. The 1996 expenditures included $7.3 million for MWD/guidance equipment (including $3.7 million to replace equipment lost-in- hole, which amount was primarily paid by customers) and $1.0 million for machinery and equipment. The Company has budgeted approximately $8.4 million for capital expenditures (excluding acquisitions and equipment lost-in-hole) in 1997. Such budgeted expenditures include $6.6 million for MWD/guidance equipment. During 1997, the Company expects to fund its working capital, anticipated capital expenditures and debt maturity requirements primarily through cash provided by operating activities and borrowings under its Credit 17 Facility. The Company carries substantial inventory and accounts receivable, and will require increased working capital as its revenues grow. The Company believes that cash flow from operations and its Credit Facility will be adequate to support its normal working capital and capital expenditures for at least the next 12 months. However, if 1997 capital expenditures exceed expected levels or if cash flow from operations for the year is less than anticipated, the Company may need to seek an increase in its borrowing limit under the Credit Facility. In September 1996 the Company entered into the Credit Facility by amending and restating its prior credit facility. The Credit Facility consists of an unsecured revolving line of credit which is scheduled to mature on September 30, 1999. The Credit Facility provides for borrowings of up to $15.0 million at December 31, 1996 (which limit was increased to $20 million in February 1997), of which up to $3.0 million may be used for letters of credit. As of February 28, 1997, borrowings under the Credit Facility were $16.1 million and $3.7 million was available for borrowings. As of December 31, 1996, $5.9 million was available for borrowing under the Credit Facility, of which $2.9 million was available for letters of credit. The Credit Facility bears interest at a rate per annum, at the Company's election, equal to (i) a Eurodollar or Eurosterling interbank offered rate plus 3/4% or (ii) the bank's prime rate. The Credit Facility requires the Company to maintain certain financial covenants (including a minimum tangible net worth, a minimum fixed charge coverage ratio and maximum debt to capitalization ratios) and limits additional borrowings of the Company (other than under the Credit Facility) to no more than $5.0 million. The Credit Facility also places restrictions on the Company's ability to, among other things, pay dividends, enter into unrelated lines of business, undertake transactions with affiliates and make investments. For an additional description of the Credit Facility's terms, see Note 6 to the Consolidated Financial Statements of the Company included elsewhere herein. In February 1997, the Company repaid certain notes issued in connection with the Cobb Acquisition, repurchased the 96,523 shares of Common Stock held by Mr. Cobb and entered into an amendment to the non-competition provisions of Mr. Cobb's employment agreement in connection with Mr. Cobb's termination of employment, resulting in a net payment by the Company of approximately $2.7 million. The Company intends to continue pursuing attractive acquisition opportunities. The timing, size or success of any acquisition effort and the associated potential capital commitments are unpredictable. The Company expects to fund future acquisitions primarily through a combination of working capital, cash flow from operations and bank borrowings, including the unborrowed portion of the Credit Facility, as well as issuances of additional equity. Due to the relatively low levels of inflation experienced in 1994, 1995 and 1996, inflation did not have a significant effect on the Company's results in such years. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 is effective for fiscal years beginning after December 15, 1995. The adoption of SFAS 121 in 1996 did not result in a charge to earnings. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes alternative methods of accounting and disclosure for employee stock-based compensation arrangements. In adopting SFAS 123 in 1996, the Company has elected to continue the use of the "intrinsic value based method" of accounting for its employee stock option plan. This method does not result in the recognition of compensation expense when employee stock options are granted if the exercise price of the options equals or exceeds the fair market value of the stock at the date of grant. See Note 10 to the Consolidated Financial Statements of the Company included elsewhere herein. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. DRILEX INTERNATIONAL INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- DRILEX INTERNATIONAL INC. AND SUBSIDIARIES Independent Auditors' Report............................................ 20 Consolidated Balance Sheet as of December 31, 1996 and 1995............. 21 Consolidated Statement of Income for the Years Ended December 31, 1996 and 1995 and for the Period from March 30, 1994 (inception) to December 31, 1994............................................................... 22 Consolidated Statement of Cash Flows for the Years Ended December 31, 1996 and 1995 and for the Period from March 30, 1994 (inception) to December 31, 1994...................................................... 23 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1996 and 1995 and for the Period from March 30, 1994 (inception) to December 31, 1994....................................... 24 Notes to Consolidated Financial Statements.............................. 25
19 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Drilex International Inc.: We have audited the accompanying consolidated balance sheets of Drilex International Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows, and stockholders' equity for the years ended December 31, 1996 and 1995 and the period from March 30, 1994 (inception) to December 31, 1994. Our audits also included the financial statement schedule listed in the Table of Contents at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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, such consolidated financial statements present fairly, in all material respects, the financial position of Drilex International Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended and for the period from March 30, 1994 (inception) to December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE llp Houston, Texas February 11, 1997 20 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, --------------- 1996 1995 ------- ------- ASSETS Current assets: Cash and cash equivalents......................................... $ 2,552 $ 819 Receivables: Trade, net of allowance for doubtful accounts of $814 and $933 at December 31, 1996 and 1995, respectively....................... 20,015 20,994 Other........................................................... 1,031 694 Inventories....................................................... 10,733 8,259 Prepaid expenses and other current assets......................... 1,208 1,217 ------- ------- Total current assets.......................................... 35,539 31,983 Property and equipment, net......................................... 33,909 27,557 Goodwill, net of accumulated amortization of $519 and $170 at December 31, 1996 and 1995, respectively........................... 13,801 14,151 Other assets, net of accumulated amortization of $1,397 and $686 at December 31, 1996 and 1995, respectively........................... 3,521 4,063 ------- ------- $86,770 $77,754 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................. $ 8,614 $ 8,706 Accrued compensation and related benefits......................... 1,112 1,550 Accrued taxes, other than on income............................... 475 1,064 Accrued income taxes.............................................. 356 476 Other accrued liabilities......................................... 347 936 Long-term debt, current maturities................................ 2,471 5,886 ------- ------- Total current liabilities..................................... 13,375 18,618 Long-term debt, less current maturities............................. 11,883 32,467 Other noncurrent liabilities........................................ 2,944 2,182 ------- ------- Total liabilities............................................. 28,202 53,267 ------- ------- Commitments and contingencies (Note 13) Minority interests.................................................. 888 805 Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 25,000,000 shares authorized; shares issued: 1996--6,759,879 and 1995--4,381,205............... 68 44 Additional paid-in capital........................................ 50,777 19,845 Retained earnings................................................. 6,835 3,793 ------- ------- Total stockholders' equity.................................... 57,680 23,682 ------- ------- $86,770 $77,754 ======= =======
See notes to consolidated financial statements. 21 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM MARCH 30, 1994 YEAR ENDED YEAR ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ -------------- Net revenues: Rental and service.................. $63,601 $43,766 $21,850 Equipment sales..................... 12,546 13,760 3,359 ------- ------- ------- 76,147 57,526 25,209 ------- ------- ------- Operating expenses: Costs of sales and operations (exclusive of depreciation and amortization): Rental and service................ 40,087 27,956 11,714 Equipment sales................... 5,609 6,650 1,210 Selling, general and administrative expenses........................... 16,945 13,448 6,711 Depreciation and amortization....... 6,575 4,492 1,855 ------- ------- ------- 69,216 52,546 21,490 ------- ------- ------- Operating income...................... 6,931 4,980 3,719 Interest expense...................... (2,079) (1,935) (478) ------- ------- ------- Income before income taxes and minority interests................... 4,852 3,045 3,241 Provision for income taxes ........... (1,727) (1,097) (1,166) Minority interests.................... (83) (164) (66) ------- ------- ------- Net income............................ $ 3,042 $ 1,784 $ 2,009 ======= ======= ======= Net income per common and common equivalent share..................... $ .53 $ .40 $ .57 ======= ======= ======= Weighted average common and common equivalent shares outstanding........ 5,712 4,411 3,507 ======= ======= =======
See notes to consolidated financial statements. 22 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
PERIOD FROM MARCH 30, 1994 YEAR ENDED YEAR ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................... $ 3,042 $ 1,784 $ 2,009 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization....... 6,575 4,492 1,855 Net (gains) losses on disposition of property and equipment............. (1,002) 1,033 883 Minority interests.................. 83 164 66 Changes in assets and liabilities, excluding the effects of acquisitions: Increase in inventories............ (7,584) (5,918) (2,393) Decrease (increase) in receivables. 554 (5,209) (3,667) Decrease (increase) in prepaid expenses and other assets......... 210 (560) (576) (Decrease) increase in accounts payable........................... (92) 4,568 1,628 (Decrease) increase in accrued and other liabilities................. (974) (539) 1,072 -------- -------- -------- Net cash provided by (used for) operating activities.............. 812 (185) 877 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposition of property and equipment....................... 3,840 1,263 29 Capital expenditures................. (9,876) (5,408) (707) Acquisition of ENSCO Technology Company net assets, net of cash acquired............................ -- (11,488) -- Acquisition of Sharewell, Inc., net of cash acquired.................... -- (3,727) -- Acquisition of Drilex Systems, Inc., net of cash acquired................ -- -- (18,625) Acquisition of Cobb net assets....... -- -- (3,590) -------- -------- -------- Net cash used for investing activities....................... (6,036) (19,360) (22,893) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt................................ -- 17,450 2,250 Net (payments) borrowings under revolving credit agreements......... (200) 4,700 4,500 Proceeds from issuance of common stock............................... 28,456 3,117 16,215 Principal payments on long-term debt. (21,299) (4,826) -- Purchases of common stock............ -- (1,026) -- -------- -------- -------- Net cash provided by financing activities....................... 6,957 19,415 22,965 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 1,733 (130) 949 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................ 819 949 -- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 2,552 $ 819 $ 949 ======== ======== ======== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Transfers of drilling equipment parts from inventories to property and equipment........................... $ 5,110 $ 2,926 $ 1,965 Conversion of ENSCO Promissory Note.. 2,500 -- -- Amounts recorded in connection with acquisitions: Fair value of net assets acquired, including goodwill................. -- 26,257 26,881 Issuances of long-term debt......... -- 10,792 1,333 Issuance of long-term debt to reacquire equity interest in subsidiary......................... -- 2,154 -- Issuances of common stock and warrants........................... -- 250 1,333 Issuance of equity interest in subsidiary......................... -- -- 2,000 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid........................ $ 2,146 $ 1,689 $ 274 Income taxes paid.................... 1,097 842 613
See notes to consolidated financial statements. 23 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL --------------------- PAID-IN RETAINED SHARES ($.01 PAR) CAPITAL EARNINGS TOTAL --------- ---------- ---------- -------- ------- Balance, March 30, 1994 (inception)................ -- $ -- $ -- $ -- $ -- Issuances of common stock. 4,080,818 41 17,507 -- 17,548 Net income................ -- -- -- 2,009 2,009 --------- ---- ------- ------ ------- Balance, December 31, 1994.. 4,080,818 41 17,507 2,009 19,557 Issuances of common stock and warrants............. 451,220 5 3,362 -- 3,367 Purchases of common stock. (150,833) (2) (1,024) -- (1,026) Net income................ -- -- -- 1,784 1,784 --------- ---- ------- ------ ------- Balance, December 31, 1995.. 4,381,205 44 19,845 3,793 23,682 Common stock issued in initial public offering.. 2,361,962 24 30,816 -- 30,840 Exercised stock options, net of tax benefit....... 16,712 -- 116 -- 116 Net income................ -- -- -- 3,042 3,042 --------- ---- ------- ------ ------- Balance, December 31, 1996.. 6,759,879 $ 68 $50,777 $6,835 $57,680 ========= ==== ======= ====== =======
See notes to consolidated financial statements. 24 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Drilex International Inc. was organized on March 10, 1994 by DRLX Partners, L.P. ("DRLX Partners") and Mr. John Forrest to acquire the common stock of Drilex Systems, Inc. ("DSI") from MascoTech, Inc. See Note 2. Mr. Forrest is a founder of DSI and the President and Chief Executive Officer of Drilex International Inc. The initial capital contributions of $11,200,000 were made on March 30, 1994. The consolidated financial statements include the accounts of Drilex International Inc. and its majority and wholly owned subsidiaries, collectively referred to herein as the "Company". All significant intercompany balances and transactions have been eliminated in consolidation. The Company provides directional, horizontal and other precision drilling services and products. Such services and products are used primarily for oil and gas drilling, environmental remediation and trenchless service applications. 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, the disclosure of contingent assets and liabilities as of 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory costs represent invoice or production cost. Production costs include materials, labor and manufacturing overhead. The largest portion of the Company's inventories is consumed in connection with rental and service activities, and the remainder is utilized for equipment sales. Certain drilling equipment parts are transferred from inventories to property and equipment when placed in service. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Additions and improvements are capitalized, while maintenance and repairs are expensed. Upon the sale or retirement of an asset, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Effective January 1, 1996, the Company implemented Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company's adoption of SFAS 121 did not result in a charge to earnings. 25 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price for acquired businesses over the allocated value of the related net assets (see Note 2). Goodwill is amortized on a straight-line basis over a forty year life. The carrying value of goodwill and other intangible assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the acquired assets may not be recoverable. If the sum of the estimated future cash flows (undiscounted) expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset. Included in other assets are noncompete agreements, a technology licensing agreement, organization costs and patents. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Revenue Recognition Rental and service revenues are recognized as the services are performed, generally on an hourly or daily rate basis, under short-term contracts. Revenues from equipment sales are recognized when products are shipped to customers. Income Taxes The Company accounts for income taxes using an asset and liability approach, which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Foreign Currency Translation The Company uses the United States dollar as the functional currency for its foreign operations. Foreign currency transaction gains and losses are recognized in consolidated income as incurred. Gains or losses resulting from balance sheet translation of foreign operations are included in consolidated income. Per Share Information Per share information is based on the weighted average number of common shares outstanding during each period and, if dilutive, the weighted average number of common equivalent shares resulting from the assumed conversion of outstanding stock options and warrants. Shares issued by the Company during the one-year period prior to the filing of its Registration Statement have been included in the computation of weighted average shares from the Company's date of inception (using the treasury stock method and the initial public offering price). The fully diluted computation assumes the conversion of the Convertible Promissory Note as of the date of its issuance (see Note 6) and the resulting decrease in interest expense for the applicable period. On July 9, 1996, the Convertible Promissory Note was converted in connection with the Company's initial public offering (the "IPO") and the resulting shares were included in the primary per share computation for the remainder of the year. The difference between earnings per common share on a primary and fully diluted basis is not significant. Stock Based Compensation In October 1995, Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123") was issued. SFAS 123 establishes alternative methods of accounting and 26 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) disclosure for employee stock-based compensation arrangements. In adopting SFAS 123 in 1996, the Company has elected to continue the use of the "intrinsic value based method" of accounting for its employee stock option plan (see Note 10). This method does not result in the recognition of compensation expense when employee stock options are granted if the exercise price of the options equals or exceeds the fair market value of the stock at the date of grant. The Company has disclosed the proforma income and earnings per share amounts that would have been reported under the "fair value" based recognition provisions of SFAS 123 in Note 10. 2. ACQUISITIONS On March 31, 1994, the Company acquired all of the common stock of DSI for cash of $20,000,000 in a transaction accounted for as a purchase. During the remainder of 1994 and during 1995, the Company consummated three additional business acquisitions which were also accounted for using the purchase method. Results of operations and cash flows of the acquired businesses are included in the consolidated financial statements for the periods subsequent to the respective dates of acquisition. ENSCO Technology Company and subsidiary ("ENSCO Technology") On September 30, 1995, the Company acquired substantially all of the assets, net of outstanding liabilities and minority interests, of ENSCO Technology. ENSCO Technology provides precision drilling and measurement-while-drilling services to customers primarily in Texas and Canada. The total purchase price of $17,851,000 consisted of $11,790,000 in cash and notes payable to ENSCO Technology totaling $6,061,000. The Company recognized goodwill of $8,586,000 in connection with this acquisition. Sharewell, Inc. and subsidiaries ("Sharewell") On May 5, 1995, the Company acquired all of the common stock of Sharewell (formerly Shareco, Inc.), which provides directional drilling guidance systems and services in both domestic and international locations. The total purchase price of $9,167,000 consisted of $4,186,000 in cash, notes payable to Sharewell's former stockholders totaling $4,731,000 and warrants to purchase 180,981 shares of the Company's common stock valued at $250,000. The Company recognized goodwill of $4,332,000 in connection with this acquisition. Cobb Directional Drilling Company, Inc. and Posi-Trak Mud Motors, Inc. (collectively, "Cobb") On September 30, 1994, the Company acquired substantially all of the fixed assets of Cobb (the "Cobb acquisition"), which provides precision drilling services to customers primarily in Louisiana and the Gulf of Mexico. The Company used a newly-formed subsidiary, Cobb Directional Drilling Company LLC ("Cobb LLC"), to acquire the Cobb assets. The total purchase price of $8,256,000 consisted of $3,590,000 in cash, a note payable to Posi-Trak Mud Motors, Inc. for $1,333,000, a one-third equity interest in Cobb LLC valued at $2,000,000 and 241,307 shares of the Company's common stock valued at $1,333,000. The Company recognized goodwill of $1,403,000 in connection with this acquisition. On March 23, 1995, the Company repurchased 144,784 of the shares of its common stock for $1,000,000 in cash (the estimated fair value of such common stock on that date). This repurchase, after retirement of the resulting treasury shares, was recorded as a reduction of common stock and additional paid-in capital on the Company's consolidated balance sheet. On the same date, the Company reacquired the one-third equity interest in Cobb LLC in exchange for two notes payable to Cobb Directional Drilling Company, Inc. totaling $2,154,000 (the estimated fair value of such equity interest on that date). This reacquisition was recorded as a reduction of minority interests on the Company's consolidated balance sheet. The minority stockholder's share of Cobb LLC's earnings for the period from October 1, 1994 through March 23, 1995 is presented as minority interests in the Company's consolidated income statement. 27 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pro forma results of operations (unaudited) The following unaudited pro forma summary presents consolidated results of operations for the Company as if (a) the Cobb acquisition had been consummated on March 30, 1994 and (b) the Sharewell and ENSCO Technology acquisitions had been consummated as of the beginning of the respective periods. Appropriate adjustments have been reflected for depreciation and amortization, interest expense, income taxes and minority interests. Net income for the period ended December 31, 1994 includes an after-tax gain of $429,000, or $.10 per share, resulting from ENSCO Technology's sale of stock of a foreign subsidiary. The pro forma information does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of future consolidated results for the Company.
PERIOD FROM MARCH 30, 1994 YEAR ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, 1995 1994 ------------ -------------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) Net revenues.................................. $73,557 $48,719 Net income.................................. 1,929 2,905 Net income per common and common equivalent share...................................... .42 .67
3. INVENTORIES Inventories consist of the following:
DECEMBER 31, -------------- 1996 1995 ------- ------ (IN THOUSANDS OF DOLLARS) Drilling equipment parts.................................. $ 9,879 $7,573 Work in process........................................... 854 686 ------- ------ $10,733 $8,259 ======= ======
4. PROPERTY AND EQUIPMENT The major classes of property and equipment are as follows:
DECEMBER 31, ESTIMATED ---------------- USEFUL LIVES 1996 1995 ------------ ------- ------- (IN THOUSANDS OF DOLLARS) Land....................................... $ 52 $ 52 Buildings and improvements................. 5-40 years 1,382 985 Machinery and equipment.................... 3-15 years 8,110 7,122 Rental tools............................... 3-7 years 29,927 19,901 Furniture and fixtures..................... 3-10 years 3,244 2,385 Construction in progress................... 33 1,844 ------- ------- 42,748 32,289 Less: accumulated depreciation............. (8,839) (4,732) ------- ------- $33,909 $27,557 ======= =======
28 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Depreciation expense for the years ended December 31, 1996 and 1995 and for the period ended December 31, 1994 was $5,467,000, $3,668,000 and $1,703,000, respectively. Effective April 1, 1995, the Company changed its estimated useful life for certain drilling motor components from five to seven years. This change was made to better reflect the estimated period during which these assets will remain in service. The effect of this change was an increase in net income of $378,000, or $.07 per share, for the year ended December 31, 1996 and $248,000, or $.06 per share, for the year ended December 31, 1995. 5. OTHER ASSETS Other assets consist of the following:
DECEMBER 31, ESTIMATED --------------- USEFUL LIVES 1996 1995 ------------ ------- ------ (IN THOUSANDS OF DOLLARS) Noncompete agreements....................... 5-10 years $ 2,100 $2,100 Technology licensing agreement.............. 13 1/3 years 1,465 1,465 Organization costs.......................... 5 years 1,058 1,052 Patents..................................... 17 years 142 122 Other....................................... 153 10 ------- ------ 4,918 4,749 Less: accumulated amortization.............. (1,397) (686) ------- ------ $ 3,521 $4,063 ======= ======
In conjunction with the acquisition of DSI, the Company obtained a licensing agreement that provides it with a non-exclusive right to use a patented technology for the remaining life of the patent. As consideration for the license, the Company is obligated to sell or lease certain drilling systems equipment to the licensor at a discount. The period of this obligation extends through December 31, 1997. A liability for this obligation is included on the Company's consolidated balance sheet in the amount of $1,138,000 and $1,238,000 at December 31, 1996 and 1995, respectively. 6. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ---------------- 1996 1995 ------- ------- (IN THOUSANDS OF DOLLARS) Bank Credit Agreement: Revolving Credit Facility.................................. $ 9,000 $ 9,200 Term Note.................................................. -- 16,578 Promissory Note payable to Posi-Trak Mud Motors, Inc......... 1,333 1,333 Promissory Note payable to Cobb Directional Drilling Company, Inc......................................................... 417 750 Promissory Notes payable to former stockholders of Sharewell. 3,604 4,431 Promissory Note payable to ENSCO Technology.................. -- 3,561 Convertible Promissory Note payable to ENSCO Technology...... -- 2,500 ------- ------- 14,354 38,353 Less: current maturities..................................... (2,471) (5,886) ------- ------- $11,883 $32,467 ======= =======
29 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Bank Credit Agreement On September 16, 1996, the Company entered into an unsecured credit agreement with a bank (the "Bank Credit Agreement") which replaced previous credit agreements entered into by the Company and its subsidiaries. The Bank Credit Agreement, as amended on February 10, 1997, consists of a revolving line of credit (the "Revolving Credit Facility") which matures on September 30, 1999 and provides for borrowings of up to $20,000,000 of which up to $3,000,000 may be used for letters of credit. As of December 31, 1996, $5,900,000 was available for borrowings, of which $2,865,000 was available for letters of credit. Letters of credit outstanding amounted to $135,000 at December 31, 1996. Borrowings under the Bank Credit Agreement bear interest at a rate per annum, at the Company's election, equal to the bank's prime rate or a Eurodollar and Eurosterling interbank offered rate plus 3/4% (8.3% and 6.4%, respectively, at December 31, 1996). The interest rate margins may be increased by 3/8% (non-cumulatively) based on a financial test, determined quarterly. The Bank Credit Agreement requires the Company to maintain certain financial covenants and places restrictions on the Company's ability to, among other things, incur debt and liens, pay dividends, enter into unrelated lines of business and make investments. Promissory Note payable to Posi-Trak Mud Motors, Inc. This note matures on September 30, 1997, bears interest at a rate of 7% per annum and is secured by a pledge of the Company's equity interest in Cobb LLC. (See Note 16.) Promissory Note payable to Cobb Directional Drilling Company, Inc. This note matures on March 23, 1998, bears interest at a rate of 7 1/2% per annum, calls for quarterly principal payments of $83,000 and is secured by a pledge of a one-third equity interest in Cobb LLC. A related promissory note for $1,154,000 was repaid on July 1, 1995. (See Note 16.) Promissory Notes payable to former stockholders of Sharewell These unsecured notes mature on April 30, 2000 and bear interest at a rate of 8% per annum. Six of the notes call for quarterly principal payments aggregating $139,000. The remaining note calls for annual principal payments of $250,000 and a final payment of $913,000 at maturity, and requires that the Company maintain a minimum consolidated net worth. Maturities Scheduled maturities of long-term debt outstanding at December 31, 1996 are as follows: years ending December 31, 1997--$2,471,000; 1998--$887,000; 1999-- $9,804,000; 2000--$1,192,000. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents approximates fair value for these instruments. The estimated fair value of long-term debt is determined based on the current rates offered for similar borrowings. The estimated fair values of the Company's financial instruments, along with the carrying amounts of the related assets (liabilities), are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- (IN THOUSANDS OF DOLLARS) Cash and cash equivalents......... $ 2,552 $ 2,552 $ 819 $ 819 Long-term debt.................... (14,354) (14,251) (38,353) (38,594) Interest rate swap agreement...... -- -- -- (332)
30 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company's interest rate swap agreement was terminated on July 9, 1996 in conjunction with the IPO and subsequent prepayment of the Term Note (see Note 10). The net settlement amount (a $57,000 credit) resulting from this agreement was recognized as an adjustment to interest expense. The Company does not hold or issue derivative financial instruments for trading purposes. 8. INCOME TAXES The domestic and foreign components of income before income taxes and minority interests are as follows:
PERIOD FROM MARCH 30, 1994 YEAR ENDED YEAR ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ -------------- (IN THOUSANDS OF DOLLARS) Domestic......................... $ 563 $ 951 $2,217 Foreign.......................... 4,289 2,094 1,024 ------ ------ ------ $4,852 $3,045 $3,241 ====== ====== ======
The provision for income taxes consists of the following:
PERIOD FROM MARCH 30, 1994 YEAR ENDED YEAR ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ -------------- (IN THOUSANDS OF DOLLARS) Current: Federal........................ $ 110 $ 301 $ 682 State.......................... 162 41 23 Foreign........................ 744 670 170 ------ ------ ------ 1,016 1,012 875 ------ ------ ------ Deferred: Federal........................ 711 85 291 ------ ------ ------ $1,727 $1,097 $1,166 ====== ====== ======
A reconciliation between the provision for income taxes and the amount computed by applying the federal statutory income tax rate to income before income taxes and minority interests is as follows:
PERIOD FROM MARCH 30, 1994 YEAR ENDED YEAR ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ -------------- (IN THOUSANDS OF DOLLARS) Provision for income taxes at statutory rate................ $1,650 $1,035 $1,102 Nondeductible goodwill amortization.................. 36 24 -- Other.......................... 41 38 64 ------ ------ ------ $1,727 $1,097 $1,166 ====== ====== ======
31 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of the net deferred income tax assets and liabilities are as follows:
DECEMBER 31, ---------------- 1996 1995 1994 ------ ---- ---- (IN THOUSANDS OF DOLLARS) Deferred income tax liabilities: Property and equipment...................................... $ 916 $626 $194 Basis difference in foreign subsidiaries, net of foreign tax credits.................................................... 598 72 151 Other....................................................... 291 236 3 ------ ---- ---- Total deferred income tax liabilities..................... 1,805 934 348 ------ ---- ---- Deferred income tax assets: Receivables allowance....................................... 277 65 52 Other....................................................... -- 52 5 ------ ---- ---- Total deferred income tax assets.......................... 277 117 57 ------ ---- ---- Net deferred income tax liabilities........................... $1,528 $817 $291 ====== ==== ====
Provision has been made for the U.S. income tax effect of the anticipated repatriation of earnings of foreign subsidiaries. No valuation allowances are required for the deferred income tax assets. The net current deferred income tax assets are included in prepaid expenses and other current assets, and the net non-current deferred income tax liabilities are included in other noncurrent liabilities, on the consolidated balance sheet. 9. MINORITY INTERESTS Minority interests at December 31, 1996 and 1995 represent minority stockholders' interests in certain foreign subsidiaries of acquired companies. 10. STOCKHOLDERS' EQUITY Authorized Shares On May 16, 1996, the Company filed an amendment to its certificate of incorporation to, among other things, (i) increase the number of authorized common shares to 25,000,000 and to effect a stock split involving the issuance of approximately 1.81 shares of common stock in exchange for each share of common stock then outstanding; (ii) retire all treasury shares of common stock purchased since the Company's inception; and (iii) authorize 10,000,000 shares of $.01 par value preferred stock. The effect of the stock split and the retirement of treasury shares has been presented retroactively to the date of inception in the Company's consolidated financial statements. Initial Public Offering On July 2, 1996, the Company entered into an underwriting agreement providing for the issuance of 2,361,962 shares of common stock in the IPO. Of the total number of shares issued, 2,000,000 were sold by the Company, and 361,962 were sold by ENSCO Technology, which had converted its Convertible Promissory Note. Net proceeds to the Company from the IPO, after issuance costs, were $28,340,000 and were used to (i) retire the $3,561,000 of outstanding principal and $12,000 accrued interest under the Promissory Note payable to ENSCO Technology; and (ii) make principal repayments of $14,833,000 for all term loan borrowings and $9,934,000 for a portion of the revolving line of credit borrowings outstanding under its Bank Credit Agreement (see Note 6). 32 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Stock options In 1996, the Company amended and restated the Drilex Holdings Corp. 1994 Stock Option Plan (the "1994 Stock Option Plan"). Up to 440,000 shares of the Company's common stock are reserved for awards or for payment of rights granted to certain employees and to non-employee directors of the Company and its subsidiaries. These options are exercisable ratably over periods of three to four years beginning one year from the date of grant. All stock options are granted at the fair market value of the Common Stock at the date of grant. Stock options granted to non-employee directors generally expire ten years after the date of grant or three months after the date of retirement from the Board of Directors, if earlier. Stock options granted to employees prior to the IPO generally expire seven years after the date of grant. Stock options granted to employees after the IPO generally expire five years after the date of grant. All stock options granted to employees may expire earlier, at the discretion of the Compensation Committee, if employment is terminated. The following table summarizes the stock option activity related to the Company's plan:
WEIGHTED AVERAGE EXERCISE EXERCISE PRICE WEIGHTED AVERAGE SHARES PRICE PER SHARE CONTRACTUAL LIFE ------- ------------ ---------------- ---------------- 1994: Granted................. 62,911 $ 5.53 $ 5.53 ------- ------ Outstanding at December 31...................... 62,911 5.53 5.53 7.12 years 1995: Granted................. 25,044 $ 5.53-11.05 $10.52 Forfeited/Cancelled..... (12,099) 5.53 5.53 ------- ------ Outstanding at December 31..................... 75,856 5.53-11.05 7.18 7.19 years 1996: Granted................. 161,850 $11.94-16.00 $15.88 Exercised............... (16,712) 5.53 5.53 Forfeited/Cancelled..... (24,806) 5.53-16.00 15.66 ------- ------ Outstanding at December 31..................... 196,188 5.53-16.00 13.43 6.34 years
The following table provides information for the exercisable stock options:
WEIGHTED AVERAGE EXERCISE EXERCISE PRICE SHARES PRICE PER SHARE ------ ----------- ---------------- December 31, 1995..................... 12,905 $ 5.53 $5.53 December 31, 1996..................... 15,561 $5.53-11.05 $7.54
In adopting SFAS 123 in 1996, the Company has elected to continue the use of the "intrinsic value based method" of accounting for its employee stock option plan. This method does not result in the recognition of compensation expense when employee stock options are granted if the exercise price of the options equals or exceeds the fair market value of the stock at the date of grant. The following table discloses the proforma income and earnings per share amounts that would have been reported as prescribed by SFAS 123:
1996 1995 ------ ------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net income: As reported............................................... $3,042 $1,784 Proforma.................................................. $2,963 $1,770 Earnings per share: As reported............................................... $ 0.53 $ 0.40 Proforma.................................................. $ 0.52 $ 0.40
33 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The weighted average fair values of options granted during 1996 and 1995 were $5.17 and $4.56 per share, respectively. The fair value of each stock option granted during 1996 and 1995 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
YEAR OF GRANT ------------------- 1996 1995 --------- --------- Risk free interest rate............................... 6.29% 6.47% Expected life of options.............................. 3.5 years 2.5 years Expected volatility of the Company's stock price...... 64% 0% Expected dividend yield of the Company's stock........ 0% 0%
Warrants On May 5, 1995, in connection with the Sharewell acquisition (see Note 2), the Company issued warrants to purchase an aggregate of 180,981 shares of its common stock at an exercise price of $5.53 per share. The warrants are exercisable, in whole or in part, at any time until May 5, 2000. None of the warrants had been exercised as of December 31, 1996. Shares reserved for issuance At December 31, 1996, the Company had the following shares of common stock reserved for future issuance: 1994 Stock Option Plan........................................... 423,288 Warrants......................................................... 180,981 ------- 604,269 =======
Restrictions on payment of dividends As of December 31, 1996, the Company is precluded from paying dividends on its common stock by the provisions of various debt agreements (see Note 6). 11. RELATED PARTY TRANSACTIONS The Company purchases equipment and services from parties related to Cobb's former stockholder. Charges for such purchases amounted to $767,000, $629,000 and $178,000 for the periods ended December 31, 1996, 1995 and 1994, respectively. In connection with the ENSCO Technology acquisition (see Note 2), the Company was charged a $150,000 fee for investment banking and consulting services by an affiliate of DRLX Partners. This fee, included in other accrued liabilities on the Company's consolidated balance sheet as of December 31, 1995, was paid in 1996. Included in other receivables at December 31, 1996 and 1995 are advances to employees of the Company amounting to $395,000 and $334,000, respectively. 34 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. EMPLOYEE BENEFIT PLAN On April 1, 1994, the Company adopted a defined contribution savings plan covering substantially all of its employees. Employees may elect to contribute up to 15% of their eligible compensation to the plan. For those participants who have elected to make voluntary contributions to the plan, the Company's contributions consist of a 50% matching amount for participant contributions, not to exceed 4% of the eligible compensation of participants. The cost to the Company of this plan was $273,000, $207,000 and $87,000 for the periods ended December 31, 1996, 1995 and 1994, respectively. 13. COMMITMENTS AND CONTINGENCIES Commitments Minimum rental commitments under operating leases at December 31, 1996 are as follows: years ending December 31, 1997--$1,202,000; 1998--$691,000; 1999-- $602,000; 2000--$370,000; 2001--$165,000; thereafter--$1,146,000. Rental expense for operating leases was $1,287,000, $993,000 and $565,000 for the periods ended December 31, 1996, 1995 and 1994, respectively. The Company has a licensing agreement that provides it with a non-exclusive right to purchase and use certain measurement-while-drilling systems equipment. Most of this equipment was obtained in connection with the ENSCO Technology acquisition (see Note 2). As consideration for this license, the Company is obligated to make annual royalty payments of $360,000 to the supplier of the equipment. The Company is entitled to receive discounts on the royalty payments for the ENSCO Technology equipment amounting to $46,000 per year for the first three years of the agreement and $260,000 per year for the fourth and fifth years of the agreement. The terms of this licensing agreement are to be reviewed and renegotiated in September 2000. In November 1996, the Company committed to be a participating lender for an unaffiliated entity's senior secured oil and gas exploration and development loan facility ("Facility"). The Company's maximum commitment of $500,000 is secured by certain domestic oil and gas properties of the borrower and it will receive an overriding royalty interest in each property for which funding under the Facility is provided. Interest is earned on advances made under this Facility at an annual rate of 12% and is receivable quarterly. Principal payments are to be received quarterly beginning in 1999 based on a stated percentage of net production revenues of properties covered under the Facility. At December 31, 1996, the Company had a receivable of $150,000 with respect to the Facility included in Other Assets. Contingencies The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, management believes the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position or results of operations. 14. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents and trade receivables. The Company mitigates its risk with respect to cash and cash equivalents by maintaining such deposits at high credit quality financial institutions and monitoring the credit ratings of those institutions. 35 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company derives a significant portion of its revenues from sales and services to customers in the energy industry. In addition, the Company has concentrations of operations in certain geographic areas (primarily Texas, the Louisiana Gulf Coast, Venezuela and the North Sea). At December 31, 1996, two customers each accounted for approximately 10% of the Company's revenues. At December 31, 1995, one customer accounted for approximately 11% of the Company's revenues. At December 31, 1996, there were no individual customers which had accounts receivable balances greater than 10% of total trade receivables. At December 31, 1995, outstanding receivables from two significant customers accounted for approximately 13% and 11% of total trade receivables, respectively. The Company mitigates its concentrations of credit risk with respect to trade receivables by actively monitoring the creditworthiness of its customers. 15. GEOGRAPHIC INFORMATION Summarized information by geographic area is as follows:
PERIOD FROM MARCH 30, 1994 YEAR ENDED YEAR ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ -------------- (IN THOUSANDS OF DOLLARS) Net revenues from unaffiliated customers: Domestic........................... $54,732 $42,557 $18,460 Latin America...................... 9,237 6,635 2,544 Europe............................. 4,848 5,378 2,023 Other foreign...................... 7,330 2,956 2,182 ------- ------- ------- Total............................ $76,147 $57,526 $25,209 ======= ======= ======= Operating income (loss): Domestic........................... $ 4,886 $ 3,180 $ 3,287 Latin America...................... 803 355 522 Europe............................. 396 1,292 42 Other foreign...................... 846 153 (132) ------- ------- ------- Total............................ $ 6,931 $ 4,980 $ 3,719 ======= ======= ======= Identifiable assets: Domestic........................... $64,747 $59,492 $28,836 Latin America...................... 10,680 7,170 2,560 Europe............................. 4,657 4,633 2,518 Other foreign...................... 6,686 6,459 2,378 ------- ------- ------- Total............................ $86,770 $77,754 $36,292 ======= ======= =======
Sales and transfers among geographic areas are not significant. Included in results of operations are aggregate foreign currency transaction gains (losses) of $(87,000), $(43,000) and $30,000 for the periods ended December 31, 1996, 1995 and 1994, respectively. Export sales were less than 10% of total net revenues for the periods ended December 31, 1996, 1995 and 1994. 36 DRILEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 16. SUBSEQUENT EVENT On January 31, 1997, the Company entered into a stock repurchase and promissory note repayment agreement and general release with the previous owner of Cobb ("the Cobb Buy-Out Agreement"), which was effected on February 10, 1997. The agreement provides for, among other things, the repurchase of Company stock, early payment of outstanding notes payable, the termination of Mr. Cobb's employment as of January 31, 1997, and the amendment of the non- compete provision in the related employment agreement. Company stock repurchased was 96,523 shares at the January 31, 1997 market closing price of $13.50 per share. The notes payable repaid were to Posi-Trak Mud Motors, Inc. and Cobb Directional Drilling Company, Inc. having principal balances outstanding of $1,333,000 and $417,000, respectively. The employment agreement was amended to provide for a reduction in the duration of the post-termination non-compete from five years to two years. The total cash payment made by the Company under the Cobb Buy-Out Agreement was $2,726,000 and was funded through its Revolving Credit Facility. 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summary quarterly financial information for the years ended December 31, 1996 and 1995, and the period from March 30, 1994 (inception) to December 31, 1994 is as follows:
THREE MONTHS ENDED ----------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1996: Net revenues....................... $19,457 $18,593 $20,075 $18,022 Operating income................... 1,616 823 2,419 2,073 Net income......................... 526 93 1,279 1,144 Net income per common and common equivalent share.................. .12 .02 .19 .17 1995: Net revenues....................... $10,527 $12,343 $14,493 $20,163 Operating income................... 660 1,023 1,411 1,886 Net income......................... 205 361 574 644 Net income per common and common equivalent share.................. .05 .08 .13 .14 1994: Net revenues....................... $ 6,689 $ 7,770 $10,750 Operating income................... 846 1,101 1,772 Net income......................... 426 631 952 Net income per common and common equivalent share.................. .18 .17 .22
37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information to be set forth under the caption "Election of Directors" in the Company's definitive proxy statement ("Proxy Statement") in connection with the 1997 annual meeting of stockholders is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission (the "Commission") not later than 120 days subsequent to December 31, 1996. Pursuant to Item 401(b) of Regulations S-K, the information required by this item with respect to executive officers of the Company is set forth in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION. The information to be set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information to be set forth under the captions "Beneficial Ownership of Stock" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information to be set forth under the caption "Certain Transactions" in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A)(1) FINANCIAL STATEMENTS. See Index on page 19. (2) FINANCIAL STATEMENT SCHEDULES. Schedule II--Valuation and Qualifying Accounts and Reserves. See page 41. (3) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION ------- ----------- *3.1 Restated Certificate of Incorporation of the Company (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333- 03405), Exhibit 3.1). *3.2 Bylaws of the Company, as amended (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 3.2). *4.1 Form of certificate representing Common Stock (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 4.1).
38
EXHIBIT NUMBER DESCRIPTION ------- ----------- *4.2 Restated Registration Rights Agreement dated as of May 15, 1996, among the Company and the stockholders listed on the signature pages thereto (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 4.2). *4.3 Form of Employee Stockholders Agreement among the Company and certain stockholders of the Company (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 4.4). *4.4 Stockholders' Agreement dated as of September 30, 1994 among the Company and Posi-Trak Mud Motors, Inc. (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 4.5). *4.5 Stockholders' Agreement dated as of May 5, 1995 among the Company and the stockholders and holders of warrants to purchase Common Stock listed on the signature pages thereto (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 4.6). *4.6 Stockholders Agreement dated as of October 4, 1995 among the Company, ENSCO Technology Company and certain permitted assigns (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333- 03405), Exhibit 4.7). *4.7 Amended and Restated Credit Agreement dated as of September 16, 1996, among the Company, Drilex Systems, Inc., Cobb Directional Drilling Company, L.L.C., Sharewell, Inc., Drilex Systems Limited and Texas Commerce Bank National Association, as lender, (Drilex International Inc. Quarterly Report on Form 10-Q (September 30, 1996), Exhibit 4.1). *4.8 Dollar Note dated September 16, 1996 of the Company, Drilex Systems, Inc., Sharewell, Inc. and Cobb Directional Drilling Company, L.L.C. payable to the order of Texas Commerce Bank National Association (Drilex International Inc. Quarterly Report on Form 10-Q (September 30, 1996), Exhibit 4.2). *4.9 Interest Rate Agreement dated as of September 16, 1996 among Texas Commerce Bank National Association, the Company, Drilex Systems, Inc., Cobb Directional Drilling Company, L.L.C., Sharewell, Inc. and Drilex Systems Limited (Drilex International Inc. Quarterly Report on Form 10-Q (September 30, 1996), Exhibit 4.3). 4.10 Amendment to Credit Agreement dated as of February 10, 1997, among the Company, Drilex Systems, Inc., Drilex Systems Limited, Cobb Directional Drilling Company, L.L.C., Sharewell, Inc. and Texas Commerce Bank National Association. The Company is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Registration S-K, the Company agrees to furnish a copy of such instruments to the Commission upon request. *10.1 Stock Purchase Agreement dated March 31, 1994 between the Company and MascoTech, Inc. (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 10.1). *10.2 Repurchase Agreement dated June 30, 1994 between Drilex Systems, Inc. and MascoTech, Inc. (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 10.2). *10.3 Asset Purchase Agreement dated September 30, 1994 among the Company, Cobb Directional Drilling Company, L.L.C., Cobb Directional Drilling Company, Inc., Posi-Trak Mud Motors, Inc. and Archie A. Cobb, III (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 10.3). *10.4 Stock Purchase Agreement dated as of March 23, 1995 among the Company, Drilex Systems, Inc., Cobb Directional Drilling, Inc. and Archie A. Cobb, III (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 10.4).
39
EXHIBIT NUMBER DESCRIPTION ------- ----------- *10.5 Stock Repurchase Agreement dated as of March 23, 1995 among the Company, Posi-Trak Mud Motors, Inc. and Archie A. Cobb, III (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333- 03405), Exhibit 10.5). *10.6 Stock Purchase Agreement dated as of May 5, 1995 between the Company and the Sellers listed on the signature pages thereto (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333- 03405), Exhibit 10.6). *10.7 Asset Purchase Agreement dated September 29, 1995 among the Company, Drilex Systems, Inc., ENSCO Technology Company and ENSCO International Incorporated (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 10.7). +*10.8 Form of Indemnification Agreement between the Company and each of its directors (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 10.8). +10.9 Stock Option Plan of the Company, as amended. +*10.10 Employment Agreement dated September 30, 1994 between Cobb Directional Drilling Company, L.L.C. and Archie A. Cobb, III (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333- 03405), Exhibit 10.10). +10.11 Stock Repurchase and Promissory Note Repayment Agreement and General Release dated as of January 31, 1997, among the Company, Cobb Directional Drilling Company, L.L.C., Drilex Systems, Inc., Posi-Trak Mud Motors, Inc., Cobb Directional Drilling Company, Inc. and Archie A. Cobb, III. 11.1 Computation of Net Income Per Common and Common Equivalent Share. *21.1 Subsidiaries of the Company (Drilex International Inc. Registration Statement on Form S-1 (Reg. No. 333-03405), Exhibit 21.1). 23.1 Consent of Deloitte & Touche LLP. 27.1 Financial Data Schedule.
- -------- * Incorporated herein by reference as indicated. + Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K. (B) REPORTS ON FORM 8-K. None. 40 SCHEDULE II DRILEX INTERNATIONAL INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS) The following table summarizes the activity in the Allowance for Doubtful Accounts for each of the years ended December 31, 1996 and 1995 and for the period from March 30, 1994 (inception) to December 31, 1994:
ADDITIONS ---------------- ALLOWANCE FOR DOUBTFUL BALANCE AT CHARGED TO BALANCE AT ACCOUNTS: BEGINNING OF YEAR EXPENSE OTHER DEDUCTIONS END OF YEAR - ------------------------ ----------------- ---------- ----- ---------- ----------- 1996.................... $933 $585 $ 10 $(714)(a) $814 1995.................... 308 224 559(b) (158) 933 1994.................... 157 182 6 (37) 308
- -------- (a) Includes a reduction of $606 of allowance related to accounts receivable written off of which $315 related to the ENSCO acquisition (See(b)). (b) Includes the addition of $458 of allowance related to the ENSCO acquisition and $69 related to the Sharewell acquisition. 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on the 28th day of March, 1997. DRILEX INTERNATIONAL INC. /s/ John Forrest By:__________________________________ John Forrest Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act 1934, this report has been signed by the following persons in the capacities indicated on March 28, 1997. /s/ John Forrest Chief Executive Officer, President and a ____________________________________ Director (Principal Executive Officer) John Forrest /s/ G. Bruce Broussard Vice President--Finance and Administration and ____________________________________ Secretary (Principal Financial Officer and G. Bruce Broussard Principal Accounting Officer) /s/ L.E. Simmons Chairman of the Board ____________________________________ L.E. Simmons /s/ A. Clark Johnson Director ____________________________________ A. Clark Johnson /s/ David C. Baldwin Director ____________________________________ David C. Baldwin /s/ Sam S. Sorrell Director ____________________________________ Sam S. Sorrell /s/ R.T. Swinton Director ____________________________________ R.T. Swinton /s/ Philip Burguieres Director ____________________________________ Philip Burguieres
42 EX-4.10 2 AMENDMENT TO CREDIT AGREEMENT EXHIBIT 4.10 AMENDMENT TO CREDIT AGREEMENT THIS AMENDMENT TO CREDIT AGREEMENT ("Amendment") dated as of February 10, 1997 (the "Amendment Effective Date") is made and entered into by and among DRILEX INTERNATIONAL, INC., a Delaware corporation, DRILEX SYSTEMS, INC., a Delaware corporation, DRILEX SYSTEMS LIMITED, a company incorporated in Scotland under the Companies Act, COBB DIRECTIONAL DRILLING COMPANY, L.L.C., a Delaware limited liability company, and SHAREWELL, INC., a Delaware corporation (collectively, the "Borrowers") and TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("Lender"), a national banking association. RECITALS: WHEREAS, the Borrowers and the Lender are parties to an Amended and Restated Credit Agreement dated as of September 16, 1996 (the "Credit Agreement"); and WHEREAS, the Borrowers and the Lender have agreed, on the terms and conditions herein set forth, that the Credit Agreement be amended in certain respects; NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED, IT IS AGREED: Section 1. Definitions. Terms used herein which are defined in the Credit Agreement shall have the same meanings when used herein unless otherwise provided herein. Section 2. Amendments to the Credit Agreement. On and after the Amendment Effective Date, (a) The definition of "Maximum Commitment" set forth in Section 1.1 is hereby amended to read in its entirety as follows: Maximum Commitment shall mean $20,000,000, subject to reduction as provided in Section 2.5. (b) The definition of "Net Capital Expenditures" set forth in Section 1.1 is hereby amended to read in its entirety as follows: Net Capital Expenditures shall mean, for any period, the excess (if any) of (a) Capital Expenditures of such period over (b) the net cash proceeds received by the Dollar Borrowers in connection with the sale of their common stock, preferred stock and Subordinated Indebtedness and applied, during such period, to pay Capital Expenditures minus expenditures for the acquisition of a business during such period; in no event may "Net Capital Expenditures" be negative. "Net Capital Expenditures" shall not include (i) Capital Expenditures which are paid by customers of the applicable Borrower resulting from "lost in hole" equipment or (ii) Capital Expenditures during the fiscal year 1997 not exceeding $5,800,000, in the aggregate, for the purchase of MWD systems. The computation under item (b) above shall specifically include expenditures for certain measurement-while-drilling equipment amounting to $2,378,000 for the month of September, 1996 and $2,336,000 for the month of November, 1996. Section 3. Limitations. The amendments set forth herein are limited precisely as written and shall not be deemed to (a) be a consent to, or waiver or modification of, any other term or condition of the Credit Agreement or any of the other Credit Documents, or (b) except as expressly set forth herein, prejudice any right or rights which the Lender may now have or may have in the future under or in connection with the Credit Agreement, the Credit Documents or any of the other documents referred to therein. Except as expressly modified hereby or by express written amendments thereof, the terms and provisions of the Credit Agreement, the Notes, and any other Credit Documents or any other documents or instruments executed in connection with any of the foregoing are and shall remain in full force and effect. In the event of a conflict between this Amendment and any of the foregoing documents, the terms of this Amendment shall be controlling. The representations and warranties made in each Credit Document are true and correct in all material respects on and as of the Amendment Effective Date. Section 4. Payment of Expenses. The Borrowers agree, whether or not the transactions hereby contemplated shall be consummated, to reimburse and save the Lender harmless from and against liability for the payment of all reasonable substantiated out-of-pocket costs and expenses arising in connection with the preparation, execution, delivery, amendment, modification, waiver and enforcement of, or the preservation of any rights under this Amendment, including, without limitation, the reasonable fees and expenses of any local or other counsel for the Lender, and all stamp taxes (including interest and penalties, if any), recording taxes and fees, filing taxes and fees, and other charges which may be payable in respect of, or in respect of any modification of, the Credit Agreement and the other Credit Documents. The provisions of this Section shall survive the termination of the Credit Agreement and the repayment of the Loans. Section 5. Governing Law. This Amendment and the rights and obligations of the parties hereunder and under the Credit Agreement shall be construed in accordance with and be governed by the laws of the State of Texas and the United States of America. Section 6. Descriptive Headings, etc. The descriptive headings of the several Sections of this Amendment are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 2 Section 7. Entire Agreement. This Amendment and the documents referred to herein represent the entire understanding of the parties hereto regarding the subject matter hereof and supersede all prior and contemporaneous oral and written agreements of the parties hereto with respect to the subject matter hereof, including, without limitation, any commitment letters regarding the transactions contemplated by this Amendment. Section 8. Counterparts. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts and all of such counterparts shall together constitute one and the same instrument. Section 9. Amended Definitions. As used in the Credit Agreement (including all Exhibits thereto) and all other instruments and documents executed in connection therewith, on and subsequent to the Amendment Effective Date the term (i) "Agreement" shall mean the Credit Agreement as amended by this Amendment, and (ii) references to any and all other Credit Documents shall mean such documents as amended as contemplated hereby. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective duly authorized offices as of the date first above written. NOTICE PURSUANT TO TEX. BUS. & COMM. CODE (S)26.02 THIS AMENDMENT AND ALL OTHER CREDIT DOCUMENTS EXECUTED BY ANY OF THE PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. DRILEX INTERNATIONAL, INC., a Delaware corporation /s/ JOHN FORREST By: __________________________ Name: John Forrest ________________________ Title: President _______________________ 3 DRILEX SYSTEMS, INC., a Texas corporation /s/ JOHN FORREST By: _____________________________ Name: John Forrest ___________________________ Title: President __________________________ COBB DIRECTIONAL DRILLING COMPANY, L.L.C., a Delaware limited liability company By: Drilex Holding Corp., a Delaware corporation, Member /s/ JOHN FORREST By: _______________________ Name: John Forrest _____________________ Title: President ____________________ By: Drilex Systems, Inc., a Texas corporation, Member /s/ JOHN FORREST By: ________________________ Name: John Forrest ______________________ Title: President _____________________ SHAREWELL, INC., a Delaware corporation /s/ JOHN FORREST By: _____________________________ Name: John Forrest ___________________________ Title: Chief Executive Officer __________________________ 4 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association /s/ MONA M. FOCH By: _____________________________ Name: Mona M. Foch ___________________________ Title: Vice President __________________________ 5 EX-10.9 3 STOCK OPTION PLAN EXHIBIT 10.9 Conformed Copy Including Amendment Effective March 12, 1997 DRILEX INTERNATIONAL INC. STOCK OPTION PLAN (AS AMENDED AND RESTATED MAY 7, 1996) I. PURPOSE OF THE PLAN The Drilex International Inc. Stock Option Plan (the "Plan") is intended to provide a means whereby certain employees of Drilex International Inc., a Delaware corporation (the "Company"), and its subsidiaries, and certain non- employee directors of the Company, may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its stockholders. The Plan was originally established March 31, 1994 as the Drilex Holding Corp. 1994 Stock Option Plan and was amended and restated in July 1994. Under the Plan, the Company may grant to certain employees (and, with respect to grants pursuant to Paragraph XII, shall grant to non-employee directors) the option ("Option") to purchase shares of Common Stock, $.01 par value, of the Company ("Stock"), as hereinafter set forth. Options granted under the Plan may be either incentive stock options, within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code") ("Incentive Stock Options"), or options which do not constitute Incentive Stock Options, provided, that options granted pursuant to Paragraph XII shall not constitute Incentive Stock Options. II. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") of two or more directors of the Company appointed by the Board of Directors of the Company (the "Board"). Each member of the Committee shall be a "disinterested person" within the meaning of Rule 16b-3(c) under the Securities Exchange Act of 1934, as amended (the "1934 Act"). Subject to the terms of this Plan (including, without limitation, the provisions governing participation in this Plan by non- employee directors), the Committee shall have sole discretion and authority to select the individuals who are to be granted Options from among those eligible hereunder and to establish the number of shares which may be issued under each Option. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations, consistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. The Committee may, in its discretion, provide for the extension of the exercisability of an Option or Stock Appreciation Rights (as defined herein) (an Option, Stock Appreciation Rights or any combination thereof being referred to at times herein as an "Award"), accelerate the vesting or exercisability of an Award, eliminate or make less restrictive any restrictions contained in an Award, waive any restriction or other provision of this Plan or an Award or otherwise amend or modify an Award in any manner that is either (i) not adverse to the optionee holding such Award or (ii) consented to by such optionee. The Committee may correct any defect or supply any omission or reconcile any inconsistency in this Plan or in any Award in the 1 manner and to the extent the Committee deems necessary or desirable to carry it into effect. Any decision of the Committee in the interpretation and administration of this Plan shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. No member of the Committee or officer of the Company to whom it has delegated authority shall be liable for anything done or omitted to be done by him or her, by any member of the Committee or by any officer of the Company in connection with the performance of any duties under this Plan, except for his or her own willful misconduct or as expressly provided by statute. III. OPTION AGREEMENTS Each Option shall be evidenced by an Option Agreement and shall contain such terms and conditions, and may be exercisable for such periods and upon such events, as may be approved by the Committee, subject to the terms of this Plan. The terms and conditions of the respective Option Agreements need not be identical. Specifically, an Option Agreement may provide for the surrender, in whole or in part, of the right to purchase shares under the Option in return for a payment in cash or shares of Stock or a combination of cash and shares of Stock equal in value to the excess of the fair market value of the shares with respect to which the right to purchase is surrendered over the option price therefor ("Stock Appreciation Rights"), on such terms and conditions as the Committee in its sole discretion may prescribe; provided, however, that, except as provided in subparagraph VIII(c) hereof, the Committee shall retain final authority (i) to determine the form in which payment of Stock Appreciation Rights will be made or (ii) to approve an election by an optionee to receive cash in whole or in part in settlement of Stock Appreciation Rights. Stock Appreciation Rights as provided herein may be granted at the time an Option is granted or at any time or from time to time thereafter. Moreover, an Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Stock (plus cash if necessary) having a fair market value equal to such option price. For all purposes under the Plan, the fair market value of a share of Stock on a particular date shall mean (i) if the shares of Stock are listed on a national securities exchange, the mean between the highest and lowest sales price per share of Stock on the consolidated transaction reporting system for the principal such national securities exchange on that date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported, (ii) if the shares of Stock are not so listed but are quoted in the NASDAQ National Market (or any successor to such market), the mean between the highest and lowest sales price per share of Stock on the NASDAQ National Market on that date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported or (iii) if the Stock is not so listed or quoted, the mean between the closing bid and asked price on that date, or, if there are no quotations available for such date, on the last preceding date on which such quotations shall be available, as reported by NASDAQ, or, if not reported by NASDAQ, by the National Quotation Bureau, Inc. In the event Stock is not listed or quoted at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate. Each Option and all rights granted thereunder shall not be transferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and shall be exercisable during the 2 optionee's lifetime only by the optionee or the optionee's guardian or legal representative. Notwithstanding anything herein to the contrary, no optionee may be granted, during any year, awards consisting of Options or Stock Appreciate Rights exercisable for more than 200,000 shares of Stock. IV. ELIGIBILITY OF OPTIONEE Options may be granted only to (i) individuals who are full-time or part- time employees (including officers and directors who are also full-time or part- time employees) of the Company or any subsidiary corporation (as defined in section 424 of the Code) of the Company at the time the Option is granted (subject to any limitation on the grant of Incentive Stock Options to part-time employees imposed by the Code) and (ii) pursuant to Paragraph XII only, individuals who are directors of the Company and who are not employees of the Company or of any subsidiary corporation of the Company (as defined in Section 424 of the Code) (each such individual described in this clause (ii) being referred to as a "non-employee director"). Options may be granted to the same individual on more than one occasion. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of section 422(b)(6) of the Code, unless (x) at the time such Option is granted the option price is at least 110% of the fair market value of the Stock subject to the Option and (y) such Option by its terms is not exercisable after the expiration of five years from the date of grant. To the extent that the aggregate fair market value (determined at the time the respective Incentive Stock Option is granted) of stock with respect to which Incentive Stock Options are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such excess Incentive Stock Options shall be treated as options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of an optionee's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the optionee of such determination as soon as practicable after such determination. V. SHARES SUBJECT TO THE PLAN The aggregate number of shares which may be issued under Options granted under the Plan shall not exceed 440,000 shares of Stock, which shall be the limitation applicable after taking into account the Stock split approved by the Board of Directors of the Company on May 7, 1996 (the "Stock Split"). Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Options at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. Should any Option hereunder expire or terminate prior to its exercise in full, the shares theretofore subject to such Option may again be subject to an Option granted under the Plan to the extent permitted under Rule 16b-3. The 3 aggregate number of shares which may be issued under the Plan shall be subject to adjustment in the same manner as provided in Paragraph VIII hereof with respect to shares of Stock subject to Options then outstanding. Exercise of an Option in any manner, including an exercise involving a Stock Appreciation Right, shall result in a decrease in the number of shares of Stock which may thereafter be available, both for purposes of the Plan and for sale to any one individual, by the number of shares as to which the Option is exercised. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option. VI. OPTION PRICE The purchase price of Stock issued under each Option shall be determined by the Committee (except with respect to options granted pursuant to Paragraph XII), but (i) in the case of an Incentive Stock Option, such purchase price shall not be less than the fair market value of Stock subject to the Option on the date the Option is granted and (ii) in the case of an Option that does not constitute an Incentive Stock Option and is not granted pursuant to Paragraph XII, such purchase price shall not be less than 50% of the fair market value of Stock subject to the Option on the date the Option is granted, and (iii) in the case of an Option granted pursuant to Paragraph XII, such purchase price shall be as set in Paragraph XII, but in no event shall any such purchase price be less than the par value of the Stock. VII. TERM OF PLAN The Plan became effective on March 31, 1994, the date of its adoption by the Board, and was approved by the stockholders of the Company within twelve months thereafter. Except with respect to Options then outstanding, if not sooner terminated under the provisions of Paragraph IX, the Plan shall terminate upon and no further Options shall be granted after the expiration of ten years from the date of its adoption by the Board. VIII. RECAPITALIZATION OR REORGANIZATION a. The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities ahead of or affecting stock or rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. b. The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option theretofore granted, the Company shall effect a subdivision or stock split or consolidation of shares of Stock or the 4 payment of a stock dividend on Stock without receipt of consideration by the Company, the number of shares of Stock with respect to which such Option may thereafter be exercised (i) in the event of an increase in the number of outstanding shares, shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares, shall be proportionately reduced, and the purchase price per share shall be proportionately increased. c. If the Company recapitalizes, or reclassifies its capital stock, or otherwise changes or reorganizes its capital structure (a "recapitalization"), thereafter upon any exercise of an Option theretofore granted the optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock then covered by such Option, the number and class of shares of stock and securities to which the optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the optionee had been the holder of record of the number of shares of Stock then covered by such Option. If (i) the Company shall not be the surviving entity in any merger or consolidation (or survives only as a subsidiary of an entity other than a previously wholly owned subsidiary of the Company), (ii) the Company sells, leases or exchanges (or agrees to sell, lease or exchange) all or substantially all of its assets to any other person or entity (other than a wholly owned subsidiary of the Company), (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act (other than DRLX Partners, L.P. or its partners or any group including DRLX Partners, L.P. or its partners), acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a "Corporate Change"), then (except with respect to Options granted pursuant to Paragraph XII) effective as of a date (selected by the Committee) within (a) ten days after the approval by the stockholders of the Company of such merger, consolidation, sale, lease or exchange of assets or dissolution or such election of directors or (b) thirty days of such change of control referred to in clause (iv) above, the Committee, acting in its sole discretion without the consent or approval of any optionee, shall effect one or more of the following alternatives, which may vary among individual optionees: (1) accelerate the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised Options and all rights of optionees thereunder shall terminate, (2) require the mandatory surrender to the Company by selected optionees of some or all of the outstanding Options held by such optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such Options and cause the Company to pay to each optionee an amount of cash per share equal to the excess of the amount calculated in Subparagraph (d) below (the "Change of Control Value") of the shares subject to such Option over the exercise price(s) under such Options for such shares, (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change (provided, however, that the 5 Committee may determine in its sole discretion that no adjustment is necessary to Options then out standing) or (4) provide that thereafter upon any exercise of an Option theretofore granted the optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock then covered by such Option, the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets or dissolution if immediately prior to such merger, consolidation or sale of assets or dissolution the optionee had been the holder of record of the number of shares of Stock then covered by such Option. If a Corporate Change occurs, then (x) on the date of approval by the stockholders of the Company of such merger, consolidation, sale, lease or exchange of assets or dissolution or such election of directors or (y) on the date of such change of control referred to in clause (iv) above, all Options granted pursuant to Paragraph XII shall be mandatorily surrendered to the Company (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of the date specified in clause (x) or (y) above, as applicable, and such Options shall thereupon automatically be canceled and the Company shall pay to each optionee an amount of cash per share equal to the excess of the Change of Control Value of the shares subject to such Option over the exercise price(s) under such Options for such shares. d. For the purposes of clause (2) and the last sentence in Subparagraph (c) above, the "Change of Control Value" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to stockholders of the Company in any such merger, consolidation, sale of assets or dissolution transaction, (ii) the per share price offered to stockholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the fair market value per share of the shares into which such Options being surrendered are exercisable, as determined by the Committee as of the date determined by the Committee (or required by the last sentence in Subparagraph (c) above, as the case may be) to be the date of cancellation and surrender of such Options. In the event that the consideration offered to stockholders of the Company in any transaction described in this Subparagraph (d) or Subparagraph (c) above consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. e. Any adjustment provided for in Subparagraphs (b) or (c) above shall be subject to any required stockholder action. f. Except as hereinbefore expressly provided, (i) the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, (ii) the payment of a dividend in property other than Stock or (iii) the occurrence of any similar transaction, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options theretofore granted or the purchase price per share, unless otherwise determined by the Board in its sole discretion. 6 IX. AMENDMENT OR TERMINATION OF THE PLAN The Board of Directors of the Company may amend, modify, alter, suspend or terminate this Plan, except that (a) no amendment or alteration that would impair the rights of any optionee under any Option that he has been granted shall be made without his consent, (b) no amendment or alteration shall be effective prior to approval by the Company's stockholders to the extent such approval is then required pursuant to Rule 16b-3 (or any successor provision) under the 1934 Act in order to preserve the applicability of any exemption provided by such rule to any Option then outstanding (unless the holder of such Option consents) or to the extent stockholder approval is otherwise required by Section 422 of the Code or other applicable legal requirements, and (c) subparagraph XII(a) and XII(c) shall not be amended more than once every six months to the extent such limitation is required by Rule 16b-3(c)(2)(ii) (or any successor provision) under the 1934 Act as then in effect. X. SECURITIES LAWS a. The Company shall not be obligated to issue any Stock pursuant to any Option granted under the Plan at any time when the shares covered by such Option have not been registered under the Securities Act of 1933 and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance and sale of such shares. b. It is intended that the Plan and any grant of an Option made to a person subject to Section 16 of the 1934 Act meet all of the requirements of Rule 16b-3 thereunder. If any provision of the Plan or any such Option would disqualify the Plan or such Option under, or would otherwise not comply with, Rule 16b-3, such provision or Option shall be construed or deemed amended to conform to Rule 16b-3. XI. WITHHOLDING AND CASH BONUSES Except with respect to Options granted pursuant to Paragraph XII, the Committee may permit an optionee to elect (which election shall be subject to the Committee's sole discretion to consent to or disapprove of, shall be irrevocable and, if the optionee is subject to Section 16 of the 1934 Act, shall be subject to such administrative rules as the Committee shall determine to assure compliance with Rule 16b-3 under the 1934 Act) to deliver to the Company (or have the Company withhold upon exercise of an Option) such shares of Stock as the Company may require to meet its obligation under applicable tax laws and regulations to the extent the exercise of an Option or the disposition of shares of Stock acquired by exercise of an Option results in compensation income to the optionee for federal or state income tax purposes. Except with respect to Options granted pursuant to Paragraph XII, the Committee may, at any time and in its discretion, grant to any optionee whose Option is not an Incentive Stock Option (or whose Incentive Stock Option fails to quality for the 7 favorable tax treatment afforded to Incentive Stock Options) the right to receive, at such time and in such amounts as determined by the Committee, a cash amount ("Cash Award") which is intended to reimburse the optionee for (i) all or a portion of the federal, state and local income taxes imposed upon such optionee as a consequence of the exercise for Stock of such Option (or Stock Appreciation Right), or as a consequence of a disqualifying disposition of Stock obtained upon exercise of an Incentive Stock Option, or of the Committee's taking any action permitted under this Plan (including the receipt of the Cash Award) and/or (ii) all or a portion of an assumed interest cost for borrowing the amount of such taxes not reimbursed by the Company during the period prior to the sale of the Stock received upon exercise of the Option (or Stock Appreciation Right). XII. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS Notwithstanding any other provision of this Plan, non-employee directors shall participate in this Plan only to the extent set forth in this Paragraph XII. a. Automatic Grant of Options. Each non-employee director elected by stockholders of the Company or appointed by the Board of Directors to the Board of Directors, who has not previously received, at any time since the adoption of the Plan, a grant under this Section XII of the Plan, shall automatically receive, as of the date of such election or appointment, as the case may be, the grant of an Option (which shall not be an Incentive Stock Option) to purchase 3,620 shares of Stock, taking into account the Stock Split. Options granted to non-employee directors shall become exercisable in installments of one-third of the shares of Stock subject to the Option on each of the first three anniversaries of the date of grant. b. Term. The term of each Option granted to a non-employee director shall be ten years from its date of grant, unless sooner terminated in accordance with Subparagraph XII (d) below. c. Option Price. The purchase price of Stock under each Option granted to a non-employee director shall be the fair market value of the Stock subject to the Option on the date the Option is granted, or such price as is more specifically described in Subparagraph XII(a). d. Exercise After Death or Other Termination. Each Option granted to a non-employee director may be exercised only by such director during such director's lifetime and while such director remains a member of the Board, except that (i) if a non-employee director ceases to be a member of the Board by reason of disability (within the meaning of section 22(e)(3) of the Code), such non- employee director's Option may be exercised by such non-employee director (or his or her estate or the person who acquires such Option by will or the laws of descent and distribution or otherwise by reason of the death of such non- employee director) at any time during the period of one year following such cessation, but only as to the number of shares such director was entitled to purchase under such Option as of the date such director ceased to be a member of the Board; 8 (ii) if a non-employee director dies while a member of the Board, such non- employee director's estate, or the person who acquires such non-employee director's Option by will or the laws of descent and distribution or otherwise by reason of the death of such non-employee director, may exercise such Option at any time during the period of one year following the date of such non- employee director's death, but only as to the number of shares such director was entitled to purchase under such Option as of the date of such director's death; and (iii) if a non-employee director ceases to be a member of the Board for any reason other than as described in clauses (i) or (ii) above, unless such non-employee director voluntarily resigns his directorship without the written consent of a majority of the remaining members of the Board or is removed from the Board by the stockholders of the Company, such non-employee director's Option may be exercised by such director at any time during the period of three months following such cessation, or by such director's estate (or the person who acquires such Option by will or the laws of decent and distribution or otherwise by reason of the death of such director) during a period of one year following such director's death if such director dies during such three-month period, but in each case only as to the number of shares such director was entitled to purchase under such Option as of the date such director ceases to be a member of the Board. In the event that a non-employee director voluntarily resigns his directorship without the written consent of a majority of the remaining members of the Board or is removed by the stockholders of the Company, any unexercised Options held by such director on the date of such resignation or removal, as the case may be, shall be forfeited as of such date and thereafter shall be unexercisable. No such Option shall be exercisable in any event after the expiration of ten years from the date of grant thereof. e. Agreement in Writing. Each Option granted to a non-employee director shall be evidenced by an Option Agreement consistent with the terms and conditions of the Plan (including this Article XII). 9 NON-EMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT AGREEMENT made as of the ____ day of ___________, 199__, between Drilex International Inc., a Delaware corporation (the "Company") and ____________________ ("Director"), a non-employee director of the Company. To carry out the purposes of the DRILEX INTERNATIONAL INC. STOCK OPTION PLAN (as amended and restated, and as it may be further amended from time to time, the "Plan"), by affording Director the opportunity to purchase shares of Stock (as defined in the Plan) of the Company, and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Director hereby agree as follows: a. Grant of Option. The Company hereby irrevocably grants to Director the right and option ("Option") to purchase all or any part of an aggregate of _____________ shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. This Option shall not be treated as an incentive stock option within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). b. Purchase Price. The purchase price of Stock purchased pursuant to the exercise of this Option shall be $___ per share, subject to adjustment as set forth herein. c. Exercise of Option. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Chief Executive Officer, at any time and from time to time after the date of grant hereof, but, except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares offered by this Option determined by the number of full years from the date of grant hereof to the date of such exercise, in accordance with the following schedule: PERCENTAGE OF SHARES THAT MAY NUMBER OF FULL YEARS BE PURCHASED ------------------------ ------------------------- Less than one year 0% 1 year 33-1/3% 2 years 66-2/3% 3 years or more 100% This Option is not transferable by Director otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and may be exercised only 10 by Director during Director's lifetime and while Director remains a member of the Board of Directors of the Company, except that: (a) if Director ceases to be a member of the Board of Directors of the Company by reason of disability (within the meaning of section 22(e)(3) of the Code), this Option may be exercised by Director (or Director's estate or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director) at any time during the period of one year following such cessation, but only as to the number of shares Director was entitled to purchase hereunder as of the date Director ceases to be a member of the Board of Directors of the Company; (b) if Director dies while a member of the Board of Directors of the Company, Director's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director, may exercise this Option at any time during the period of one year following the date of Director's death, but only as to the number of shares Director was entitled to purchase hereunder as of the date of Director's death; and (c) if Director ceases to be a member of the Board of Directors of the Company for any reason other than as described in clauses (a) or (b) above, unless Director voluntarily resigns his directorship without the written consent of a majority of the remaining members of the Board of Directors of the Company or is removed from such Board of Directors by the stockholders of the Company, this Option may be exercised by Director at any time during the period of three months following such cessation, or by Director's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director) during a period of one year following Director's death if Director dies during such three-month period, but in each case only as to the number of shares Director was entitled to purchase hereunder as of the date Director ceases to be a member of the Board of Directors of the Company. In the event that Director voluntarily resigns his directorship without the written consent of a majority of the remaining members of the Board of Directors of the Company or is removed by the stockholders of the Company, any unexercised portion of this Option held by Director on the date of such resignation or removal, as the case may be, shall be forfeited as of such date and thereafter shall be unexercisable. This Option shall not be exercisable in any event after the expiration of ten years from the date of grant hereof. The purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise in cash (including check, bank draft or money order payable to the order of the Company). Director shall exercise this Option for whole shares of Stock only. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to Director, Director (or the person permitted to exercise this Option in the event of Director's death) shall not be or have any of the rights or privileges of a stockholder of the Company with respect to shares acquirable upon an exercise of the Option. 11 d. Withholding of Tax. To the extent that the exercise of this Option results in compensation income to Director for federal or state income tax purposes, Director shall deliver to the Company at the time of such exercise such amount of money as the Company may require to meet its obligation under applicable tax laws or regulations, and, if Director fails to do so, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to Director any tax required to be withheld by reason of such resulting compensation income. e. Status of Stock. If the shares of Stock acquirable upon the exercise of this Option have not been registered under the Securities Act of 1933, as amended (the "Act"), the Company will not issue such shares unless the holder of the Option provides the Company with a written opinion of legal counsel, who shall be satisfactory to the Company, addressed to the Company and satisfactory in form and substance to the Company's counsel, to the effect that the proposed issuance of such shares to such Option holder may be made without registration under the Act. In the event exemption from registration under the Act is available upon an exercise of this Option, Director (or the person permitted to exercise this Option in the event of Director's death), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws. Director agrees that the shares of Stock which Director may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. In addition, Director agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Company deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option. f. Board of Directors. Director understands and agrees that nothing contained in this Agreement shall be deemed to confer on any person any rights other than as expressly provided herein, including but not limited to any right to continue to be nominated to, or to serve as a member of, the Board of Directors of the Company, and acknowledges and agrees that neither the execution of this Agreement nor any acquisition of Stock by Director creates any obligation whatsoever by any person to nominate or vote for Director (or refrain from removing Director) as a member of the Board of Directors of the Company. g. Binding Effect. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Director. 12 h. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Director has executed this Agreement, all as of the day and year first above written. DRILEX INTERNATIONAL INC. By: ------------------------------ Name: ---------------------------- Title: --------------------------- DIRECTOR Name: ---------------------------- 13 EX-10.11 4 STOCK REPURCHASE AND PROM NOTE EXHIBIT 10.11 STOCK REPURCHASE AND PROMISSORY NOTE REPAYMENT AGREEMENT AND GENERAL RELEASE This STOCK REPURCHASE AND PROMISSORY NOTE REPAYMENT AGREEMENT AND GENERAL RELEASE (this "Agreement"), dated as of January 31, 1997, among Drilex International Inc., a Delaware corporation (formerly Drilex Holdings Corp.) (the "Company"), Cobb Directional Drilling Company, L.L.C., a Delaware limited liability company ("Cobb LLC"), Drilex Systems, Inc., a Texas corporation ("DSI" and, together with the Company and Cobb LLC, the "Drilex Parties"), Posi-Trak Mud Motors, Inc., a Louisiana corporation ("Posi-Trak"), Cobb Directional Drilling Company, Inc., a Louisiana corporation ("Cobb Inc."), and Archie A. Cobb, III ("Cobb" and, together with Posi-Trak and Cobb Inc., the "Cobb Parties"), W I T N E S S E T H: WHEREAS, pursuant to an Asset Purchase Agreement dated as of September 30, 1994 (the "Asset Purchase Agreement") among the Company, Cobb LLC, Cobb Inc., Posi-Trak and Cobb, Posi-Trak acquired 133,333 shares of Common Stock, par value $.01 per share, of the Company (the "Initial Shares"); WHEREAS, pursuant to the Asset Purchase Agreement, the Company issued a promissory note payable to Posi-Trak in the aggregate principal amount of $1,333,340.00 (the "Original Note"); WHEREAS, pursuant to the Asset Purchase Agreement, Cobb LLC and Cobb entered into an Employment Agreement dated as of September 30, 1994 (the "Employment Agreement"); WHEREAS, pursuant to the Asset Purchase Agreement, the Company and Posi- Trak entered into a Stockholders' Agreement dated as of September 30, 1994 (the "Stockholders' Agreement"); WHEREAS, pursuant to a Stock Repurchase Agreement dated as of March 23, 1995 (the "Stock Repurchase Agreement"), among the Company, Posi-Trak and Cobb, the Company repurchased 80,000 of the Initial Shares; WHEREAS, pursuant to a Stock Purchase Agreement dated as of March 23, 1995 (the "Stock Purchase Agreement"), by and among the Company, DSI, Cobb Inc. and Cobb, the Company issued a promissory note payable to Cobb Inc. in the original aggregate principal amount of $1,000,000 (the "Amortizing Note"); WHEREAS, as a result of the stock split effected May 16, 1996, the 53,333 Initial Shares not repurchased from Posi-Trak pursuant to the Stock Repurchase Agreement now constitute 96,523 shares of Common Stock; and -1- WHEREAS, the parties to this Agreement mutually desire that, among other things, (i) the Company prepay the outstanding principal amount of each of the Original Note and the Amortizing Note, together with interest accrued and unpaid thereon through the Closing (as hereinafter defined), respectively, (ii) the Company purchase the 96,523 shares of Common Stock held by Posi-Trak (the "Shares"), (iii) the employment of Cobb with Cobb LLC, the Company or any other affiliate of the Company, be terminated and (iv) the Non-Competition Period (as defined in the Employment Agreement) be reduced to two years; NOW, THEREFORE, in consideration of the premises and of the respective representations, warranties, covenants, agreements and conditions contained herein, the parties hereto hereby agree as follows: ARTICLE I PURCHASE AND SALE OF THE SHARES 1.1 The Sale. Upon the terms and subject to the conditions of this Agreement, at the Closing, Posi-Trak will sell, assign, transfer and deliver the Shares to the Company, and the Company will purchase and acquire the Shares from Posi-Trak. 1.2 Purchase Price. The aggregate purchase price for the Shares (the "Purchase Price") is $1,303,061.00 to be paid to Posi-Trak against delivery of the Shares, which payment shall be offset by the amount of $313,665.00, in consideration of the amendment of the Employment Agreement provide for in Section 3.2 hereof; all in accordance with Article VI hereof. ARTICLE II PREPAYMENT OF THE NOTES 2.1 Prepayment of the Original Note. Upon the terms and subject to the conditions of this Agreement, at the Closing, the Company will pay $1,341,267.00 to Posi-Trak in accordance with Article VI hereof, in full satisfaction of the outstanding principal of the Original Note and interest accrued but unpaid thereon, against delivery of the Original Note, and Cobb will accept such prepayment. 2.2 Prepayment of the Amortizing Note. Upon the terms and subject to the conditions of this Agreement, at the Closing, the Company will pay $419,337.00 to Cobb Inc. in accordance with Article VI hereof, in full satisfaction of the outstanding principal of the Amortizing Note and interest accrued but unpaid thereon, against delivery of the Amortizing Note, and Cobb will accept such prepayment. 2.3 Termination of Security Agreements. Upon the terms and subject to the conditions of this Agreement, at the Closing, the Security Agreement dated as of September 30, 1994, made by the Company to Posi-Trak (the "First Security Agreement") will terminate. Upon -2- the terms and subject to the conditions of this Agreement, at the Closing, Posi- Trak will release and deliver the certificates representing the Pledged Shares and any other Pledged Collateral (each as defined in the First Security Agreement). Upon the terms and subject to the conditions of this Agreement, at the Closing, the Security Agreement dated as of March 23, 1995, made by the Company to Cobb Inc. (the "Second Security Agreement") will terminate. Upon the terms and subject to the conditions of this Agreement, at the Closing, Posi-Trak will release and deliver the certificates representing the Pledged Shares and any other Pledged Collateral (each as defined in the Second Security Agreement). ARTICLE III EMPLOYMENT MATTERS 3.1 Termination of Employment. Upon the terms and subject to the conditions of this Agreement, effective January 31, 1997, Cobb's employment with Cobb LLC, the Company or any other affiliate of the Company, is deemed to be terminated pursuant to Section 4(d) (Termination by Employee) of the Employment Agreement. 3.2 Amendment of Employment Agreement. Upon the terms and subject to the conditions of this Agreement, the Non-Competition Period as referenced in Section 7 of the Employment Agreement shall be reduced from five years to two years, with the date of termination of Cobb's employment for such purpose to be deemed to be January 31, 1997. 3.3 Waiver and Release. In consideration of Company's payment pursuant hereto the receipt and sufficiency of which are hereby acknowledged, Cobb hereby releases and forever discharges the Drilex Parties and the officers, directors, agents, servants, and employees of the foregoing, their successors, assigns, and insurers, and their parents, subsidiaries, and affiliates, and any and all other persons, firms, organizations, and corporations from any and all damage, losses, causes of action, expenses, demands, liabilities, and claims on behalf of himself, his heirs, executors, administrators, and assigns with respect to his employment relationship (including the Employment Agreement) other than benefits or matters to which Cobb is entitled under this Agreement. Further, Cobb and the Drilex Parties agree to terminate his employment relationship on the basis and terms described herein, and Cobb hereby accepts payment pursuant hereto in full settlement of all such damages, losses, causes of action, expenses, demands, liabilities, and claims he now has or may have with respect to such employment relationship. Such release includes, but is not limited to, claims arising under the Age Discrimination in Employment Act, the Older Workers' Benefit Protection Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Family and Medical Leave Act, the Texas Labor Code, any claims for breach of contract, tort or personal injury of any sort, and any claim under any other state or federal statute or regulation. Further, by accepting the payment pursuant hereto, Cobb agrees not to sue the Drilex Parties or the related persons and entities described above with respect to the matters released above other than to enforce rights or benefits -3- provided herein. Cobb affirms and agrees that his employment relationship will end as set forth above and waives all rights in connection with such relationship. Provided, however, that the parties to this Agreement agree that Cobb has the right to revoke or cancel this Agreement, by delivery of written notice to the Company within seven days after its execution by him (the "Recession Period"). In the event that this Agreement is cancelled or revoked, this Agreement shall be terminated and the Company shall have no obligation to furnish the payments described herein. Cobb acknowledges and represents that he has been advised in writing to consult with an attorney prior to signing this Agreement and has had an adequate opportunity to seek advice of his own choosing. Cobb acknowledges and represents that he understands that this Agreement will have the effect of knowingly and voluntarily waiving any action he might pursue, including breach of contract, personal injury, retaliation, discrimination on the basis of race, age, sex, national origin, or disability and any other claims arising prior to the date of this Agreement. ARTICLE IV SALE OF ANCILLARY ASSETS 4.1 The Sale. Upon the terms and subject to the conditions of this Agreement, the Company, Cobb LLC or DSI, as the case may be, will sell, transfer, convey, assign and deliver to Cobb and Cobb will acquire and purchase, the assets listed on Schedule 4.1 hereto (the "Ancillary Assets"), effective upon the respective dates set forth in such schedule or on such earlier date (but in no event prior to the Closing Date) as Cobb shall specify in writing, in a notice that is received by the Company at least three business days in advance of such proposed date (the "Asset Transfer Date"). 4.2 Purchase Price. Upon the terms and subject to the conditions of this Agreement, at the Closing, Cobb shall pay $23,695.00, in the aggregate, for the Ancillary Assets, in accordance with Article VI hereof. On the Asset Transfer Date, the Company, Cobb LLC or DSI, as the case may be, shall deliver certificates of title to Cobb in respect of the Ancillary Assets which are motor vehicles. 4.3 Taxes Upon Conveyance and Transfer. The Company shall pay all sales, use, transfer or similar taxes payable in connection with the sale, transfer and assignment of the Ancillary Assets to Cobb. ARTICLE V CLOSING The closing of the transactions contemplated hereby (the "Closing") will be held at the offices of Baker & Botts, L.L.P., Houston, Texas, on or before February 10, 1997 (but in no event prior to the expiration of the Recession Period as defined in Section 3.3 hereof), at 11:00 a.m., Houston time. The date of the Closing is referred to herein as the "Closing Date." Delivery to the -4- offices of Baker & Botts, L.L.P. of documents and other materials in connection with the Closing may be made in person or otherwise, in any event prior to 11:00 a.m. on the Closing Date. No party to this Agreement need be present at the Closing. ARTICLE VI PAYMENT At the Closing, and upon the terms and subject to the conditions of this Agreement, the Company shall pay to Cobb Inc. and Posi-Trak a total of $2,726,305.00, equal to the sum of: the net of the amounts referenced in Section 1.2, plus the amount referenced in Section 2.1, plus the amount referenced in Section 2.2, less the amount referenced in Section 4.2, by wire transfer of immediately available funds to an account designated by Cobb. Cobb shall make no payment pursuant to either of Sections 1.2 or 4.2, respectively, except by offset to the amounts payable by the Company as provided in Section 1.2 and the foregoing sentence, respectively. ARTICLE VII REPRESENTATIONS AND WARRANTIES OF COBB PARTIES The Cobb Parties, jointly and severally, represent and warrant to the Company: 7.1 Corporate Status and Good Standing. Each of Cobb Inc. and Posi-Trak is a corporation duly organized, validly existing and in good standing under the laws of Louisiana, with full corporate power and authority under its certificate or articles of incorporation and by-laws to own and lease its properties and to conduct business as the same exists, respectively. Each of Cobb Inc. and Posi- Trak is duly qualified to do business as a foreign corporation in all states in which the nature of its business requires such qualification and the failure to do so would have an adverse effect on either of Cobb Inc. and Posi-Trak, respectively. 7.2 Authorization. Each of Cobb Inc. and Posi-Trak has full corporate power and authority under its certificate or articles of incorporation and by- laws, and its board of directors and stockholders have taken all necessary action to authorize each such corporation, to execute and deliver this Agreement, to consummate the transactions contemplated herein and to take all actions required to be taken by it pursuant to the provisions hereof, and this Agreement constitutes the valid and binding obligation of each of Cobb Inc. and Posi-Trak, respectively, enforceable in accordance with its terms. 7.3 Non-Contravention. Neither the execution and delivery of this Agreement or any documents executed in connection herewith, nor the consummation of the transactions contemplated herein or therein, does or will violate, conflict with, result in breach of or require notice or consent under any law, the charter or bylaws of either of Cobb Inc. or Posi-Trak or any provision of any agreement or instrument to which any Cobb Party is a party. Cobb owns 100% of the outstanding securities of each of Cobb Inc. and Posi-Trak. -5- 7.4 Validity. There are no pending or threatened judicial or administration actions, proceedings or investigations which question the validity of this Agreement or any action taken or contemplated by any Cobb Party in connection with this Agreement. 7.5 Broker Involvement. No Cobb Party has hired, retained or dealt with any broker or finder in connection with the transactions contemplated by this Agreement. 7.6 Title to Shares. Posi-Trak owns beneficially and of record the Shares, free and clear of all liens, charges, encumbrances, rights of others, mortgages, pledges or security interests, and the Shares are not subject to any agreements or understandings with respect to the voting or transfer thereof other than as set forth in the Stockholders' Agreement. Except as set forth in the Stockholders' Agreement, there are no outstanding subscriptions, options, convertible securities, warrants or calls of any kind issued or granted by, or binding upon, Posi-Trak to purchase or otherwise acquire or to sell or otherwise dispose of any security of or equity interest in the Company. Posi-Trak has full legal right to sell, assign and transfer the Shares to the Company and will, upon delivery of a certificate or certificates representing such Shares to the Company pursuant to the terms hereof, transfer to the Company title to such Shares, free and clear of any liens, charges, encumbrances, rights of others, mortgages, pledges or security interests. 7.7 Title to Original Note. Posi-Trak owns beneficially and of record the Original Note, free and clear of all liens, charges, encumbrances, rights of others, mortgages, pledges or security interests. Posi-Trak has full legal right to sell, assign and transfer the Original Note to the Company and will, upon delivery of the Original Note to the Company pursuant to the terms hereof, transfer to the Company title to the Original Note, free and clear of any liens, charges, encumbrances, rights of others, mortgages, pledges or security interests. 7.8 Title to Amortizing Note. Cobb Inc. owns beneficially and of record the Amortizing Note, free and clear of all liens, charges, encumbrances, rights of others, mortgages, pledges or security interests. There are no outstanding subscriptions, options, convertible securities, warrants or calls of any kind issued or granted by, or binding upon, Cobb Inc. to purchase or otherwise acquire or to sell or otherwise dispose of any security of or equity interest in the Company. Cobb Inc. has full legal right to sell, assign and transfer the Amortizing Note to the Company and will, upon delivery of the Amortizing Note to the Company pursuant to the terms hereof, transfer to the Company title to the Amortizing Note, free and clear of any liens, charges, encumbrances, rights of others, mortgages, pledges or security interests. ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to each Cobb Party the following: 8.1 Corporate Status and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of Delaware, with full corporate -6- power and authority under its certificate or articles of incorporation and by- laws to conduct its business as the same exists. 8.2 Authorization. The Company has full corporate power and authority under its certificate or articles of incorporation and by-laws, and its board of directors has taken all necessary corporate action to authorize it, to execute and deliver this Agreement, to consummate the transactions contemplated herein and to take all actions required to be taken by it pursuant to the provisions hereof or thereof, and this Agreement constitutes the valid and binding obligation of the Buyer enforceable in accordance with its terms. 8.3 Non-Contravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated herein, does or will violate, conflict with, result in breach of or require notice or consent under any law, the charter or bylaws of the Company or any provision of any agreement or instrument to which the Company is a party. 8.4 Validity. There are no pending or threatened judicial or administrative actions, proceedings or investigations which question the validity of this Agreement or any action taken or contemplated by Company in connection with this Agreement. 8.5 Broker Involvement. The Company has not hired, retained or dealt with any broker or finder in connection with the transactions contemplated by this Agreement. 8.6 Title to Ancillary Assets. The Company, DSI or Cobb LLC, as the case may be, is the true and lawful owner of the Ancillary Assets, free and clear of any and all liens, encumbrances, mortgages, options, security interests, restrictions, liabilities, pledges and assignments of any kind other than Permitted Encumbrances (as defined herein), and the same has the full right to sell and transfer to Cobb good and marketable title to the Ancillary Assets, free and clear of any and all liens and encumbrances of any nature or description other than Permitted Encumbrances. The delivery to Cobb of the instruments of transfer of ownership contemplated by this Agreement will vest good and marketable title to Ancillary Assets in Cobb, free and clear of all liens and encumbrances of any nature or description other than Permitted Encumbrances. For purposes hereof, "Permitted Encumbrances" means liens for taxes not yet due and payable, materialmen's, mechanics', workmen's, repairmen's or other like liens arising against any of the Drilex Parties or the Ancillary Assets in the ordinary course of business, in each case with respect to obligations or claims which are either not delinquent or are being contested in good faith and by appropriate proceedings conducted with due diligence. ARTICLE IX ADDITIONAL AGREEMENTS AND COVENANTS 9.1 Prior Agreements Unaffected. The parties agree that, except as specifically provided herein, the Asset Purchase Agreement, the Stock Purchase Agreement, the Repurchase Agreement, and the Employment Agreement, and all documents executed in connection with each of the foregoing or that otherwise relate thereto shall not be affected, modified or changed by this -7- Agreement or the transactions contemplated hereby, and that, except as set forth herein, the rights of the parties thereunder shall be unaffected hereby. 9.2 Further Assurances. Each Cobb Party shall execute, acknowledge and deliver or cause to be executed, acknowledged and delivered to the Company or its affiliates such assignments or other instruments of transfer, assignment, release of liens and security interests, and conveyance, in form and substance satisfactory to counsel of the Company, as shall be necessary to vest in the Company all of the right, title and interest in and to each of the Shares, the Original Note and the Amortizing Note free and clear of all liens, charges, encumbrances, rights of others, mortgages, pledges or security interests. 9.3 Agreements with Respect to Stockholders' Agreement. The Company and Posi-Trak agree that (i) the sale of the Shares is in compliance with Section 7(i) and 2(vi) of the Stockholders' Agreement and (ii) the Stockholders' Agreement shall not be affected, modified or changed by this Agreement or the transactions contemplated hereby, and that the rights of the parties thereunder shall be unaffected hereby. 9.4 COBRA Matters. The Drilex Parties shall make available to Cobb, at Cobb's expense, health insurance continuation coverage to the extent required under Part 6 Title I of the Employee Retirement Income Security Act of 1974, as amended (COBRA). 9.5 Records. The Drilex Parties shall make available to Cobb, during normal business hours and at Cobb's expense, the records of Posi-Trak and Cobb Inc. acquired by the Drilex Parties in connection with the Asset Purchase Agreement, for a period of three (3) years following the Closing Date. 9.6 Insurance on Ancillary Assets. Between the date of this Agreement and the Asset Transfer Date with respect to each Ancillary Asset which is a motor vehicle, the Company shall use reasonable best efforts to maintain the automobile insurance in place on the date of this Agreement with respect to each such vehicle. ARTICLE X CONDITIONS TO CLOSING 10.1 Conditions Precedent to Obligations of the Drilex Parties. The obligation of the Drilex Parties to consummate the transactions contemplated by this Agreement is subject to the fulfillment, prior to or at the Closing, of each of the following conditions (any or all of which may be waived by the Drilex Parties): (a) all representations and warranties of the Cobb Parties contained in this Agreement shall be true and correct in all respects at and as of the time of the Closing with the same effect as though made again at, and as of, that time; -8- (b) the Cobb Parties shall have performed and complied in all material respects with all obligations and covenants required by this Agreement to be performed or complied with by the Cobb Parties prior to or at the Closing; (c) no provision of any applicable law or regulation shall prohibit, and there shall not be in effect any injunction or restraining order issued by a court of competent jurisdiction in any action or proceeding against, the consummation of this Agreement; and (d) The Company shall have received any and all necessary consents, including pursuant to its Restated and Amended Credit Agreement. 10.2 Conditions Precedent to Obligations of the Cobb Parties. The obligation of the Cobb Parties to consummate the sale under this Agreement is subject to the fulfillment, prior to or at the Closing, of each of the following conditions (any or all of which may be waived by the Cobb Parties): (a) all representations and warranties of the Company contained in this Agreement shall be true and correct in all respects at and as of the time of the Closing with the same effect as though made again at, and as of, that time; (b) the Company shall have performed and complied in all material respects with all obligations and covenants required by this Agreement to be performed or complied with by the Company prior to or at the Closing; (c) no provision of any applicable law or regulation shall prohibit, and there shall not be in effect any injunction or restraining order issued by a court of competent jurisdiction in any action or proceeding against, the consummation of this Agreement. ARTICLE XI NOTICES; MISCELLANEOUS 11.1 Expenses. The Drilex Parties and the Cobb Parties shall pay their own respective expenses, including the fees and disbursements of their respective counsel in connection with the negotiation, preparation and execution of this Agreement and the consummation of the transactions contemplated herein. 11.2 Entire Agreement. This Agreement, including all exhibits hereto, constitutes the entire agreement of the parties with respect to the subject matter hereof, and may not be modified, amended or terminated except by a written instrument specifically referring to this Agreement signed by all the parties hereto. 11.3 Waivers and Consents. All waivers and consents given hereunder shall be in writing. No waiver by any party hereto of any breach or anticipated breach of any provision hereof -9- by any other party shall be deemed a waiver of any other contemporaneous, preceding or succeeding breach or anticipated breach, whether or not similar. 11.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been received only if and when (i) personally delivered or (ii) on the third day after mailing, by United States mail, first class, postage prepaid, by certified mail return receipt requested, addressed in each case as follows (or to such other address as may be specified by like notice): (a) If to any Drilex Party, to: Drilex International Inc. 15151 Sommermeyer Houston, Texas 77041 Attention: John Forrest (b) If to any Cobb Party, to: Archie Cobb III P. O. Box 59 Milton, Louisiana 70558 11.5 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, legal representatives and assigns. No third party shall have any rights hereunder. No assignment shall release the assigning party. 11.6 Performance. Cobb agrees to cause each of Cobb Inc. and Posi-Trak to perform all their obligations and agreements under this Agreement, respectively, and hereby guarantees the payment and performance by each of Cobb Inc. and Posi- Trak, respectively of all such obligations and agreements. 11.7 Choice of Law; Section Headings. This Agreement shall be governed by the internal laws of the State of Texas (without regard to the choice of law provisions thereof). The section headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 11.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. -10- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. DRILEX INTERNATIONAL INC. /s/ G. BRUCE BROUSSARD __________________________________ By: G. Bruce Broussard Vice President--Finance and Administration COBB DIRECTIONAL DRILLING COMPANY, L.L.C. By: DRILEX INTERNATIONAL INC. /s/ G. BRUCE BROUSSARD By: _____________________________ G. Bruce Broussard Vice President--Finance and Administration DRILEX SYSTEMS, INC. /s/ G. BRUCE BROUSSARD By: __________________________________ Name: Title: POSI-TRAK MUD MOTORS, INC. /s/ ARCHIE A. COBB, III By: __________________________________ Archie A. Cobb, III -11- COBB DIRECTIONAL DRILLING COMPANY, INC. /s/ ARCHIE A. COBB, III By: __________________________________ Archie A. Cobb, III /s/ ARCHIE A. COBB, III __________________________________ Archie A. Cobb, III -12- Schedule 4.1 Asset Asset Transfer Date - ----- ------------------- 1985 Toyota Landcruiser March 1, 1997 1988 Jeep Wrangler March 1, 1997 Oakbourne Country Club Stock Closing Date 1994 GMC Surburban March 1, 1997 -13- EX-11.1 5 COMPUTATION OF NET INCOME EXHIBIT 11.1 DRILEX INTERNATIONAL INC. COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
TWELVE MONTHS ENDED DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- Net income................................. $ 3,042 $ 1,784 ========== Interest expense on Convertible Promissory Note, net of tax.............. 66 ---------- As adjusted for fully diluted computation.............................. $ 3,108 ========== Weighted average common shares out- standing................................. 5,558,347 4,004,682 Incremental effect of shares issued during the twelve months prior to the filing date of the Registration Statement................................ - 277,921 ---------- ----------- Incremental shares attributable to outstanding stock options and warrants................................. 153,355 128,357 ---------- ----------- Weighted average common and common equivalent shares outstanding............ 5,711,702 4,410,960 =========== Incremental shares attributable to conversion of Convertible Promissory Note.......................... 182,948 ---------- As adjusted for fully diluted computation.. 5,894,650 ========== Net income per common and common equivalent share: Primary.................................. $ .53 $ .40 ========== =========== Fully diluted............................ $ .53 ==========
Note: The computations in this exhibit are presented in accordance with Regulation S-K, Item 601(b)(11). Under the provisions of Accounting Principles Board Opinion No. 15, the fully diluted amounts are not presented in the Company's Consolidated Statement of Income, since such amounts are anti-dilutive. EX-23.1 6 CONSENT OF DELOITTE & TOUCHE EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement on Form S-8 (No. 333-08517) of Drilex International Inc. of our report dated February 11, 1997, appearing in this Annual Report on Form 10-K of Drilex International Inc. for the year ended December 31, 1996. Deloitte & Touche LLP Houston, Texas March 28, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,552 0 20,829 814 10,733 35,539 42,748 8,839 86,770 13,375 11,883 0 0 68 57,612 86,770 12,546 76,147 5,609 45,696 23,520 0 2,079 4,852 1,727 3,042 0 0 0 3,042 .53 .53
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