ITEM 1. BUSINESS
GENERAL
Dawson Production Services, Inc. (the "Company" or "Dawson") is a leading provider of a broad range of workover, liquid and production services used in the production of oil and gas. The Company's services are utilized by major oil and gas companies as well as independent producers to optimize performance of oil and gas wells. Dawson is currently the third largest provider of land based workover rigs in the United States.
The Company commenced operations in 1951. In 1982, under the direction of the current president, the Company initiated a strategy to expand and diversify the Company's workover rig services. At that time, the Company owned four workover rigs that were operated out of a single yard. In November 1994, the Company broadened the array of services that it provides by acquiring the liquid services and production services businesses of Well Solutions, Inc. (the "Well Solutions Acquisition") and expanded such business in July 1996 with the acquisition of Taylor Companies, Inc. (the "Taylor Acquisition") and in January 1997 with the acquisition of Mobley Company, Inc. (the "Mobley Acquisition"). In February 1997, the Company continued the growth by acquiring the stock of Pride Land Operations L.P. (the "Pride Acquisition"). The Taylor, Mobley and Pride Acquisitions (the "1997 Acquisitions") established the Company as one of the largest providers of services in the oil industry. In December 1997, the Company acquired Bobby's Hot Oil Service, Inc., Tubing Testers Corp. and Alamo Tubing Testers Corp. (collectively, the "Bobby's Acquisition"), and in January 1998, the Company acquired PetroStar Corporation of Louisiana (the "PetroStar Acquisition"). The Bobby's, PetroStar and other small acquisitions during fiscal year 1998 (the "1998 Acquisitions") continued the Company's growth with the addition of 26 workover rigs and other equipment. In addition, the Company expanded its services to include hot oil trucks. The Company believes that it generally has been successful in acquiring businesses and assets and subsequently reducing overhead, enhancing internal controls, improving marketing and related operations through management incentives and improving the utilization of its assets by redeploying equipment.
As a result of its acquisitions and certain corporate restructuring, the Company currently has several direct and indirect subsidiaries through which it conducts a significant portion of its operations. All of the assets are held in Dawson Production Partners, L.P., a Delaware limited partnership (the "Partnership"). All of the general and limited partnership interests in the Partnership are owned by three wholly owned corporate subsidiaries of Dawson Production Services; Dawson Production Management, Inc., a Delaware corporation, owns a 1.4% general partnership interest in the Partnership; Dawson Production Taylor, Inc., a Delaware corporation, owns a 8.85% limited partnership interest in the Partnership; and Dawson Production Acquisition Corp., a Delaware corporation owns the remaining 89.75% limited partnership interest in the Partnership. Dawson has the following additional wholly-owned subsidiaries: Dawson Production Services de Mexico, S.A. de C.V., and Ubicadora de Tecnicos S.A. de C.V., both of which are companies organized under the laws of Mexico.
BUSINESS STRATEGY
The Company's strategy emphasizes diversification and expansion through acquisitions and internal growth. In recent years, there has been significant industry consolidation activity in the Company's principal businesses. The Company has been an active participant in this industry consolidation and plans to continue to pursue strategic acquisitions of businesses and assets that enhance or expand its market presence or complement its existing businesses. The Company has expanded the range of services offered at its locations and continues to increase its presence, through redeployment of underutilized assets, within the geographic regions in which the Company operates. The Company believes that its ability to offer a wide range of services over a large operating base will provide it with a competitive advantage by allowing its customers to consolidate their procurement of workover, liquid and production services by utilizing fewer vendors. The Company believes that this consolidation may allow customers to lower their costs by streamlining production decisions and increasing operational efficiencies. The Company also believes that its strategy will allow it to take advantage of cross-marketing opportunities for its services and to appeal to a broader customer base by enhancing its position as a one-stop source for workover, liquid and production services.
The Company believes that the high quality of its equipment, employees and services combined with its favorable safety record enable it to maintain its position as a leader in its principal markets. In that regard, the Company has committed substantial capital to an ongoing workover rig refurbishment program to maintain the Company's equipment in good working condition. The Company has invested, and plans to continue to invest, in quality management and safety programs. The Company believes that many smaller competitors have not undertaken comparable maintenance or training programs and do not have the financial resources to enable them to do so. The Company believes that a number of its customers place significant importance on their contractors' safety records and quality management systems in their screening and selection processes, and that such factors will gain further importance in the future.
OVERVIEW OF SERVICES
WORKOVER RIG SERVICES
The Company provides workover rig services to oil and gas exploration and production companies through the use of mobile well servicing workover rigs together with crews of three to four workers. Additional equipment such as pumps, tanks, blowout preventers and power swivels are provided by the Company as may be required for a particular job. The Company also provides trucking services for moving large equipment to and from the job sites of its customers. The Company charges its customers an hourly rate for its workover rig services, which varies based on a number of considerations including market conditions in each region, the type of rig, the amount of ancillary equipment required and the necessary personnel. The Company gives its yard managers considerable flexibility to negotiate with customers and, through compensation arrangements, seeks to provide incentives to its managers to maximize both revenues and
profitability. For the fiscal year ended March 31, 1998, workover rig services contributed approximately 71% of the Company's revenues.
The Company operates 517 land workover rigs, two barge-mounted workover rigs and ancillary equipment from yards in Texas, Louisiana, California and New Mexico. The Company's land workover rigs are mobile units that generally operate within a radius of approximately 75 to 100 miles from their respective bases. Swab rigs are used for swabbing or cleaning wells at depths of up to approximately 16,000 feet. Pole rigs are used for swabbing and rod and tubing workovers and repairs on wells at depths of up to approximately 4,000 feet. Rigs having between 150 and 250 horsepower are used for services on wells to maximum depths of between 4,000 and 6,000 feet and work primarily on rod and tubing workovers and repairs. Rigs having between 251 and 350 horsepower are used for services on wells to maximum depths of between 10,000 and 12,000 feet and also work primarily on rod and tubing workovers and repairs. Rigs having between 351 and 550 horsepower are used for deeper workovers and more complicated procedures such as deepening of existing well bores, recompletions and complicated fishing operations. These rigs operate at maximum depths of between 16,000 and 18,000 feet. Rigs having between 551 and 750 horsepower are used in wells with maximum depths of approximately 20,000 feet. Rigs having between 751 and 1,000 horsepower are generally used for horizontal drilling or recompletion jobs and deep workovers at depths of up to approximately 25,000 feet. These rigs are almost always operated for continuous 24-hour periods as contrasted to the Company's other rigs that typically operate during daylight hours only.
The Company operates two barge-mounted workover rigs in the Louisiana inland waters. These rigs typically are outfitted by moving a land workover rig onto the barge, with operating crews housed on the barge, and have the capability to operate for continuous 24-hour periods. In addition to hourly charges for the workover rigs, when market conditions permit, the Company charges its customers for auxiliary equipment, travel time, mobilization and other related items.
Set forth below is certain information pertaining to the Company's land-based workover rigs.
MARCH 31, ------------------ DESCRIPTION 1997 1998 ------ ------ Swab ................................................... 19 19 Pole ................................................... 1 5 150-250 hp ............................................. 71 74 251-350 hp ............................................. 285 288 351-550 hp ............................................. 108 113 551-750 hp ............................................. 7 10 751-1,000 hp ........................................... 5 8 ------ ------ 496 517
Workover rig services are categorized by the type of job performed: completion, maintenance, workover, and plugging and abandonment and other workover.
COMPLETION SERVICES. Completion services prepare a newly drilled well for production. The completion process may involve selectively perforating the well casing to access producing
zones, stimulating and testing these zones and installing downhole equipment. The Company provides a workover rig to assist in this completion process. Newly drilled wells are frequently completed by well servicing rigs to minimize the use of higher cost drilling rigs. The completion process typically requires a few days to several weeks, depending on the nature and type of the completion, and generally requires additional auxiliary equipment.
The demand for well completion services is directly related to drilling activity levels, which are sensitive to expectations relating to and changes in oil and gas prices. During periods of weak drilling demand, drilling contractors frequently price well completion work competitively compared to a workover rig so that the drilling rig stays on the job. Thus, excess drilling capacity will serve to reduce the amount of completion work available to the well servicing industry.
MAINTENANCE SERVICES. Maintenance services are required on producing oil and gas wells to ensure efficient and continuous operation. These services consist of routine mechanical repairs necessary to maintain production from the well, such as repairing parted sucker rods or defective downhole pumps in an oil well or replacing defective tubing in a gas well. The Company provides the workover rigs, equipment and crews for these maintenance services. Many of these workover rigs also have pumps and tanks that can be used for circulating fluids into and out of the well. Maintenance jobs are often performed on a series of wells in proximity to each other and typically take less than 48 hours per well.
Maintenance services are generally required throughout the life of a well. The need for these services does not depend on the level of drilling activity and is generally independent of short-term fluctuations in oil and gas prices. Accordingly, maintenance services are generally the most stable type of workover rig services activity. The general level of maintenance, however, is affected by changes in the total number of producing oil and gas wells in the Company's geographic service area.
WORKOVER SERVICES. In addition to periodic maintenance, producing oil and gas wells occasionally require major repairs or modifications called "workovers." Workover services include extensions of existing wells to drain new formations either through deepening well bores or through drilling of horizontal laterals. In less extensive workovers, the Company's rigs are used to drill out plugs and packers in existing well bores to access previously bypassed productive zones. The Company's workover rigs are also used to convert producing wells to injection wells during enhanced recovery operations. Workover services also include major subsurface repairs such as casing repair or replacement, recovery of tubing and removal of foreign objects in the well bore. These extensive workover operations are normally performed by a workover rig with additional specialized auxiliary equipment, which may include rotary drilling equipment, mud pumps, mud tanks and blowout preventers, depending upon the particular type of workover operation. Most of the Company's workover rigs are designed and equipped to perform complex workover operations. A workover may last from a few days to several weeks.
The demand for workover services is more sensitive to expectations relating to and changes in oil and gas prices than the demand for maintenance services, but not as sensitive as the demand
for completion services. When oil and gas prices are low, there is little incentive to perform workovers on wells to increase production and well operators tend to defer workover services. As oil and gas prices increase, the level of workover activity tends to increase as operators seek to increase production by enhancing the efficiency of their wells.
PLUGGING AND ABANDONMENT SERVICES. Workover rigs are also used in the plugging and abandonment of oil and gas wells no longer capable of producing in economic quantities. The demand for well plugging services is not impacted significantly by levels of demand for oil and gas.
OTHER WORKOVER SERVICES. Other workover services include the use of hot oil trucks, hyperclean units, coil tubing units and other non-rig equipment. This equipment is used for various types of projects including hot oiling flow lines and casings, heating water for frac jobs and a variety of well cleaning services.
LIQUID SERVICES
The Company provides liquid services, which are comprised of vacuum truck services, frac tank rentals and salt water injection services. The Company uses its vacuum trucks, frac tanks and salt water injection wells to provide an integrated mix of liquid services to well site customers. For the fiscal year ended March 31, 1998, liquid services contributed approximately 21% of the Company's revenues.
VACUUM TRUCK SERVICES. The Company owns and operates 192 vacuum trucks. A vacuum truck is a tractor trailer with a fluid hauling capacity of 130 barrels. A large vacuum pump mounted on each truck extracts fluids from pits, tanks and other storage facilities. The vacuum trucks also are used for the following purposes: to transport water to fill frac tanks on well locations, including frac tanks provided by the Company and by others; to transport produced salt water to injection wells, including injection wells owned and operated by the Company; and to transport brine and other drilling fluids to and from well locations. In conjunction with the rental of its frac tanks, the Company generally uses its vacuum trucks to transport water for use in fracturing operations. Following completion of fracturing operations, the Company's vacuum trucks are used to transport salt water produced as a result of the fracturing operations from the well site to injection wells. Vacuum truck services are generally provided to oilfield operators within a 30-mile radius of the Company's nearest yard.
FRAC TANK RENTALS. The Company owns 698 frac tanks located primarily at the Company's yards in Bryan, Carthage, Giddings and Kilgore, Texas. Each frac tank can store up to 500 barrels of fluid and is used by oilfield operators to store various fluids at the well site, including water, drilling mud, acid and brine. The Company transports frac tanks on its trucks to well locations which are usually within a 30-mile radius of the Company's nearest yard. Frac tanks are used during all phases of the life of a producing well. The Company generally rents frac tanks at daily rates for a minimum of four days. A typical fracturing operation, absent complications, can be completed within four days using 20 to 100 frac tanks.
INJECTION WELL SERVICES. The Company owns or leases 22 injection wells that are authorized to dispose of salt water and incidental non-hazardous oil and gas wastes, each with an injection capacity of 2,000 to 21,000 barrels per day. The Company's injection wells are strategically located in close proximity to its customers' producing wells. These wells are utilized primarily to dispose of salt water produced from oil and gas wells. Most oil and gas wells ultimately produce varying amounts of salt water and, particularly in vertically fractured formations such as those common in the Austin Chalk trend, produce salt water at increasing rates throughout their productive lives. In addition, these wells are utilized for the disposal of incidental, non-hazardous oil and gas wastes. In Texas and Arkansas, oil and gas wastes and salt water produced from oil and gas wells are required by law to be disposed of in authorized facilities, including permitted injection wells. Injection wells are licensed by state authorities and are completed in permeable formations below the fresh water table.
The Company utilizes its injection wells primarily for the disposal of salt water and incidental, non-hazardous oil and gas waste transported from the well site by vacuum trucks owned and operated by the Company. Although the Company is authorized to inject salt water and non-hazardous oil and gas wastes transported by other licensed vacuum truck operators, the Company does not currently permit such uses by third parties. The Company also maintains separators at each of its injection wells permitting it to salvage residual crude oil, which is later sold for the account of the Company.
The Company's injection operations pose certain risks of environmental liability to the Company. Although the Company monitors the injection process, any leakage from the subsurface portions of the wells could cause degradation of fresh groundwater resources, potentially resulting in cancellation of operation of the well, fines and penalties from governmental agencies, expenditures for remediation of the affected resource, and liability to third parties for property damages and personal injuries. In addition, the sale by the Company of residual crude oil collected as part of the saltwater injection process could impose liability on the Company in the event the entity to which the oil was transferred fails to manage the material in accordance with applicable environmental health and safety laws.
PRODUCTION SERVICES
The Company provides production services, which are comprised of production testing services, slickline wireline services, fishing and rental tool services and pipe testing. For the fiscal year ended March 31, 1998, production services contributed approximately 8% of the Company's revenues.
PRODUCTION TESTING SERVICES. The Company owns 21 gas production testing units that are used to provide services to oil and gas wells located onshore and in inland waters. The Company performs production testing services for oil and gas producers primarily along the Texas Gulf Coast.
The Company's equipment includes several trailer-mounted manifolds, separators, heater treaters, sand separators, light generators and slickline wireline units. Manifolds are used to
reduce the flowing pressure of the well stream to a rate that will easily flow through the production testing equipment. After the appropriate well stream rate is achieved, a separator is used to divide the well stream into its respective components -- oil, gas and water. For gas wells, a heater is used to prevent the gas from freezing during flowbacks. Slickline wireline equipment generally is used to lower measurement equipment into a well for several days to retrieve data to determine the characteristics of the reservoir.
The Company uses its production testing units to perform deliverability tests required upon the initial completion of a well and periodically during the productive life of a gas well to determine the maximum production allowable under certain rules of the Texas Railroad Commission, the state oil and gas regulatory agency. In addition, these units are used to clean and test stimulated wells and to measure the pressure, volume and quality of gas and liquids produced by the well. These units also are used to determine the most efficient production flow rate, to run pressure build-up tests that measure the rate of increase of shut-in gas pressure to determine reservoir characteristics and to determine whether a producing formation has been damaged.
SLICKLINE WIRELINE SERVICES. The Company owns seven slickline wireline units. The mechanical downhole wireline or "slickline" services are used to simplify completion operations and in connection with regular maintenance on producing wells. In some cases, slickline wireline services may be used instead of workover rigs to provide workover services. By using slickline wireline services, workover services can be performed under 15,000 psi of pressure without shutting-in the well. The Company also provides slickline wireline consulting services where unusual conditions exist.
FISHING AND RENTAL TOOLS. The Company provides a complete line of cased hole fishing and rental tools to oilfield operators and well service companies from two yards in the Texas Panhandle. The Company's rental tool inventory includes both air compressor equipment, which is used in drilling and workover activities, and fishing tools, which are used to mill or retrieve loose or broken equipment or other material in the well bore or to free stuck pipe and other tools, such as slips, elevators and casing cutters. The Company rents the equipment to its customers at daily rates and, in the case of air compressors and fishing tools, generally conducts or supervises the operations.
PIPE TESTING. The Company operates 18 pipe testing units along the Texas Gulf Coast and Panhandle. The Company's testing equipment is used during completion and recompletion operations for leak detection in the internal pipe systems of oil and gas wells.
COMPETITION
The workover rig and production services industry is highly competitive and fragmented and includes several large companies and a number of small companies capable of competing effectively on a local basis. As a result of the Pride Acquisition, the Company is the third largest provider of workover rigs in the United States behind Key Energy Group, Inc. ("Key") and Pool Energy Services Co. ("Pool"). Pool and Key are the largest companies that currently compete
with the Company in providing workover rig and liquid services in the domestic well servicing markets. Pool and Key operate in multiple geographic regions and have more domestic workover rigs than the Company. In addition to these large companies, the Company has numerous regional competitors for each of the services it provides. The Company believes that it is competitive in terms of pricing, performance, equipment, safety, availability of equipment to meet customer needs and availability of experienced, skilled personnel in those areas in which it operates.
Excess capacity in the well servicing industry has resulted in severe price competition throughout much of the past decade. In the well servicing market, an important competitive factor in establishing and maintaining long-term customer relationships is having an experienced and skilled work force. In recent years, many of the Company's larger customers have placed an emphasis not only on pricing, but also on safety records and quality management systems of contractors. The Company believes that such factors will gain further importance in the future. The Company has directed substantial resources toward employee safety and quality management training programs as well as its employee review process. While the Company's efforts in these areas are not unique, many competitors, particularly small contractors, have not undertaken similar training programs for their employees. The Company expects competition and pricing pressures to continue in the foreseeable future.
CUSTOMERS
The Company has approximately 2,200 active customers. The Company's largest customer, Union Pacific Resources Company ("UPRC"), accounted for approximately 11.2% of the Company's revenues for the fiscal year ended March 31, 1998. The Company is required to maintain established levels of insurance and to indemnify UPRC against all losses arising in whole or in part from the Company's negligence, whether or not UPRC and its agents were contributorily negligent. While the Company believes that its relationship with UPRC is good, the loss of UPRC, or a significant reduction in business done with the Company by UPRC, if not offset by sales to new or existing customers, could have a material adverse effect on the Company's business, results of operations and prospects. No other customer accounted for more than 10% of the Company's revenues during the fiscal year ended March 31, 1998.
EMPLOYEES
As of May 5, 1998, the Company employed approximately 3,074 people, of whom approximately 2,554 were employed on an hourly basis. The Company's future success will depend partially on its ability to attract, retain and motivate qualified personnel. The Company is not a party to any collective bargaining agreements and has not experienced any strikes or work stoppages. The Company considers its relations with employees to be generally satisfactory.
OPERATING RISKS AND INSURANCE
The Company's operations are subject to hazards inherent in the oil and gas industry, such as blowouts, explosions, craterings, fires and oil spills, that can cause personal injury or loss of life,
damage to or destruction of property, equipment, the environment and marine life, and suspension of operations. In addition, claims for loss of oil and gas production and damage to formations can occur in the workover business. If a serious accident was to occur at a location where the Company's equipment and services are used, it could result in the Company being named as a defendant in lawsuits asserting potentially large claims.
Because the Company's vacuum truck and frac tank rentals involve the transportation of heavy equipment and materials, the Company may experience traffic accidents which may result in spills, property damage and personal injury. Despite the Company's efforts to maintain high safety standards, the Company from time to time has suffered losses in the past and anticipates that it could experience further losses in the future. Moreover, the frequency and severity of such incidents affect the Company's operating costs and insurability, and its relationship with customers, employees and regulators. Any significant increase in the frequency or severity of such incidents, or the general level of compensation awards with respect thereto, could adversely affect the cost of, or ability of the Company to obtain, workers' compensation and other forms of insurance, and could have other material adverse effects on the Company's financial condition and results of operations.
As a protection against operating hazards, the Company maintains broad insurance coverage, including physical damage, employer's liability, comprehensive commercial general liability and workers' compensation insurance. The Company believes that it is adequately insured for public liability and property damage to others with respect to its operations, and that its insurance coverage is comparable to that which is customary in the industry against such hazards. However, such insurance may not be sufficient to protect the Company against liability for all consequences of well disasters, extensive fire damage, damage to personal property, injuries to or deaths of persons or damage to the environment. In addition, certain insurance policies exclude coverage for damages resulting from environmental contamination. The Company also carries insurance to cover physical damage to or loss of certain of its workover rigs. No assurance can be given that the Company will be able to maintain the type and amount of coverage that it considers adequate at rates that it considers reasonable or that insurance will continue to be available on terms as favorable as the Company's existing arrangements.
In addition to insurance, the Company conducts training programs designed to promote the safe operation of all equipment and to minimize accidents occurring on job sites. The Company gives its managers and other employees incentives, through compensation arrangements, to take all reasonable steps possible to promote safety. The Company monitors safety closely and has carefully designed safety programs to reduce costs associated with accidents. However, there can be no assurance that the Company's insurance or safety programs will be adequate to protect against liability for accidents occurring on the job site or affecting the Company's equipment.
ENVIRONMENTAL REGULATION
Many of the Company's operations take place in or near ecologically sensitive areas, such as the Texas Gulf Coast and the Louisiana inland waters, as well as in states that stringently regulate environmental matters, such as California. In addition, the Company's operations
routinely involve the handling of significant amounts of waste materials, some of which are classified as hazardous substances. The Company's operations and facilities are thus subject to numerous local, state and federal environmental and public health and safety laws, rules and regulations, including laws concerning the containment and disposal of hazardous materials, oilfield waste and other waste materials, the use of underground storage tanks and the use of underground injection wells. The regulations applicable to the Company's operations include certain regulations controlling the discharge of hazardous or toxic materials into the environment, requiring removal or remediation of pollutants, requiring permits or licenses issued by regulatory agencies and imposing civil and criminal penalties for violations. Some of the statutory and regulatory programs that apply to the Company's operations also authorize private suits, the recovery of natural resource damages by the government, injunctive relief and cease and desist orders. Moreover, environmental laws typically expose the Company to "strict liability" rendering a person or entity liable for environmental damage without regard to negligence or fault on the part of such person or entity. As a result, the Company could be liable for cleanup costs, even if the situation resulted from previous acts by the Company that were lawful at the time or from the improper conduct of, or conditions caused by, previous property owners, lessees or other persons not associated with the Company. Environmental laws have become more stringent in recent years and are expected to become even more so in the future.
Cleanup costs associated with environmental claims or capital expenditures or increased operating costs associated with changes in environmental laws and regulations could be substantial and could have a material adverse effect on the Company's financial condition and results of operations. However, the cost of environmental compliance has not had any material adverse effect on the Company's operations, financial condition or competitive position in the past, and management is not currently aware of any situation or condition that it believes is likely to have any such material adverse effect or require any material capital expenditure in the foreseeable future. In addition to management personnel who are responsible for monitoring environmental compliance and arranging for remedial actions as required, the Company also employs from time to time outside experts to advise and assist the Company's environmental compliance efforts.
In addition to having a direct effect on the Company, local, state and federal environmental regulations also may negatively impact oil and gas exploration and production companies which in turn could have a material adverse effect on the Company. To the extent laws are enacted or other governmental action is taken that prohibits or restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and gas industry in general and the drilling industry in particular, the financial condition and results of operations of the Company could be adversely affected.
In this regard, RCRA, the principal federal statute governing the disposal of solid and hazardous wastes, includes a statutory exemption that allows oil and gas exploration and production wastes to be classified as nonhazardous waste. A similar exemption is contained in many of the state counterparts to RCRA, including the state statutes in Texas, New Mexico and Louisiana; however, there is no such exemption in the California statutes. If oil and gas exploration and production wastes were required to be managed and disposed of as hazardous waste, either as a result of changes in RCRA or the imposition of more stringent state regulations, the Company could be required to make significant unanticipated capital and operating expenditures or to cease or curtail certain operations. Further, if such wastes were required to be managed and disposed of as hazardous
waste, domestic oil and gas producers, including many of the Company's customers, could be required to incur substantial obligations with respect to such waste. Because of the potential impact on the Company's customers, any regulatory changes that impose additional restrictions or requirements on the disposal of oil and gas wastes could adversely affect demand for the Company's services.
SENIOR NOTES; SUBSIDIARY GUARANTEES
Terms used in this subheading as defined terms have the same meanings as set forth in the Indenture between the Company and its Subsidiary Guarantors, dated as of February 20, 1997, with U.S. Trust Company of Texas, N.A. as trustee, relating to the Company's 9 3/8% Senior Notes due 2007. Each of the Company's Significant Subsidiaries on the Issue Date, including those acquired in the Pride Acquisition, and each other Restricted Subsidiary that provides a guarantee under the Credit Facility (defined in the Indenture to include the Working Line which is in effect, and the Acquisition Line, which is not) became a Subsidiary Guarantor under the Indenture. Each Subsidiary Guarantor has unconditionally guaranteed on a senior basis, jointly and severally, the full and prompt performance of the Company's obligations under the Indenture and the Notes, including the payment of principal and interest on the Notes. The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee is limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. The terms of the Subsidiary Guarantees provide that, for purposes of such limitations and the applicable fraudulent conveyance laws, any indebtedness of a Subsidiary Guarantor incurred from time to time pursuant to the Credit Facility and secured by a perfected Lien on the assets of such Subsidiary Guarantor (assuming, for purposes of such determination, that the incurrence of any such indebtedness and the granting of any such security interest did not violate any such fraudulent conveyance laws) shall be deemed, to the extent of the value of the assets subject to such Lien, to have been incurred prior to the incurrence by such Subsidiary Guarantor of liability under its Subsidiary Guarantee.
The Indenture provides that no Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person) another Person (other than the Company or another Subsidiary Guarantor), whether or not affiliated with such Subsidiary Guarantor, unless (i) subject to the provisions of the following paragraph, the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) shall execute a Subsidiary Guarantee and deliver an opinion of counsel in accordance with the terms of the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; (iii) such Subsidiary Guarantor, or any Person formed by or
surviving any such consolidation or merger, would have Consolidated Net Worth (immediately after giving effect to such transaction), equal to or greater than the Consolidated Net Worth of such Subsidiary Guarantor immediately preceding the transaction; (iv) the Company would be permitted by virtue of the Company's pro forma Fixed Charge Coverage Ratio, immediately after giving effect to such transaction, to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the Indenture; and (v) such transaction does not violate certain other covenants described in the Indenture.
The Indenture provides that in the event of (i) the designation of any Subsidiary Guarantor as an Unrestricted Subsidiary or (ii) a sale or other disposition of all or substantially all of the property or assets of any Subsidiary Guarantor to a third party or an Unrestricted Subsidiary, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Subsidiary Guarantor, in either case, in a transaction or manner that does not violate any of the covenants in the Indenture, then such Subsidiary Guarantor (in the event of such a designation or a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Subsidiary Guarantor) or the Person acquiring the property (in the event of a sale or other disposition of all or substantially all of the properties or assets of such Subsidiary Guarantor) will be released from and relieved of any obligations under its Subsidiary Guarantee, PROVIDED that any Net Proceeds of such sale or other disposition are applied in accordance with certain covenants set forth in the Indenture, and PROVIDED, FURTHER, HOWEVER, that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests that secure, any other Indebtedness of the Company or its Restricted Subsidiaries shall also terminate upon such release, sale or disposition.
The Indenture provides that (i) if the Company or any of its Restricted Subsidiaries shall, after the Issue Date, (a) transfer or cause to be transferred, any assets, businesses, divisions, real property or equipment having an aggregate fair market or book value in excess of $1.0 million to any Restricted Subsidiary that is not a Subsidiary Guarantor or (b) make any Investment having an aggregate fair market or book value in excess of $1.0 million in any Restricted Subsidiary that is not a Subsidiary Guarantor or (ii) if, after the Issue Date, any Restricted Subsidiary that is not a Subsidiary Guarantor shall own any assets or properties having an aggregate fair market or book value in excess of $1.0 million, then the Company shall cause such Restricted Subsidiary to execute a Subsidiary Guarantee and deliver an opinion of counsel, in accordance with the terms of the Indenture. In addition, the Company shall not permit any of its Restricted Subsidiaries, other than a Subsidiary Guarantor, directly or indirectly, to (i) incur, guarantee or secure through the granting of Liens the payment of any Indebtedness of the Company or (ii) pledge any intercompany notes representing obligations of any of its Restricted Subsidiaries to secure the payment of any Indebtedness of the Company, in each case, unless the Company shall cause such Restricted Subsidiary to execute a Subsidiary Guarantee and deliver an opinion of counsel in advance in accordance with the terms of the Indenture.
The Notes are effectively subordinated in right of payment to all existing and future senior Indebtedness of the Company, which includes any draws made under the Credit Facility. As of March 31, 1998, the Company's Credit Facility consisted of a $50.0 million working capital line
of credit which, if borrowed, would be included as senior Indebtedness. The Indenture also permits the Company to have an acquisition line of credit of up to $10.0 million. See "Management's Discussion and Analysis - Liquidity and Capital Resources." Thus, the Notes and the Subsidiary Guarantees are effectively subordinated to claims of the lenders under the Credit Facility to the extent of such pledged collateral. At March 31, 1998, the Notes and the Subsidiary Guarantees were not subordinated to any secured Indebtedness (excluding letters of credit) of the Company or the Subsidiary Guarantors.
During fiscal 1998, the Company completed a reorganization of its corporate structure whereby all operating assets were transferred into the Company's subsidiaries. As of March 31, 1998, the parent Company is principally a holding company for its investments in subsidiaries and has no independent operations. All of the significant direct and indirect subsidiaries of the Company are jointly and individually liable for the indebtedness of the parent; therefore, separate financial statements of the guarantor subsidiaries have been omitted.
ITEM 2.
ITEM 2. PROPERTIES
PROPERTIES
The Company's physical property consists primarily of well servicing rigs and ancillary equipment, including 517 land workover rigs and two barge-mounted workover rigs located in yards in Texas, Louisiana, California and New Mexico. The Company also owns and operates production service equipment, including 192 vacuum trucks, 698 frac tanks, 21 gas production testing units, seven slickline wireline units, 18 pipe testing units and related equipment. In addition, the Company operates 1,238 vehicles, 1,062 of which it owns and 176 of which it leases.
The principal office of the Company is located in approximately 16,400 square feet of leased office space in San Antonio, Texas. The Company now operates 37 yards, 24 of which it owns and 13 of which it leases. Of the Company's 37 yards, 30 yards are located in Texas, 2 yards are located in Louisiana, 2 yards are located in New Mexico, and 3 yards are located in California. The Company also operates 21 injection wells in Texas and 1 in Arkansas, 6 of which it owns and 16 of which it leases. The Company believes that its leased and owned properties, none of which individually is material to the Company, are adequate for its current needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to litigation or other legal proceedings that the Company considers to be a part of the ordinary course of its business. The Company currently is not involved in any legal proceedings that could reasonably be expected to have a material adverse effect on the Company's financial condition or results of operations. See "Business Operating Risks and Insurance."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted, during the fourth quarter of the Company's fiscal year ended March 31, 1998, to a vote of its shareholders.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market on March 20, 1996 under the symbol "DPSI." The following table sets forth the high and low bid information per share of the Common Stock as reported by the Nasdaq National Market for the periods indicated.
FISCAL 1997 HIGH LOW -------- -------- First Quarter (April 1 - June 30, 1996) ............ $14 1/2 $10 3/4 Second Quarter (July 1 - September 30, 1996) ....... $14 $ 9 3/4 Third Quarter (October 1 - December 31, 1996) ...... $16 1/4 $11 1/2 Fourth Quarter (January 1 - March 31, 1997) ........ $16 1/2 $11 3/16
FISCAL 1998 HIGH LOW -------- -------- First Quarter (April 1 - June 30, 1997) ............ $14 1/2 $ 9 5/8 Second Quarter (July 1 - September 30, 1997) ....... $24 1/2 $12 7/8 Third Quarter (October 1 - December 31, 1997) ...... $30 1/4 $14 3/4 Fourth Quarter (January 1 - March 31, 1998) ........ $18 3/8 $10 1/2
On March 31, 1998, the last reported sale price of the Common Stock on the Nasdaq National Market was $12 5/8 per share. At June 17, 1998, the Company had approximately 1,993 shareholders of record of the Common Stock. The Company believes that there are in excess of 2,500 beneficial owners of the Common Stock.
The Company has never paid cash dividends on the Common Stock and does not anticipate that cash dividends will be paid in the foreseeable future. Furthermore, certain provisions of the Credit Facility and the Indenture restrict the Company's ability to pay cash dividends on the Common Stock.
The Company currently intends to retain any future earnings to finance the expansion and continuing development of the Company's business. The declaration and payment in the future of any cash dividends will be at the election of the Company's Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, future loan covenants, general economic conditions and other pertinent factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
During the period covered by this report, the Company sold the following unregistered securities. On or about April 1, 1997, the Company granted options to acquire 30,100 shares of its Common Stock at an exercise price of $12.25 per share to seven non-employee directors. These options expire on April 1, 2007. On or about July 30, 1997, the Company granted options
to acquire 86,476 shares of its Common Stock at an exercise price of $17.25 per share to 11 employees. These options expire on July 30, 2007. All of the above grants of options were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
In addition, the Company issued the following restricted shares of its Common Stock in connection with the exercise of options. On or about September 23, 1997, the Company issued 660 shares to an employee for $11.375 per share. On or about December 1, 1997, the Company issued 600 shares to an employee for $11.375 per share. On or about January 16, 1998, the Company issued 600 shares to a former employee for $11.375 per share. All such issuances were made in connection with the exercise of employee or director options and were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
Finally, the Company issued the following shares of its restricted stock to certain third parties as part of the purchase price for the acquisition of all of the stock or of substantially all of the assets of certain businesses. In connection with the purchase of all of the issued and outstanding shares of Alamo Tubing Testers Corp., a Texas corporation, on or about December 23, 1997, the Company issued an aggregate of 26,733 shares to two individual sellers as partial consideration valued at $.5 million. In connection with the purchase of substantially all of the assets of Security Well Service, Inc. and Security Well Service, a Texas general partnership, on or about January 2, 1998, the Company issued a aggregate of 21,071 to the general partnership and the corporation in partial consideration valued at $.4 million. These issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the Company for the periods indicated. The selected consolidated financial data for all fiscal years presented have been derived from the audited consolidated financial statements of the Company. The selected financial data should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements of the Company and related notes and other financial information included elsewhere in this Annual Report on Form 10-K and with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(1) Includes a $92,000 charge in fiscal 1994 to reflect the cumulative effect of change in accounting principle.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings are computed as income before income taxes, extraordinary item and cumulative effect of a change in accounting principle, plus fixed charges. Fixed charges consist of interest, whether expensed or capitalized, amortization of debt issuance costs and an estimated portion of rentals representing interest costs.
(3) EBITDA is defined as earnings before interest expense, taxes, depreciation and amortization, minority interest and other (income) expense and is presented because it is a widely accepted financial indication of a company's ability to incur and service debt. EBITDA should not be considered as an alternative to earnings as an indicator of the Company's operating performance or to cash flows as a measure of liquidity.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward looking statements. In addition, the Management's Discussion and Analysis should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements of the Company and the notes thereto included elsewhere in this Annual Report. This discussion and analysis of operations compares the three fiscal years ended March 31, 1996, 1997 and 1998.
GENERAL
The Company's operations have been significantly impacted by the Pride Acquisition, and as a result, the Company is the third largest provider of workover rigs in the United States. The Company seeks to expand its liquid and production services into land-based well servicing markets through integration and acquisitions. During the year, the Company has succeeded in this goal through the 1998 Acquisitions. Additionally, on April 1, 1998, the Company acquired the assets of Bill's Fluid Service, Inc., for approximately $2.2 million, which expanded liquid services into the panhandle region of Texas. The Company does not have any other current understanding, arrangement or agreement to acquire other businesses or assets. There can be no assurance that attractive acquisitions will be available to the Company at prices it believes to be reasonable or that any acquisition achieved will ultimately prove to be a successful undertaking by the Company. Consistent with its strategy, the Company intends to continue to pursue acquisitions of businesses and assets as attractive opportunities become available.
The Company has experienced revenue increases due to acquisitions and internal growth. The Company derives its revenues from workover rig services, liquid services and production services. Workover rig services are billed at hourly rates that are generally determined by the type of equipment required, market conditions in the region in which the rig operates, the ancillary equipment provided on the rig and the necessary personnel. The Company charges its customers for liquid services either on an hourly basis or on a per barrel basis depending on the services offered, while production services are primarily billed on an hourly basis. The base rates for the Company's services have generally been stable over the past three years.
In February 1997, the Company sold 4,722,259 shares of its Common Stock at $12.50 per share in a public offering which yielded net proceeds of approximately $55.3 million. Concurrent with the stock offering, the Company sold $140 million of senior unsecured notes at par value. The senior unsecured notes carry a coupon rate of interest of 9 3/8%, the proceeds of which netted
the Company approximately $135.3 million. The total proceeds from the stock and senior unsecured note offerings (the "Offerings") yielded the Company combined proceeds of approximately $190.6 million of which $135.4 million was used to pay the consideration attributable to the Pride Acquisition. Approximately $12.3 million was used to repay existing indebtedness and the remainder is being used for working capital and general corporate purposes.
The Company's operating costs are comprised primarily of labor and maintenance costs. Labor costs generally are variable and are incurred only while a workover rig is operating or liquid services or production services are being provided; however, the Company employs rig personnel to perform maintenance and other services who are paid even when rigs are not operating. The Company's administrative staff at the yard level and in the corporate office are accounted for as general and administrative expense. Insurance costs generally are fixed costs and relate to the number of employees, active rigs, trucks and other equipment in the Company's fleet.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998 COMPARED TO THE YEAR ENDED MARCH 31, 1997
REVENUES. Revenues for the year ended March 31, 1998 were $226.2 million, an increase of 144% from $92.6 million for the year ended March 31, 1997. The increase in revenue is primarily attributed to the 1997 and 1998 Acquisitions.
OPERATING COSTS. Operating costs for the year ended March 31, 1998 were $157.5 million, an increase of 155% from $61.7 million for the year ended March 31, 1997. This increase was due primarily to the 1997 Acquisitions. Operating costs as a percentage of revenues increased to 70% for the year ended March 31, 1998 compared to 67% for the prior year. This increase is attributed to the change in service mix to more workover services from 1997 and 1998. Management believes operating costs as a percentage of revenue are likely to remain at current levels until such time, if at all, as the Company makes additional changes to its service mix. In the year ended March 31, 1998, the Company recorded an accrual for a fuel tax refund. This accrual was approximately $.9 million of which approximately $.2 million related to a prior year refund. The fuel tax accrual is pursuant to a study performed in the liquid service locations, which has resulted in an increase in the amount of nontaxable use pertaining to the liquid services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the year ended March 31, 1998 were $24.1 million, an increase of 85% from $13 million for the year ended March 31, 1997. This increase was due primarily to the higher general and administrative expenses associated with the 1997 Acquisitions, which significantly increased the Company's fixed cost base. As a percentage of revenue, general and administrative expenses decreased to 11% for the year ended March 31, 1998, compared to 14% for the year ended March 31, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the year ended March 31, 1998 was $20.6 million, an increase of 163% from $7.8 million for the year ended March 31, 1997. This increase was due to a substantial increase in the Company's asset base resulting from the 1997 Acquisitions.
INTEREST EXPENSE. Interest expense for the year ended March 31, 1998 was $13.7 million compared to $2.3 million for the year ended March 31, 1997. This increase is substantially due to the $140.0 million senior notes incurred in the Debt Offering in February 1997.
NET INCOME. For the year ended March 31, 1998, the Company had a net income of $7.7 million, a 51% increase in earnings over the $5.1 million for the year ended March 31, 1997. The increase in earnings is attributed to the 1997 and 1998 Acquisitions.
YEAR ENDED MARCH 31, 1997 COMPARED TO THE YEAR ENDED MARCH 31, 1996
REVENUES. Revenues for the year ended March 31, 1997 were $92.6 million, an increase of 77% from $52.4 million for the year ended March 31, 1996. This increase in revenues is primarily attributable to the 1997 Acquisitions.
OPERATING COSTS. Operating costs for the year ended March 31, 1997 were $61.7 million, an increase of 78% from $34.7 million for the year ended March 31, 1996. This increase was due primarily to the 1997 Acquisitions. For the year ended March 31, 1997, operating costs as a percentage of revenue increased to 67% from 66% for the year ended March 31, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the year ended March 31, 1997 were $13.0 million, an increase of 49% from $8.7 million for the year ended March 31, 1996. This increase was due primarily to the higher general and administrative expenses associated with the 1997 Acquisitions, which significantly increased the Company's fixed cost base. As a percentage of revenues, general and administrative expenses decreased to 14% for the year ended March 31, 1997, compared to 17% for the prior year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the year ended March 31, 1997 was $7.8 million, an increase of 77% from $4.4 million for the year ended March 31, 1996. This increase was due to a substantial increase in the Company's asset base resulting from the 1997 Acquisitions.
INTEREST EXPENSE. Interest expense for the year ended March 31, 1997 was $2.3 million compared to $1.9 million for the year ended March 31, 1996. The increase of $.4 million is attributable to two factors. First, interest expense declined for the first nine months of the year ended March 31, 1997 due to the retirement of debt from funds generated from the Company's initial public offering completed in March 1996. Secondly, interest expense in the fourth quarter of fiscal 1997 increased substantially due to the $140.0 million senior notes incurred in the Debt Offering in February 1997.
MINORITY INTEREST. Minority interest for the year ended March 31, 1997 was $nil, compared to $0.9 million for the year ended March 31, 1996. This decrease was a result of the Company's acquisition of the Minority interest in Dawson Welltech L.C. in November 1995.
NET INCOME. For the year ended March 31, 1997, the Company had net income of $5.1 million, a 538% increase in earnings over the $0.8 million for the year ended March 31, 1996. The increase in earnings is attributed to the 1997 Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $25 million at March 31, 1998 compared to approximately $42.3 million at March 31, 1997. Working capital was approximately $48.9 million and approximately $56.0 million at March 31, 1998 and March 31, 1997, respectively. The Company used a net amount of approximately $35.9 million for investing activities during the fiscal year ended March 31, 1998, primarily for capital expenditures and acquisitions. Acquisitions of additional assets and businesses are expected to continue to be an important part of the Company's strategy. Under certain circumstances, the Company would need to obtain additional financing to fund such acquisitions. If the Company is unable to locate suitable acquisitions or to obtain financing on acceptable terms, the Company's growth may be adversely affected. While the Company believes it will be able to negotiate favorable acquisitions and financing, there can not be assurance that this will be the case.
In February 1997, the Company sold $140.0 million of senior unsecured notes at par value. The senior unsecured notes carry a coupon rate of interest of 9 3/8%, the proceeds of which netted the Company approximately $135.3 million. The senior notes will not be redeemable at the Company's option prior to February 1, 2002. Thereafter, the notes will be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the 12-month period beginning on February 1, of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2002..................................................... 104.6875% 2003..................................................... 103.1250% 2004..................................................... 101.5625% 2005 and thereafter...................................... 100.0000%
Notwithstanding the foregoing, at any time on or prior to February 1, 2000, the Company may redeem up to an aggregate of $49.0 million principal amount of notes (or 35%) at a redemption price of 109.375% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date, with the net proceeds of a Public Equity Offering, PROVIDED that at least $91.0 million in aggregate principal amount of notes remain outstanding immediately after the occurrence of such redemption; and, PROVIDED FURTHER, that such redemption shall occur within 60 days of the date of the closing of such Public Equity Offering.
The senior notes are unconditionally guaranteed on a senior unsecured basis by each of the Company's principal operating subsidiaries. The terms of the indenture related to the notes contain covenants limiting, among other things, the incurrence of additional indebtedness of the Company; dividend payments on or issuance and sales of capital stock of restricted subsidiaries; payments with respect to certain subordinated obligations and the making of certain investments;
sales of assets; certain transactions with affiliates; and sale/leaseback transactions in the event that the Company's "fixed charge coverage ratio" (cash flow to fixed charges as defined in the indenture) is below 2.25 to 1 for the year ended March 31, 1998. The Company's actual fixed charge coverage ratio for the year ended March 31, 1998, was 3.77 to 1.
The Company has approximately $4.4 million of subordinated debt outstanding at March 31, 1998. Approximately $1.5 million of the subordinated debt is represented by a debenture held by Well Solutions, bears interest at 8%, matures on November 30, 1999, is prepayable without penalty at any time, and may be converted at any time, at the option of the holder, into 37,634 shares of Company Common Stock, subject to adjustment to prevent dilution. The remaining subordinated debt of approximately $2.9 million was incurred in conjunction with acquisitions, bears interest at a rates between 8.0% and 8.5%, matures between March 13, 2001 and January 31, 2003 and is prepayable without penalty at any time.
The Company used cash for financing activities of approximately $3.2 million during the year ended March 31, 1998. The principal uses of cash was payment on long-term debt and the purchase of treasury stock. In 1998, the Company purchased 100,000 shares of Common Stock for approximately $1.2 million under a program that authorizes the Company to purchase up to $5.0 million of the Company's stock.
The Company generated cash from operating activities of approximately $21.7 million during the year ended March 31, 1998.
The Company believes internally generated cash flow and availability under the Credit Facility should provide the Company with sufficient financing to fund the Company's operations for at least the next 12 months. There can be no assurance, however, that the Company will not need additional financing or that such financing will be available on economically acceptable terms.
DESCRIPTION OF CREDIT FACILITY
On February 20, 1997, the Company put into place a working capital line of credit (the "Working Line") with a bank. The maximum availability under the Working Line is the lesser of (i) $50.0 million or (ii) 80% of eligible accounts receivable that have been outstanding less than 90 days. The Working Line is secured by a first lien security interest on all the Company's accounts receivable. Borrowings under the Working Line mature on February 20, 1999 and bear interest, at a rate the Company may select from time to time, equal to: (i) the Bank's prime rate of interest or (ii) the applicable margin plus the Wall Street Journal LIBOR rate of interest; the applicable margin is determined by a ratio of total funded debt to consolidated EBITDA, but shall never be less than 1.75% nor higher than 2.75%. Under the terms of the agreement relating to the Working Line, the Company must maintain minimum working capital, tangible net worth, current ratios and debt to capital ratios. The foregoing description does not purport to be a complete description of all terms of the Working Line or the Credit Facility. The Company had not drawn against the Working Line as of March 31, 1998, but has used the line to secure four letters of credit totaling $1.8 million related to its worker's compensation insurance program.
INFLATION AND SEASONALITY
Inflation has not had a significant impact on the Company's operations to date and the Company's operating revenues have not historically been subject to significant seasonal changes.
NEW ACCOUNTING PRONOUNCEMENTS -- REPORTING COMPREHENSIVE INCOME; DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The FASB also issued in June 1997 SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information," which establishes new standards for the way public companies disclose information about operating segments, products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997.
YEAR 2000 ISSUE
The Year 2000 issue is a result of computer programs being written using two digits rather than four to define the applicable year. The Company has conducted a preliminary review of its computer systems to identify those that could be affected by the Year 2000 issue and has developed an informal implementation plan to resolve the issue. The Company is utilizing both internal and external resources to correct or reprogram and test the systems for the Year 2000 compliance. It is anticipated that all remediation efforts will be completed by December 31, 1998, allowing adequate time for testing. The Company is also in the process of communicating to primary processing vendors and customers (including customers that utilize Electronic Data Interchange [EDI]) to help the Company identify and resolve any Year 2000 issues. However, no estimates can be made as to the potential adverse impact that may result from the failure of the Company's vendors, customers and others with which it conducts business to become Year 2000 compliant. The Company does not expect the amounts required to be expensed for any Year 2000 issues over the next two years to have a material effect on its financial position of results of operations.
1999 INDUSTRY OUTLOOK
Demand for the Company's services depends substantially upon the level of activity in the oil and gas industry, which in turn depends in part on oil and gas prices, expectations about future prices, the cost of exploring for, producing and delivering oil and gas, the discovery rate of new oil and gas reserves in land areas, the level of drilling and workover activity, domestic and international political, military, regulatory and economic conditions and the ability of the oil and gas companies to raise capital. Prices for oil and gas historically have been extremely volatile and have reacted to changes in the supply and demand for oil and natural gas, domestic and worldwide economic conditions and political instability in oil producing countries. Currently, oil
prices are down and natural gas prices are stable, while both oil and gas inventories are on the rise. Additionally, energy demand from Asian countries is on the decline. For the well servicing industry in particular, excess capacity throughout all regions has and will for the foreseeable future make competition a major market force. As conditions weaken for the drilling industry, well servicing may come under additional competition as drillers compete for completion work. Given current market conditions, it is extremely difficult to predict or forecast customer demand for the Company's services. Additionally, price increases appear unlikely for the foreseeable future. Prices for oil and natural gas are expected to continue to be volatile and effect the demand for and pricing of the Company's services. Continued depressed prices of oil, or material decline in natural gas prices or activities could materially adversely affect the demand for the Company's services and the Company's results of operations. Industry conditions will continue to be influenced by numerous factors over which the Company has no control, such as weather.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1993 as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements other than statements of historical facts included in this Annual Report, including without limitation, the statements under "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes to the consolidated financial statements regarding the Company's financial position and liquidity, acquisitions and its ability to make debt service payments and other similar matters are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed elsewhere in this Report, including the discussions under the headings noted above. All subsequent written and oral forward-looking statements attributed to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report..................................................32 Consolidated Financial Statements: Consolidated Balance Sheets at March 31, 1997 and 1998.....................33 Consolidated Statements of Income for the years ended March 31, 1996, 1997 and 1998..................................................................34 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1996, 1997 and 1998...................................................35 Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1997 and 1998.............................................................36 Notes to the Consolidated Financial Statements.............................37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Dawson Production Services, Inc.:
We have audited the accompanying consolidated balance sheets of Dawson Production Services, Inc. and subsidiaries as of March 31, 1997 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dawson Production Services, Inc. and subsidiaries as of March 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Antonio, Texas June 17, 1998
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, 1997 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents .......................... $ 42,330 $ 24,964 Trade receivables, substantially all pledged (net of allowance for doubtful accounts of $561 and $966, respectively) ...................... 30,914 39,632 Other receivables .................................. 674 848 Income taxes receivable ............................ 574 1,624 Prepaid expenses and other ......................... 444 573 --------- --------- Total current assets ............................. 74,936 67,641 Net property and equipment (note 6) .................. 145,641 164,846 Goodwill and other assets ............................ 53,159 57,866 --------- --------- Total assets ..................................... $ 273,736 $ 290,353 ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................... $ 9,606 $ 8,444 Accrued liabilities ................................ 8,622 8,825 Current portion of long-term debt (note 4) ......... 624 353 Current portion of obligations under capital leases (note 6) ................................... 38 1,086 --------- --------- Total current liabilities ........................ 18,890 18,708 --------- --------- Long-term debt, net of current portion (note 4) ..... 3,166 4,058 Obligations under capital leases, net of current portion (note 6) ..................................... 140 3,145 Senior notes (note 5) ................................ 140,000 140,000 Deferred income taxes (note 9) ....................... 5,321 10,943 Shareholders' equity (notes 7 and 8): Preferred stock, no par value 560,600 shares authorized, none issued and outstanding ........... -- -- Common Stock, $.01 par value, 20,561 shares authorized, 11,126 and 11,178 issued and 11,126 and 11,078 outstanding, respectively ....... 111 112 Paid-in capital .................................... 96,859 97,707 Retained earnings .................................. 9,391 17,069 Notes receivable from officers ..................... (142) (142) --------- --------- 106,219 114,746
Less treasury Common Stock, at cost ................ -- (1,247) --------- --------- Total shareholders' equity ....................... 106,219 113,499 Commitments and contingencies (note 12) --------- --------- Total liabilities and shareholders' equity ....... $ 273,736 $ 290,353 ========= =========
See accompanying notes to consolidated financial statements.
DAWSON PRODUCTION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31, ------------------------------------- 1996 1997 1998 -------- -------- --------- REVENUES ............................ $ 52,391 $ 92,628 $ 226,162 -------- -------- --------- COSTS AND EXPENSES:
Operating ........................ 34,745 61,722 157,452 General and administrative .................. 8,680 13,026 24,086 Depreciation and amortization .................... 4,396 7,844 20,621 -------- -------- --------- Total costs and expenses ....................... 47,821 82,592 202,159 -------- -------- --------- Operating income ............... 4,570 10,036 24,003 -------- -------- --------- OTHER INCOME AND EXPENSE:
Interest expense ................. 1,848 2,313 13,693 Interest income .................. (169) (833) (1,848) Other income, net ................ (128) 136 (18) -------- -------- --------- Total other income and expense ......................... 1,551 1,616 11,827 -------- -------- --------- Income before minority interest, income taxes and extraordinary item .......... 3,019 8,420 12,176 Minority interest in consolidated subsidiary ......... 937 -- -- -------- -------- --------- Income before income taxes and extraordinary item .......... 2,082 8,420 12,176 Provision for income taxes (note 9) ........................ 709 3,343 4,498 -------- -------- --------- Income before extraordinary item ............................ 1,373 5,077 7,678 Extraordinary item .................. (514) -- -- -------- -------- --------- Net income .......................... 859 5,077 7,678 -------- -------- --------- Preferred stock dividends ........... 88 -- -- -------- -------- --------- Net income applicable to Common Stock .................... $ 771 $ 5,077 $ 7,678 ======== ======== =========
EARNINGS PER COMMON SHARE: BASIC:
Income before extraordinary item .............. $ 0.52 $ 0.72 $ 0.69 Extraordinary item ............... (0.21) -- -- -------- -------- --------- Net income ...................... $ 0.31 $ 0.72 $ 0.69 ======== ======== ========= Average number of shares outstanding ..................... 2,472 7,055 11,130 ======== ======== ========= DILUTED:
Income before extraordinary item .............. $ 0.49 $ 0.71 $ 0.68 Extraordinary item ............... (0.18) -- -- -------- -------- --------- Net income ...................... $ 0.31 $ 0.71 $ 0.68 ======== ======== ========= Average number of shares outstanding ..................... 2,796 7,190 11,367 ======== ======== =========
See accompanying notes to consolidated financial statements.
DAWSON PRODUCTION SERVICES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
See accompanying notes to consolidated financial statements.
DAWSON PRODUCTION SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to consolidated financial statements
DAWSON PRODUCTION SERVICES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Dawson Production Services, Inc. (the "Company" or "Dawson") is a leading provider of a broad range of workover, liquid and production services used in the production of oil and gas in the Texas and Louisiana Gulf Coasts, the Permian Basin areas of West Texas and New Mexico, and California. The Company's services are utilized by major oil and gas companies as well as independent producers to optimize performance of oil and gas wells.
As a result of its acquisitions and certain corporate restructuring, the Company currently has several direct and indirect subsidiaries through which it conducts a significant portion of its operations. All of the assets are held in Dawson Production Partners, L.P., a Delaware limited partnership (the "Partnership"). All of the general and limited partnership interests in the Partnership are owned by three wholly owned corporate subsidiaries of Dawson; Dawson Production Management, Inc., a Delaware corporation, owns a 1.4% general partnership interest in the Partnership, Dawson Production Taylor, Inc., a Delaware corporation, owns a 8.85% limited partnership interest in the Partnership, and Dawson Production Acquisition Corp., a Delaware corporation owns the remaining 89.75% limited partnership interest in the Partnership. Dawson has the following additional wholly owned subsidiaries: Dawson Production Services de Mexico, S.A. de C.V., and Ubicadora de Tecnicos S.A. de C.V., both of which are companies organized under the laws of Mexico.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While it is believed that such estimates are reasonable, actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and short-term investments with an original maturity of three months or less from the date of purchase are considered to be cash equivalents.
REVENUE RECOGNITION
The Company generally recognizes revenue when services are rendered.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and improvements are capitalized and depreciated over the respective asset's useful life. Expenditures for repairs and maintenance are charged to expense as incurred. Property and equipment are reviewed for impairment whenever events or circumstances provide evidence that suggests that the carrying amounts of the property and equipment may not be recoverable.
Property and equipment are depreciated over their estimated useful lives on the straight-line method. The Company utilizes a "component parts" approach to depreciating fixed assets. Estimated useful lives are as follows:
ESTIMATED LIFE (YEARS) ---------- Buildings......................................................... 20 Well servicing equipment.......................................... 3-20 Vehicles.......................................................... 3-5 Office furniture and other equipment.............................. 5-12
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
INTANGIBLE AND OTHER ASSETS
Goodwill represents the excess purchase price over fair value of net assets acquired and is amortized on a straight-line basis over twenty to twenty-five year periods from the dates of acquisition. Other assets consist principally of loan costs and are amortized on a straight-line basis over the terms of the loans.
Intangible assets are reviewed for impairment whenever events or circumstances provide evidence that suggests that the carrying amount of the intangible asset may not be recoverable.
The Company assesses the recoverability of the intangible asset by determining whether the carrying amount of the intangible asset can be recovered through projected undiscounted future cash flows over the remaining amortization period.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of short-term, variable rate items or recently issued debt instruments for which management believes fair value approximates carrying value. The carrying value of the $140 million Senior Notes due February 1, 2007 (see note 5) approximates fair value as of March 31, 1998.
EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement requires the presentation of basic earnings per share (EPS) and diluted earnings per share for reporting periods of all public companies ending after December 15, 1997, instead of the primary and fully diluted EPS previously required. The new standard requires the restatement of EPS for all periods presented.
EPS restated as required by SFAS No. 128 is as follows:
1996 1997 1998 ------- ------ ------- Income before extraordinary item ........... $ 1,373 $5,077 $ 7,678 Dividends Declared ......................... (88) -- -- Extraordinary item ......................... (514) -- -- ------- ------ ------- Net income applicable to common stock....... 771 5,077 7,678 Interest on convertible debt................ 5 -- -- Dividends declared.......................... 88 -- -- ------- ------ ------- Net income applicable to diluted Common Stock................... $ 864 $5,077 $ 7,678 ======= ====== ======= Basic weighted average shares outstanding... 2,472 7,055 11,130 Dilutive effect of convertible stock ....... 14 -- -- Dilutive effect of preferred stock ......... 262 -- -- Dilutive effect of options ................. 48 134 237 ------- ------ ------- Diluted weighted average shares outstanding ................................ 2,796 7,190 11,367
Basic earnings Per Share: Income before extraordinary item ........... $ 0.52 $ 0.72 $ 0.69 Extraordinary item ......................... (0.21) -- -- ------- ------ ------- Net income ................................. $ 0.31 $ 0.72 $ 0.69 ======= ====== ======= Diluted earnings Per Share: Income before extraordinary item ........... $ 0.49 $ 0.71 $ 0.68 Extraordinary item ......................... (0.18) -- -- ------- ------ ------- Net income ................................. $ 0.31 $ 0.71 $ 0.68 ======= ====== =======
RECLASSIFICATION
Certain amounts, as previously presented, have been reclassified to conform with the current year financial statement presentation.
NEW ACCOUNTING PRONOUNCEMENTS -- REPORTING COMPREHENSIVE INCOME; DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The FASB also issued in June 1997 SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information," which establishes new standards for the way public companies disclose information about operating segments, products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. The Company places its temporary cash investments in U.S. Government securities and in other high quality financial instruments. By policy the Company limits the amount of credit exposure to any one financial institution or issuer. The Company's customer base consists primarily of independent oil and natural gas producers. During the years ended March 31, 1996, 1997 and 1998, the provisions charged to operations to increase the reserve for doubtful trade accounts receivable were $.02 million, $.3 million and $.4 million, respectively. During the years ended March 31, 1996, 1997 and 1998, sales to the Company's largest customer accounted for approximately 24%, 20% and 11%, respectively, of total operating revenues.
(2) ACQUISITIONS
PETROSTAR CORPORATION
On January 8, 1998, the Company acquired the workover services assets of PetroStar Corporation, a Louisiana based company, for approximately $11.6 million in cash and a $1.2 million in a five-year subordinated note. Goodwill recognized on this transaction amounted to $2.9 million and is being amortized over 25 years.
PRIDE
Effective February 20, 1997, the Company acquired Pride for approximately $135.4 million in cash and acquisition costs of $1.9 million. The acquisition has been accounted for as a purchase and, accordingly, the operating results of Pride have been included in the Company's
consolidated statements of income since the effective date of acquisition. The excess of the aggregate purchase price over the fair market value of the net assets acquired was recognized as goodwill and is being amortized over 25 years. The fair value of assets acquired, including goodwill of $30.2 million, was $138.0 million and liabilities assumed totaled $1.8 million. The funds used to acquire Pride were provided by proceeds of sales of Common Stock and senior notes through public offerings in February 1997. The final purchase price allocation may be adjusted based on the resolution of certain issues.
TAYLOR COMPANIES, INC.
Effective July 29, 1996, the Company acquired all of the issued and outstanding stock of Taylor Companies, Inc. for an aggregate purchase price of $12.8 million consisting of $11.0 million in cash and a $1.8 million subordinated promissory note payable to the selling shareholder. Goodwill recognized on this transaction amounted to approximately $7.4 million, which is being amortized over a twenty-year period. The final purchase price allocation for the Taylor Acquisition has been adjusted based on the resolution of certain issues.
WELL SOLUTIONS, INC.
On November 30, 1994, the Company acquired substantially all of the property and equipment of Well Solutions, Inc. (Well Solutions), a company engaged in providing oilfield services, for an aggregate purchase price of approximately $18.1 million, consisting of $15.9 million in cash, a convertible note payable of $1.5 million and closing costs of approximately $.7 million. The acquisition has been accounted for as a purchase and, accordingly, the operating results of Well Solutions have been included in the Company's consolidated statements of income since the date of acquisition. The excess of the aggregate purchase price over the fair market value of the net assets acquired was recognized as goodwill and is being amortized over 20 years. The fair value of assets acquired, including goodwill of $2.5 million, was $18.5 million and liabilities assumed totaled $.4 million. The funds used to acquire Well Solutions were provided by long-term borrowings, proceeds of sales of Common Stock and subordinated debt and cash from operations.
OTHER ACQUISITIONS
Effective November 1, 1995, the Company acquired the 39% minority interest in the Company's subsidiary, Dawson WellTech, L.C., from WellTech, Inc. in exchange for the issuance to WellTech, Inc. of 1,329,495 shares of Common Stock for a total purchase price of $7.7 million based on an independent appraisal of the Common Stock. Goodwill recognized on this transaction amounted to $.4 million and is being amortized over 20 years.
Effective March 1, 1996, the Company acquired a portion of the assets of a small company in Giddings, Texas for an aggregate purchase price of approximately $1.2 million, consisting of $.1 million in cash and $1.1 million in capital leases and a note payable. Goodwill recognized on this transaction amounted to $.1 million and is being amortized over 20 years.
In April 1996, the Company acquired the assets of two small production testing companies in Louisiana. The aggregate purchase price was approximately $.7 million. Goodwill and a non-compete agreement were recognized on these transactions which amounted to approximately $.1 million. These items are being amortized over 20 and 5 year periods, respectively.
In May 1996, the Company acquired the Texas-based well servicing division of a non-affiliated company. The aggregate purchase price was $.8 million.
In July 1996, the Company acquired the assets of a trucking company in Louisiana. The aggregate purchase price was approximately $.4 million. Goodwill recognized on the transaction amounted to $.05 million, which is being amortized over a 20 year period.
Effective December 23, 1997, the Company acquired all of the issued and outstanding stock of Bobby's Hot Oil Service, Inc., Tubing Testers Corp. and Alamo Tubing Testers Corp., all commonly-owned companies headquartered in Perryton, Texas. The aggregate purchase price of approximately $4.9 million consisted of $3.9 million in cash, $.5 million in two subordinated notes to the selling shareholders and $.5 million in Common Stock of the Company. Goodwill recognized on this transaction amounted to $2.7 million, which is being amortized over a 25 year period.
On January 20, 1997, the Company acquired the liquid services assets of Mobley Company, Inc. for approximately $5.0 million in cash and a $.5 million five-year subordinated note. Goodwill recognized on this transaction amounted to $1.6 million and is being amortized over 20 years.
On January 2, 1998, the Company acquired the well servicing assets of a company for approximately $3.4 million in cash and the issuance to Security Well Service, Inc. of 21,071 shares of Common Stock for a total purchase price of $3.8 million. Goodwill recognized on this transaction amounted to $.7 million and is being amortized over 25 years.
On March 13, 1998, the Company acquired the assets of a small South Texas well servicing company for approximately $2.2 million in cash and a $.3 million three-year subordinated note. Goodwill recognized on this transaction amounted to $.7 million and is being amortized over 25 years.
All of the Company's acquisitions have been accounted for as purchases and, accordingly, the operating results have been included in the Company's consolidated statements of income since the dates of acquisition. The effect on results of operations would not have been material if the 1998 acquisitions had occurred at the beginning of the year.
(3) MANDATORILY REDEEMABLE PREFERRED STOCK
In October 1990, the Company issued 80,800 shares of 10% cumulative convertible preferred stock for a total price of $1.0 million. Each preferred shareholder was entitled to receive, in preference to common shareholders, annual dividends in the amount of $1.25 per share, payable
quarterly. At the discretion of the Company, the dividends could have been declared in either cash or Common Stock valued at $3.49 a share. Dividends were cumulative and accrued from the date of the stock issuance. The Company declared dividends on the preferred stock in the amount of $.1 million in the year ended March 31, 1996. Holders of the preferred stock elected to convert the shares of such stock into 347,440 shares of Common Stock in fiscal 1996.
(4) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt other than the Senior Notes consists of the following:
MARCH 31, ----------------- (IN THOUSANDS) ----------------- 1997 1998 ------ ------ Convertible debenture bearing interest at 8% Interest is due quarterly; principal is due November 30, 1999 ...................................... $1,500 $1,500 Subordinated promissory note payable to a former Taylor shareholder bearing interest at 8.0% per annum. Interest is due quarterly; principal is due in quarterly installments of $83,333 ............... 1,750 416 Subordinated note bearing interest at 8.5% Interest is due quarterly; principal is due January 20, 2002 ....................................... 500 500 Subordinated notes bearing interest at 8.5% Interest is due annually; principal is due December 23, 2002 ...................................... -- 500 Subordinated note bearing interest at 8.5% Interest is due quarterly; principal is due in four annual installments of $300,000, beginning January 31, 2000 ....................................... -- 1,200 Subordinated note bearing interest at 8% Interest is due quarterly; principal is due March 13, 2001 ......................................... -- 275 Other note payable bearing interest at 10% ............... 40 20 ------ ------ Total long-term debt ..................................... 3,790 4,411 Less current portion ..................................... 624 353 ------ ------ Long-term debt, net of current portion ................... $3,166 $4,058 ====== ======
On February 20, 1997, concurrent with the closing of the Senior Note and Common Stock offerings and the acquisition of Pride, the Company entered into a working capital line of credit (the "Working Line") with a bank. The maximum availability under the Working Line would be the lesser of (i) $50 million or (ii) 80% of eligible accounts receivable that have been outstanding less than 90 days. The Working Line is secured by a first lien security interest on all the Company's accounts receivable. Borrowings under the Working Line mature two years from the date of any such borrowings and bear interest at the lesser of (i) the Bank's prime rate of interest or (ii) a varying percentage rate ranging from 1.75% to 2.75%, based on the total funded debt to cash flow defined as EBITDA, over the Company's choice of the 30, 90 or 180-day LIBOR rate of interest. The Company had not drawn against the line as of March 31, 1998, but has used the line to secure four letters of credit totaling $1.8 million related to its worker's compensation insurance program. Under the terms of the loan agreement, the Company must maintain minimum working capital, tangible net worth, current ratios and debt to capital ratios. The foregoing description does not purport to be a complete description of all terms of the Credit Facility.
The Company has approximately $4.4 million of subordinated debt outstanding at March 31, 1998. Approximately $1.5 million of the subordinated debt is represented by a debenture held by
Well Solutions, bears interest at 8%, matures on November 30, 1999, is prepayable without penalty at any time, and may be converted at any time, at the option of the holder, into 37,634 shares of Company Common Stock, subject to adjustment to prevent dilution. The remaining subordinated debt of approximately $2.9 million was incurred in conjunction with acquisitions, bears interest at a rates between 8.0% and 8.5%, matures between March 13, 2001 and January 31, 2003 and is prepayable without penalty at any time.
All of the subordinated debt of the Company was incurred in conjunction with certain acquisitions made by the Company and have offset provisions in conjunction with unforeseen liabilities that might arise from these acquisitions.
In March 1996, the Company elected to prepay a $13 million note payable to a bank. An extraordinary charge of $.51 million (net of income tax benefit of $.26 million) was incurred as a result of the early extinguishment of the note payable.
During fiscal 1996, $.15 million in principal amount of subordinated notes were converted into 27,232 shares of Common Stock.
Also, pursuant to the Conversion Agreement, $2.4 million of the Company's subordinated debt converted into Common Stock at the rate of one share of Common Stock for each $6.98 in principal amount of subordinated debt effective February 19, 1996.
Scheduled maturities of principal for long-term debt based on balances outstanding at March 31, 1998 are summarized as follows:
TOTAL ------------ (IN THOUSANDS) YEARS ENDING MARCH 31, 1999................................................. $ 353 2000................................................. 1,883 2001................................................. 575 2002................................................. 1,300 2003................................................. 300 Thereafter (*)....................................... 140,000 ---------- $ 144,411 ==========
(*) See note 5 for discussion of Senior Notes due 2007.
(5) SENIOR NOTES
MARCH 31, (IN THOUSANDS) ------------------------------ 1997 1998 -------------- -------------- 9 3/8% Senior Notes due 2007 $ 140,000 $ 140,000 ============== ==============
The Senior Notes due February 1, 2007 (Notes) were issued by the Company in February 1997. The Notes bear interest at 9 3/8%, payable semi-annually on February 1 and August 1 of each year, commencing August 1, 1997. The proceeds from the issuance of the Notes were utilized primarily to acquire Pride (see note 2) and prepay existing debt.
The senior notes will not be redeemable at the Company's option prior to February 1, 2002. Thereafter, the notes will be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the 12-month period beginning on February 1, or the years indicated below:
YEAR PERCENTAGE ---- ---------- 2002................................................ 104.6875% 2003................................................ 103.1250% 2004................................................ 101.5625% 2005 and thereafter................................. 100.0000%
Notwithstanding the foregoing, at any time on or prior to February 1, 2000, the Company may redeem up to an aggregate of $49.0 million principal amount of notes (or 35%) at a redemption price of 109.375% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date, with the net proceeds of a Public Equity Offering: PROVIDED that at least $91.0 million in aggregate principal amount of notes remain outstanding immediately after the occurrence of such redemption; and, PROVIDED FURTHER, that such redemption shall occur within 60 days of the date of the closing of such Public Equity Offering.
The senior notes are unconditionally guaranteed on a senior unsecured basis by each of the Company's principal operating subsidiaries. The terms of the indenture related to the notes contain covenants limiting, among other things, the incurrence of additional indebtedness of the Company; dividend payments on or issuance and sales of capital stock of restricted subsidiaries; payments with respect to certain subordinated obligations and the making of certain investments; sales of assets; certain transactions with affiliates; and sale/leaseback transactions in the event that the Company's "fixed charge coverage ratio" (cash flow to fixed charges as defined in the indenture) is below 2.25 to 1 for the year ended March 31, 1998. The Company's actual fixed charge coverage ratio for the year ended March 31, 1998, was 3.77 to 1.
(6) LEASES AND LEASE COMMITMENTS
The Company leases vehicles and office equipment under capital leases. Total assets recorded under capital leases at March 31, 1997 and 1998 are $6.4 million and $11.2 million, respectively. Amortization expense related to assets held under capital lease for the years ended March 31, 1996, 1997 and 1998 was $.24 million, $1.0 million and $1.5 million, respectively.
The Company leases certain of its facilities under operating leases. Lease terms generally range from one to five years. Rent expense for the years ended March 31, 1996, 1997 and 1998 was approximately $.25 million, $.37 million and $.99 million, respectively.
Future minimum lease payments as of March 31, 1998 are as follows:
CAPITAL OPERATING YEAR ENDING MARCH 31, LEASES LEASES ----------- ----------- (IN THOUSANDS)
1999................................................ $ 1,274 $ 644 2000................................................ 1,274 524 2001................................................ 1,270 437 2002................................................ 924 334 2003................................................ 729 250 Thereafter - 1,200 ----------- ---------- Total minimum lease payments........................ $ 5,471 $ 3,389 =========== Less amounts representing interest.................. (1,240) ----------- Present value of minimum lease payments............. $ 4,231 ===========
(7) SHAREHOLDERS' EQUITY
(A) EQUITY OFFERINGS
In March 1996, the Company completed an initial public offering (the "IPO") of 2,616,202 shares (net of 48 fractional shares paid in cash) of its Common Stock for the purpose of raising funds to acquire additional businesses and to retire debt. Net proceeds to the Company from the IPO, after deduction of associated expenses, were approximately $23.5 million.
In February 1997, the Company completed a secondary public offering of 4,722,259 shares (including 689,773 shares issued in connection with an over-allotment option) of its Common Stock for the purpose of raising funds to acquire Pride and retire debt (see notes 2 and 4). Net proceeds to the Company, after deduction of associated expenses, were approximately $55.3 million.
(B) TREASURY STOCK
In July 1997, the Company's Board of Directors approved a program to repurchase up to $5 million of its Common Stock. The Company repurchased 100,000 shares during the year ended March 31, 1998, for an approximate value of $1.2 million.
In addition, on September 11, 1997, the Company adopted a Shareholder Rights Plan (the "Rights Plan") that is designed to deter unfair takeover tactics. On that date, the Board of Directors of the Company declared a dividend distribution of one Right for each outstanding share of Common Stock to shareholders of record at the close of business on September 22, 1997. Each Right entitles the registered holder to purchase from the Company one-tenth of one share of Common Stock of the Company, at a purchase price of $85 per share of Common Stock, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the Company and Harris Trust Company of New York, as Rights Agent. The Rights have certain anti-takeover effects and will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on a substantial number of Rights being acquired.
(8) STOCK OPTIONS
In fiscal 1995, 118,250 Common Stock options were issued by the Company to several officers and directors of the Company. The options have an exercise price of $4.65 per share. During fiscal 1995 and 1996, employees and officers of the Company exercised their options to purchase 40,618 and 36,546 shares, respectively, of Common Stock in exchange for notes payable to the Company of $.1 million and $.1 million. The notes are secured by the shares of Common Stock issued and the personal guarantees of the officers receiving the stock.
In October 1995, the Company adopted the 1995 Incentive Plan (the "1995 Plan"). Under the 1995 Plan, incentive options, non-statutory options, restricted stock awards, and/or stock appreciation rights may be granted to key employees, non-employee directors and consultants to purchase the Company's Common Stock at prices not less than the fair market value at the time of grant, which become exercisable as described in the respective Award Agreement. Pursuant to the 1995 Plan, as of April 1, 1997 an aggregate of 704,394 shares of the Company's Common Stock is available for issuance upon the exercise of such options, awards and rights, which may be granted over a ten-year period.
The following table summarizes the activity of stock options granted by the Company:
PRICE SHARES PER SHARE -------- ----------------- Outstanding, March 31, 1995 .............. 154,796 $ .23 to $4.65 Granted ................................. 133,300 $ 7.44 Exercised ............................... (36,546) $ .23 to $2.33 Canceled ................................ (10,750) $ 4.55 -------- Outstanding, March 31, 1996 .............. 240,800 $ 4.65 to $7.44 -------- Granted ................................. 329,350 $ 10.75 to $12.25 Exercised ............................... (21,500) $ 4.65 to $10.75 Canceled ................................ (5,300) $10.75 to $11.375 -------- Outstanding, March 31, 1997 .............. 543,350 $ 4.65 to $11.375 -------- Granted ................................. 116,576 $ 12.25 to $17.25 Exercised ............................... (1,860) $ 11.375 Canceled ................................ (23,000) $ 7.44 to $11.375 -------- Outstanding, March 31, 1998 .............. 635,066 $4.65 to $17.25 -------- Exercisable at end of year ............... 300,780 ========
The weighted average fair value of stock options granted during 1996, 1997 and 1998 was $7.44, $11.32 and $10.29 per share, respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes options-pricing model. The model assumed expected volatility of 0%, 47.6% and 65.8%, weighted average risk-free interest rates of 6.66%, 6.75% and 5.61%, for grants in 1997 and 1998, respectively, and an expected life of four years for 1996 and 1997 and six years in 1998. As the Company has not declared dividends since it became a public entity, no dividend yield was used. Actual value realized, if any, is dependent on the future performance of the Company's Common Stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes model.
As discussed in note 1, no compensation expense has been recorded in 1995, 1996 or 1997 for the Company's stock options. Had compensation cost for the Company's stock option plans been determined based on the fair-value at the grant dates for awards made after March 31, 1995 under that plan, the Company's net income and earnings per common share would have been reduced to the pro forma amounts indicated below:
YEARS ENDED MARCH 31, ---------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1997 1998 ------- --------- --------- Net income: As reported ........................ $ 771 $ 5,077 $ 7,678 Pro forma .......................... $ 686 $ 4,928 $ 7,415
Basic earnings per common share: As reported ........................ $ 0.31 $ 0.72 $ 0.69 Pro forma .......................... $ 0.28 $ 0.70 $ 0.67
Diluted earnings per common share: As reported ........................ $ 0.31 $ 0.71 $ 0.68 Pro forma .......................... $ 0.28 $ 0.69 $ 0.65
(9) INCOME TAXES
The components of income tax expense applicable to continuing operations are as follows:
YEARS ENDED MARCH 31, (IN THOUSANDS) ---------------------------- 1996 1997 1998 ------ ------ ------ Current ...................................... $ -- $ 770 $ 58 Deferred ..................................... 709 2,573 4,440 ------ ------ ------ $ 709 $3,343 4,498 ====== ====== ======
Income taxes for financial reporting purposes differs from the amount computed by applying the statutory federal income tax rate of 34% in 1996 and 1997 and 35% in 1998 to income before income taxes as follows:
YEARS ENDED MARCH 31, (IN THOUSANDS) ------------------------ 1996 1997 1998 ----- ------ ------ Expected tax expense at U.S. statutory rate ....... $ 708 $2,863 $4,262 Expenses not deductible ........................... 35 70 159 State income taxes, net of federal effect ......... (37) 310 340 Other ............................................. 3 100 (263) ----- ------ ------ Provision for income taxes ........................ $ 709 $3,343 $4,498 ===== ====== ======
The extraordinary loss of $.5 million in 1996 is net of deferred tax benefits of $.3 million.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
MARCH 31, (IN THOUSANDS) ------------------- 1997 1998 ------ ------- Deferred tax assets: Allowance for uncollectible accounts receivable ..... $ 210 $ 356 Reserve for worker's compensation ................... 621 736 Accrued bonuses ..................................... 249 301 Net operating loss carryforwards .................... 641 7,973 Alternative minimum tax credit carryforwards ........ 869 720 Foreign tax credit carryforwards .................... 124 167 Other ............................................... 39 0 ------ ------- Total gross deferred tax assets ................. 2,753 10,253 ------ ------- Deferred tax liabilities: Property and equipment .............................. 8,074 20,674 Accounts Recievable ................................. -- 522 ------ ------- Total gross deffered tax liability .................. 8,074 21,196 ------ ------- Net deferred tax liability ...................... $5,321 $10,943 ====== =======
The Company anticipates the reversal of existing taxable temporary differences will provide sufficient taxable income to realize the benefits of its deferred tax assets.
At March 31, 1998, the Company had $.7 million of alternative minimum tax credit carryforwards available to reduce regular Federal income taxes which have no expiration date. The Company has Federal and State net operating loss carryforwards of approximately $21 and $7.3 million, respectively. The Federal net operating losses expire in the year beginning 2011. The State net operating losses expire in the years beginning 2002. The Company also has foreign tax credits of approximately $.2 million for federal income tax purposes which expire in 2002.
As a result of certain acquisitions involving capital stock, the Company provided for deferred tax liabilities of $2.5 million and $1 million in fiscal years ended March 31, 1997 and 1998, respectively, due to differences in basis of assets for financial reporting and income tax purposes.
(10) RELATED PARTY TRANSACTIONS
The Company previously retained a company owned by a member of the Board of Directors to provide consulting services. Additionally, the Company retained the services of a family member of an Officer of the Company and purchased products from a company owned by a family member of an Officer of the Company. Payments for these services, expenses and products for the years ended March 31, 1996, 1997 and 1998, were $.05 million, $.02 million and $.14 million, respectively.
(11) EMPLOYEE BENEFIT PLANS
The Company has a welfare benefit plan (the "Plan") to provide medical benefits for eligible employees and their dependents. Contributions to the Plan are made by the Company and covered employees. The Plan may be terminated at the discretion of the Company. Contributions to the Plan in the amounts of $.7 million, $1.0 million and $3.6 million were made in fiscal 1996, 1997 and 1998, respectively.
The Company has a 401(k) savings plan. Eligible employees can make contributions to the plan. The Company may, at its option, match a portion of the contributions made by the employees. The Company did not match employee contributions made in fiscal 1996, 1997 or fiscal 1998.
(12) COMMITMENTS AND CONTINGENCIES
Under the Company's worker's compensation insurance program, the Company pays the first $250,000 of all claims with no aggregate limit in any one year. Provision for claims under the program has been made in the financial statements which represent the expected future payments based on the estimated ultimate costs for incidents incurred through the end of each period. The insurance carrier required the Company to make a deposit of $.33 million, which has been included in other assets in the accompanying balance sheet. In addition, the Company has entered into an agreement with an insurance carrier for the guarantee of deductible reimbursements. The agreement requires the Company to establish a letter of credit (note 4) and a surety bond in favor of its respective insurance carriers. The amount of the surety bond for the year ended March 31, 1998 was $1.6 million.
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.
(13) SUPPLEMENTARY INFORMATION
MARCH 31, --------------------- (IN THOUSANDS) 1997 1998 --------- --------- Receivables: Trade receivables ..................................... $ 31,475 $ 40,598 Less allowance for doubtful accounts .................. (561) (966) --------- --------- Net trade receivables ............................. $ 30,914 $ 39,632 ========= ========= Prepaid expenses and other: Prepaid expenses ...................................... $ 68 $ 293 Other current assets .................................. 376 280 --------- --------- Total prepaids and other assets ................... $ 444 $ 573 ========= ========= Property and equipment: Land .................................................. $ 98 $ 143 Buildings ............................................. 754 3,332 Well servicing equipment .............................. 150,981 167,684 Automobiles, trucks and other vehicles ................ 12,951 28,184 Office furniture and other equipment .................. 692 1,868 --------- --------- 165,476 201,211 Less accumulated depreciation and amortization ........ (19,835) (36,365) --------- --------- Net property and equipment ........................ $ 145,641 $ 164,846 ========= ========= Goodwill and other assets: Goodwill (net of accumulated amortization of $680 and $2,473) .................................. $ 40,060 $ 41,138 Other assets (net of accumulated amortization of $448 and $2,125) .................................. 12,748 16,232 Deposits and notes receivable ......................... 351 496 --------- --------- $ 53,159 $ 57,866 ========= ========= Accrued liabilities: Accrued payroll ....................................... $ 2,196 $ 1,951 Accrued insurance ..................................... 1,657 1,952 Other accrued expenses ................................ 4,769 4,922 --------- --------- $ 8,622 $ 8,825 ========= =========
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 1997 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues ........................ $14,677 $19,134 $22,456 $36,361 Operating income ................ 1,550 2,154 2,769 3,563 Net income ...................... 1,016 1,159 1,550 1,352 Earnings per share -- basic ..... .16 .18 .24 .14 Earnings per share -- diluted ... .15 .18 .24 .14
Summarized quarterly financial data for 1998 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues ........................... $54,732 $59,856 $55,410 $56,164 Operating income ................... 5,869 5,856 6,268 6,010 Net income ......................... 1,876 2,077 2,143 1,582 Earnings per share -- basic ........ .17 .19 .19 .14 Earnings per share -- diluted ...... .17 .18 .19 .14
PART III
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors and Executive Officers of the Company is incorporated by reference from the Company's definitive Proxy Statement and related materials in connection with the annual meeting of shareholders expected to be held on September 30, 1998. The incorporated portions consist of all of the disclosures that appear in that Proxy Statement under the headings "Nominees for Election as Directors" and "Executive Officers."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning Executive Compensation is incorporated by reference from the Company's definitive Proxy Statement and related materials in connection with the annual meeting of shareholders expected to be held on September 30, 1998. The incorporated portions consist of all of the disclosures that appear in that Proxy Statement under the heading "Executive Compensation."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the Security Ownership of Certain Beneficial Owners and Management is incorporated by reference from the Company's definitive Proxy Statement and related materials in connection with the annual meeting of shareholders expected to be held on September 30, 1998. The incorporated portions consist of all of the disclosures that appear in that Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning Certain Relationships and Related Transactions is incorporated by reference from the Company's definitive Proxy Statement and related materials in connection with the annual meeting of shareholders expected to be held on September 30, 1998. The incorporated portions consist of all of the disclosures that appear in that Proxy Statement under the heading "Certain Relationships and Related Transactions."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of Dawson Production Services, Inc. and subsidiaries are included in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of March 31, 1997 and March 31, 1998
Consolidated Statements of Income for each of the years in the three-year period ended March 31, 1998
Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended March 31, 1998
Consolidated Statements of Cash Flows for each of the years in the three-year period ended March 31, 1998
Notes to the Consolidated Financial Statements
(2) The following Financial Statement Schedules are included herein:
None.
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.
(3) Listing of Exhibits (included herein)
(b) Reports on Form 8-K. The Company has not filed any reports on Form 8-K for the year ended March 31, 1998.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
EXHIBIT NUMBER - ------- 3.1 -Amended and Restated Articles of Incorporation of the Company, as amended by Articles of Amendment to the Amended and Restated Articles of Incorporation (incorporated by reference as Exhibit 3.1 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
3.2 -Bylaws of the Company, as amended (incorporated by reference as Exhibit 3.2 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
4.1 -Specimen stock certificate evidencing the Common Stock (incorporated by reference as Exhibit 4.1 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
4.2 -See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws of the Company defining the rights of the holders of Common Stock.
4.3 -Indenture between the Company and U.S. Trust Company of Texas, N.A. related to the offering of the 9 3/8% Senior Notes due 2007 (incorporated by reference from Exhibit 4.3 of the Company's report on Form 10-K filed June 30, 1997 [No. 000-27732]).
4.4 -Rights Agreement, dated as of September 11, 1997, between Dawson Production Services, Inc., and Harris Trust Company of New York as Rights Agent, which includes as EXHIBIT A thereto the Form of Rights Certificate (incorporated by reference as Exhibit 1 of the Company's Registration statement on Form 8-A [No. 000-2773 dated Sepptember 18, 1997]).
10.1 -Dawson Production Services, Inc. 1995 Incentive Plan (incorporated by reference as Exhibit 10.1 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.2 -Employment Agreement between the Company and Michael E. Little dated as of April 1, 1996 (incorporated by reference as Exhibit 10.2 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.3 -Service contract between the Company and Union Pacific Resources Company dated December 8, 1992 and Purchase Order dated April 27, 1995 (incorporated by reference as Exhibit 10.4 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.4 -Credit Agreement between the Company and The Frost National Bank, dated February 20, 1997, relating to a $50.0 million Working Capital Revolving Facility (incorporated by reference from Exhibit 10.4 of the Company's report on Form 10-K filed June 30, 1997 [No. 000-27732]).
10.5 -Security Agreement between the Company and The Frost National Bank, dated as of February 20, 1997 relating to the Working Capital Revolving Facility. Pursuant to Item 601, Instructions of Reg. S-K, identical copies of the Security Agreement are not included for the following debtors or guarantors: Dawson Production Acquisition Corp., Dawson Production Management, Inc., Taylor Companies, Inc., Dawson Production Partners, L.P., Dawson Production Services de Mexico, S.A. de C.V.
10.6 -Non-Negotiable Convertible Debenture dated December 1, 1994 executed by Dawson WellTech, L.C., as maker, and payable to Well Solutions, Inc., and Amendment and Modification of Non-Negotiable Convertible Debenture (incorporated by reference as Exhibit 10.11 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.7 -Agreement for the Acquisition of Minority Interest in Dawson WellTech, L.C. between the Company and WellTech, Inc. dated as of November 1, 1995 (incorporated by reference as Exhibit 10.12 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.8 -Agreement for the Conversion of Securities of Dawson Well Servicing, Inc. among the Company, RIMCO Partners, L.P., RIMCO Partners, L.P. II, RIMCO Partners, L.P. III, Triad Ventures Limited II and Nueces
Ventures, Inc., dated as of November 1, 1995, and Joint Agreement executed by NationsBanc Capital Corporation (incorporated by reference as Exhibit 10.13 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.9 -Registration Rights Agreement among the Company, WellTech, Inc., RIMCO Partners, L.P., RIMCO Partners, L.P. II, RIMCO Partners, L.P. III, RIMCO Partners, L.P. IV, Triad Ventures Limited II, NationsBanc Capital Corporation and Nueces Ventures, Inc., dated as of November 1, 1995 (incorporated by reference as Exhibit 10.14 of the Registrant's Registration on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.10 -Omitted.
10.11 -Form of Indemnification Agreement between the Company and each of its directors and executive officers (incorporated by reference as Exhibit 10.16 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.12 -Employment Agreement between the Company and P. Mark Stark dated as of April 1, 1996 (incorporated by reference as Exhibit 10.17 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.13 -Employment Agreement between the Company and Joseph Eustace dated as of April 1, 1996 (incorporated by reference as Exhibit 10.18 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.14 -Promissory Notes dated November 1, 1994 and February 1, 1996 payable to the Company by Michael E. Little (incorporated by reference as Exhibit 10.19 of the Registrant's Registration Statement on Form S-1 [No. 333-00452 dated March 14, 1996]).
10.15 -Voting Agreement among RIMCO Partners, L. P., RIMCO Partners, L. P. II, RIMCO Partners, L. P. III, RIMCO Partners, L. P. IV, Triad Ventures Limited II, the Company and Michael E. Little dated November 28, 1994, and letter dated January 16, 1995 relating thereto (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 effective March 20, 1996 [File No. 333-00452]).
10.16 -Purchase Agreement between the Company and Pride Petroleum Services, Inc. a Louisiana corporation, (incorporated by reference from Exhibit 10.16 of the Company's Registration Statement on Form S-1 [File No. 333-19413 dated as of December 23, 1996]).
10.17 -First Amendment to Purchase Agreement dated February 20, 1997 between the Company and Pride Petroleum Services, Inc. a Louisiana corporation, (incorporated by reference from Exhibit 10.24 of the Company's report on Form 8-K filed March 7, 1997 [File No. 0-27732]).
10.18 -Stock Purchase Agreement dated July 8, 1996 among Dawson Production Services, Inc., a Texas Corporation (the "Buyer"), PSD Investments, Ltd., a Texas limited partnership(the "Seller"), John Randall Taylor, an individual residing in Panola County, Texas, in his individual capacity, and as general partner and sole managing partner of the Seller and his spouse, Kathy Dianne Taylor, who is also an individual residing in Panola County, Texas, in her individual capacity and as a general partner of the Seller (incorporated by reference as Exhibit 10.23 of the Registrant's Current Report on Form 8-K [No. 0-27732 dated July 29, 1996]).
10.19 -First Amendment dated July 29, 1996 to Stock Purchase Agreement dated July 8, 1996 by and among Dawson Production Services, Inc., a Texas corporation (the "Buyer"), PSD Investments, Ltd., a Texas limited partnership (the "Seller"), John Randall Taylor,an individual residing in Panola County, Texas, in his individual capacity, and as general partner and sole managing partner of the Seller and his spouse, Kathy Dianne Taylor, who is also an individual residing in Panola County, Texas, in her individual capacity and as a general partner of the Seller (incorporated by reference as Exhibit 10.24 of the Registrant's Current Report on Form 8-K (No. 0-27732 dated July 29, 1996)).
10.20 -Omitted.
10.21 -Omitted.
10.25 -Dawson Production Services, Inc., Amended and Restated 1995 Incentive Plan (Amended as of July 31, 1997) (incorporated by reference from Exhibit 10.1(a) of the Company's report on Form 10-Q for the quarterly period ended June 30, 1997 [No. 0-27732]).
10.26 -Agreement Regarding Election of Directors dated as of November 21, 1996 by and between the Company and RIMCO Partners, L.P., RIMCO Partners, L.P. II, RIMCO Partners, L.P. III, and RIMCO Partners, L.P. IV.
11.1 -Statement Regarding Computation of Per Share Earnings.
12.1 -Statement of Ratio of Earnings to Fixed Charges for each of the last three fiscal years.
21.1 -Subsidiaries of the Registrant.
24.1 -Power of Attorney for Dawson Production Services, Inc. (contained on the signature page of this report).
As permitted by Item 601 (b) (4) (iii) (A) of Regulation S-K, the Registrant has not filed with this Registration Statement certain instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries because the total amount of securities authorized under any such instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to furnish a copy of any such agreement to the Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 San Antonio, State of Texas, on June 19, 1998.
DAWSON PRODUCTION SERVICES, INC.
By: /s/ MICHAEL E. LITTLE Michael E. Little Chairman of the Board, President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Michael E. Little and P. Mark Stark, and each of them, each with full power to act without the other, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Report, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person hereby ratifying and confirming that each of said attorneys-in-fact and agents or his substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
/s/MICHAEL E. LITTLE Chairman of the Board, President, June 19, 1998 Michael E. Little Chief Executive Officer and Director (Principal Executive Officer)
/s/P. MARK STARK Chief Financial Officer (Principal June 19, 1998 P. Mark Stark Accounting and Financial Officer)
/s/WM. WARD GREENWOOD Director June 19, 1998 Wm. Ward Greenwood
/s/J. MICHAEL BELL Director June 18, 1998 J. Michael Bell
/s/DOUGLAS D. LEWIS Director June 18, 1998 Douglas D. Lewis
/s/LAWRENCE C. PETRUCCI Director June 19, 1998 Lawrence C. Petrucci