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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Revised Preliminary Proxy Statement [ ] Confidential, For Use of
the Commission Only (as
permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
BAYARD DRILLING TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$27,849
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Confidential Preliminary Proxy Statement (1-13553)
- --------------------------------------------------------------------------------
(3) Filing Party:
Bayard Drilling Technologies, Inc.
- --------------------------------------------------------------------------------
(4) Date Filed:
November 6, 1998
- --------------------------------------------------------------------------------
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[NABORS INDUSTRIES LOGO] [BAYARD DRILLING LOGO]
PROSPECTUS PROXY STATEMENT
---------------------
Nabors Industries, Inc. and Bayard Drilling Technologies, Inc. have entered
into a merger agreement which provides that Nabors will acquire Bayard through a
merger. If the merger is consummated, each share of Bayard common stock will be
converted into the right to receive:
- 0.3375 shares of Nabors common stock; and
- $0.30 in cash.
After the merger, the former stockholders of Bayard will own approximately
5.7% of the outstanding shares of Nabors common stock. Nabors common stock
trades on the American Stock Exchange under the symbol "NBR."
THE BAYARD BOARD HAS UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT, THE
MERGER AND RELATED TRANSACTIONS, TAKEN TOGETHER, ARE ADVISABLE AND IN THE BEST
INTERESTS OF, AND ARE FAIR TO, THE STOCKHOLDERS OF BAYARD. ACCORDINGLY, THE
BAYARD BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND
UNANIMOUSLY RECOMMENDS THAT ALL STOCKHOLDERS VOTE FOR ADOPTION OF THE MERGER
AGREEMENT.
You are cordially invited to attend a special meeting of the stockholders
of Bayard to consider and vote upon the merger agreement. The merger agreement
will be adopted at the special meeting if it is approved by the holders of a
majority of the outstanding shares of Bayard common stock.
The special meeting will be held at the following date, time and place:
March 16, 1999 at 10:00 a.m. local time
Hotel Sofitel
425 North Sam Houston Parkway East
Houston, Texas 77060
Your vote is very important and you are encouraged to attend the special
meeting. Whether or not you plan to attend the special meeting, please complete,
sign and date the enclosed proxy card, and return it as soon as possible in the
enclosed postage prepaid envelope.
THIS TRANSACTION INVOLVES VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 10.
You have the right to dissent from the merger. To do so you must follow
certain special procedures. If you comply with these procedures, you may obtain
what a court determines to be the fair value of your shares of Bayard common
stock instead of receiving the merger consideration described above.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SHARES OF NABORS COMMON STOCK TO
BE ISSUED IN THE MERGER OR DETERMINED IF THIS DOCUMENT IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This document provides detailed information about Bayard, Nabors and the
proposed merger. You should read this entire document carefully. This document
is dated February 16, 1999 and was first mailed to Bayard stockholders on or
about February 16, 1999.
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TABLE OF CONTENTS
<TABLE>
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SUMMARY..................................................... 1
The Companies............................................. 1
The Merger................................................ 2
The Special Meeting....................................... 6
Risk Factors.............................................. 7
Forward-Looking Statements................................ 7
Summary Selected Historical and Unaudited Pro Forma
Combined Financial Data................................ 8
RISK FACTORS................................................ 10
Risks Relating to the Transaction......................... 10
Changes in the relationship between the Bayard common
stock trading price and the Nabors common stock
trading price may cause the value of the merger
consideration to decrease............................. 10
If Nabors breaches the merger agreement, its payments
to Bayard may not cover Bayard's losses............... 10
The termination fee may deter potentially more
favorable competing offers; if Bayard must pay the
termination fee, the payment will reduce its cash and
could reduce the trading price for its common stock... 10
The 19.9% lock-up option Bayard granted to Nabors may
deter or delay competing offers....................... 11
Risks Relating to Nabors and its Business................. 11
Decreased oil and gas prices could adversely affect
drilling activity and Nabors' revenues, cash flows and
profitability......................................... 11
Nabors operates in a highly competitive industry with
excess drilling capacity, which may adversely affect
Nabors' results of operations......................... 11
The nature of Nabors' operations present inherent risks
of loss that, if not insured or indemnified against,
could adversely affect its results of operations...... 12
The profitability of Nabors' international operations
could be adversely affected by war, civil disturbance
or economic turmoil................................... 12
Exposure to environmental liabilities could adversely
affect Nabors' results of operations.................. 13
Nabors could be adversely affected if it loses the
services of Mr. Isenberg, Mr. Petrello or Mr.
Stratton.............................................. 13
The market price of Nabors common stock could be
adversely affected by the sale of the large number of
shares that are available for sale in the future...... 13
The absence of dividends limits the ability of
stockholders to recognize a return on an investment in
Nabors common stock................................... 13
Nabors has implemented anti-takeover measures that
could prevent Nabors' stockholders from recognizing a
possible premium on their shares...................... 13
WHERE YOU CAN FIND MORE INFORMATION......................... 14
COMPARATIVE MARKET PRICE DATA............................... 15
THE SPECIAL MEETING......................................... 16
General................................................... 16
Notice of Meeting......................................... 16
Record Date; Shares Entitled to Vote...................... 16
Quorum.................................................... 16
Vote Required............................................. 16
Effect of Abstentions and Broker Non-Votes................ 17
Voting of Proxies......................................... 17
Revocation of Proxies..................................... 17
Solicitation of Proxies; Expenses......................... 17
Shares Held by Bayard Management; Stockholder
Agreements............................................. 18
</TABLE>
ii
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<TABLE>
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<S> <C>
THE MERGER.................................................. 19
General................................................... 19
Background of the Merger.................................. 19
Reasons for the Merger.................................... 23
Recommendation of the Bayard Board........................ 24
Opinion of Bayard's Financial Advisor..................... 25
Effective Time............................................ 29
Exchange of Certificates.................................. 29
Federal Securities Law Consequences....................... 30
American Stock Exchange Listing of Nabors Common Stock.... 30
Certain Effects of the Merger............................. 30
Interests of Certain Persons in the Merger................ 30
Regulatory Matters........................................ 34
Source and Amount of Funds................................ 34
Management of Nabors Following the Merger................. 34
Rights of Dissenting Stockholders......................... 35
Accounting Treatment...................................... 37
THE MERGER AGREEMENT AND RELATED AGREEMENTS................. 38
The Merger................................................ 38
Conversion of Securities.................................. 38
Representations and Warranties............................ 39
Covenants................................................. 40
Closing Conditions........................................ 43
Termination............................................... 44
Fees, Expenses and Other Payments......................... 45
Amendment; Waiver......................................... 45
Stock Option Agreement.................................... 45
Stockholder Agreements.................................... 46
Amendment of Bayard Rights Agreement...................... 46
FEDERAL INCOME TAX CONSEQUENCES............................. 48
Qualification of Merger as a Reorganization............... 48
Consequences of Merger to Nabors, Nabors' Acquisition
Subsidiary and Bayard.................................. 49
Consequences of Merger to Bayard Stockholders............. 49
Consequences of Pre-Merger Sale of Bayard Stock........... 50
Backup Withholding........................................ 50
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ 51
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA OF
BAYARD.................................................... 57
BAYARD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 59
General................................................... 59
Domestic Land Drilling Industry Overview.................. 60
Financial Condition and Liquidity......................... 60
Results of Operations..................................... 64
Recent Operating Results.................................. 67
Inflation and Changing Prices............................. 68
Year 2000 Computer Issues................................. 68
BUSINESS OF BAYARD.......................................... 70
General................................................... 70
Core Operating Areas...................................... 70
Business Strategy......................................... 71
</TABLE>
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Drilling Equipment and Supplies........................... 72
Rig Fleet................................................. 73
Contract Drilling Operations.............................. 75
Customers and Marketing................................... 76
Competition............................................... 77
Operating Hazards and Insurance........................... 77
Government Regulation and Environmental Matters........... 77
Facilities and Other Property............................. 80
Employees................................................. 80
Legal Proceedings......................................... 80
PRINCIPAL STOCKHOLDERS OF BAYARD............................ 82
COMPARISON OF STOCKHOLDER RIGHTS............................ 85
General................................................... 85
Bayard Rights Agreement................................... 86
NABORS' YEAR 2000 COMPLIANCE PROGRAM........................ 88
INDEPENDENT AUDITORS........................................ 89
OTHER MATTERS............................................... 89
STOCKHOLDER PROPOSALS....................................... 89
LEGAL MATTERS............................................... 89
EXPERTS..................................................... 90
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
ANNEX A -- Merger Agreement
ANNEX B -- Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
ANNEX C -- Section 262 of the Delaware General Corporation Law
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SUMMARY
This summary is qualified by, and should be read along with, the more
detailed information contained in the rest of this document, including the
attached annexes and the financial statements and related notes included or
incorporated by reference into this document. We urge you to read all of these
materials carefully.
THE COMPANIES
BAYARD DRILLING TECHNOLOGIES, INC.
Bayard is a leading provider of contract land drilling services to major
and independent oil and gas companies. Since its incorporation in December 1996,
Bayard has grown from a regional competitor with ten rigs to the fifth largest
land drilling fleet operator in the United States. As of December 31, 1998,
Bayard's rig fleet consisted of 87 rigs, of which 73 were being actively
marketed and 14 were available for refurbishment. Bayard's fleet consists
primarily of rigs capable of drilling to well depths of 15,000 feet or greater.
Of Bayard's 87 rigs, 69 are capable of drilling to depths of 15,000 feet or
greater and 43 are capable of drilling to depths of 20,000 feet or greater.
Thirty-one of Bayard's 87 rigs are diesel electric silicon controlled rectifier
rigs, which utilize electric power to control drilling operations and are
commonly referred to as "SCR" rigs in the land drilling industry. The remainder
are mechanical rigs. Bayard's rig fleet is currently concentrated in three core
operating regions -- the Mid-Continent region, the Gulf Coast region and the
South Texas region. Bayard's principal executive offices are located at 4005
Northwest Expressway, Suite 550E, Oklahoma City, Oklahoma 73116, and its
telephone number is (405) 840-9550.
NABORS INDUSTRIES, INC.
Nabors is the largest land drilling contractor in the world, with over 400
actively marketed land rigs as of November 30, 1998. Nabors conducts oil and gas
land drilling operations in North America, including the lower 48 United States,
Alaska and Canada, and internationally, primarily in South and Central America
and the Middle East. Offshore, Nabors markets 25 platforms, six jack-up and two
barge drilling rigs in the Gulf of Mexico, Alaska's Cook Inlet and several
international markets. To supplement its primary businesses, Nabors offers a
number of ancillary well-site services, including oilfield management,
engineering, transportation, construction, maintenance, well logging and other
support services, in selected domestic and international markets. In addition,
Nabors manufactures and leases or sells top drives for a broad range of drilling
rig applications and manufactures and leases or sells rig instrumentation
equipment to monitor rig performance. Nabors' principal executive offices are
located at 515 West Greens Road, Suite 1200, Houston, Texas 77067, and its
telephone number is (281) 874-0035.
On January 10, 1999, Nabors entered into an agreement and plan of merger to
acquire Pool Energy Services Co., an energy services company principally engaged
in providing well-servicing, workover and drilling services and related
transportation services on land and offshore in the United States and selected
international markets. Pool's rig fleet includes approximately 750 land
well-servicing workover rigs, 29 land drilling rigs and 27 offshore rigs. The
consummation of the Pool merger transaction is subject to customary closing
conditions, including regulatory approval and the approval of holders of at
least two-thirds of Pool shares. The agreement provides for Nabors to issue
1.025 shares of Nabors common stock for each outstanding Pool share not already
owned by Nabors and assume approximately $144 million of debt. Based on the
number of Pool shares outstanding on January 10, 1999, upon consummation of the
Pool merger transaction Nabors would issue approximately 19 million shares of
Nabors common stock which, on the last trading date before the announcement of
the Pool merger agreement, had a value of approximately $305 million.
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THE MERGER
GENERAL
Nabors will acquire Bayard in the merger. Bayard will continue in existence
after the merger as a wholly owned subsidiary of Nabors.
TREATMENT OF BAYARD COMMON STOCK
In the merger, each issued and outstanding share of Bayard common stock,
except for shares held by persons who properly exercise dissenters' appraisal
rights, will be converted into the right to receive:
- 0.3375 shares of Nabors common stock; and
- $0.30 in cash, without interest.
See "The Merger Agreement and Related Agreements -- Conversion of Securities."
OPINION OF BAYARD'S FINANCIAL ADVISOR
DLJ acted as financial advisor to Bayard in connection with the merger. DLJ
has rendered its opinion to the Bayard Board of Directors that, as of February
12, 1999, and subject to the assumptions, limitations and qualifications
contained in the opinion, the consideration to be received by the stockholders
of Bayard under the merger agreement was fair to such stockholders from a
financial point of view. DLJ's written opinion is attached to this document as
Annex B. Bayard's stockholders should read this entire opinion carefully.
RECOMMENDATION OF THE BAYARD BOARD
The Bayard Board has unanimously determined that the merger agreement, the
merger and related transactions, taken together, are advisable and in the best
interests of, and are fair to, the stockholders of Bayard. The Bayard Board has
authorized and approved the merger agreement, subject to the approval of such
agreement by the stockholders of Bayard, and has unanimously recommended that
the stockholders of Bayard vote FOR adoption of the merger agreement.
The Bayard Board based its determination and recommendation on the
following principal grounds:
- its belief that the combination of the resources and operations of Bayard
and Nabors is a good strategic fit, especially in view of the focus by
both companies on technologically advanced rigs capable of deep drilling
applications;
- the fact that Nabors has been a strong financial performer historically,
maintaining low levels of debt, while operating a large contract drilling
fleet; and
- its belief that Nabors, after giving effect to the acquisition of Bayard
in the merger, will be a stronger company in the short-term and long-term
than either Nabors or Bayard as an independent company.
See "The Merger -- Background of the Merger," "-- Reasons for the Merger" and
"-- Recommendation of the Bayard Board."
RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders of Bayard who wish to dissent from the merger will be entitled
to exercise appraisal rights granted under Section 262 of the Delaware General
Corporation Law. If you wish to exercise appraisal rights, you must comply with
the procedures set forth in Section 262. Stockholders who properly exercise
these appraisal rights will be entitled to obtain a determination by a Delaware
court of the "fair value" of their shares after the consummation of the merger.
A determination of "fair value" would
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exclude any element of value arising from the accomplishment or expectation of
the merger. No one can predict the ultimate outcome of a judicial appraisal
proceeding.
In order to exercise appraisal rights, you must, among other things:
- not vote in favor of adoption of the merger agreement or deliver to
Bayard a signed proxy card without express voting instructions;
- deliver to Bayard, before the vote on the adoption of the merger
agreement at the special meeting, a written demand for appraisal of your
shares;
- hold the shares in question on January 15, 1999, the record date for
voting on the merger agreement, and continue to hold them through the
date of consummation of the merger; and
- file a petition in Delaware court, within 120 days after the merger,
demanding a determination of the fair value of your shares.
For more detailed information regarding the requirements of Section 262 of the
Delaware General Corporation Law, see "The Merger -- Rights of Dissenting
Stockholders." In addition, the full text of Section 262 is attached to this
document as Annex C.
FEDERAL INCOME TAX CONSEQUENCES
The merger will be treated as a reorganization for federal income tax
purposes. As a result, except with respect to cash received instead of
fractional shares, Bayard stockholders:
- will not recognize any loss as a result of the merger; and
- will recognize gain as a result of the merger only to the extent of the
lesser of the cash consideration received or the excess, if any, of the
value of the total consideration received over the stockholder's tax
basis in the Bayard common stock.
Stockholders who sell shares of Bayard common stock in the market before the
merger will generally recognize capital gain or loss in an amount equal to the
difference between the amount received in the sale and the stockholder's tax
basis in the shares that are sold. See "Federal Income Tax Consequences."
Bayard and Nabors base these statements on a number of assumptions that are
more fully described in "Federal Income Tax Consequences," including the
assumption that, as of the date of the merger, Nabors common stock will continue
to represent at least 80% of the value of the total consideration furnished by
Nabors in the merger.
GRANT OF 19.9% LOCK-UP OPTION; EFFECT ON COMPETING OFFERS
At the time that the merger agreement was executed, Bayard and Nabors also
entered into a stock option agreement. The existence of the stock option
agreement could deter third parties from making offers to Bayard for competing
acquisition transactions by making such transactions more expensive or difficult
to consummate. The stock option agreement gives Nabors the right to purchase up
to 19.9% of the outstanding shares of Bayard common stock at a price of $5.50
per share. However, Nabors may purchase such shares only if the merger agreement
is terminated for specified reasons, including the following:
- the stockholders of Bayard fail to adopt the merger agreement, and within
180 days after the termination of such agreement, Bayard authorizes or
announces an intention to enter into a competing acquisition transaction;
- Bayard intentionally breaches any of its covenants or agreements
contained in the merger agreement;
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- the representations and warranties of Bayard contained in the merger
agreement are or become untrue;
- the Bayard Board withdraws its recommendation of the merger agreement or
recommends that a competing acquisition proposal be adopted by the
stockholders of Bayard; or
- the Bayard Board determines that proceeding with the merger would be
inconsistent with its fiduciary duties because of the existence of a
competing acquisition proposal.
The Bayard Board determined to enter into the stock option agreement because it
believed such an agreement was necessary to obtain Nabors' agreement to other
favorable terms, including the favorable exchange ratio at which Bayard common
stock is to be converted into Nabors common stock. See "Risk Factors -- The
19.9% lock-up option Bayard granted to Nabors may deter or delay competing
offers" and "The Merger Agreement and Related Agreements -- Stock Option
Agreement."
PROHIBITION ON SOLICITATION OF COMPETING TRANSACTIONS
So long as the merger agreement is in effect, Bayard is prohibited from
initiating, soliciting or encouraging the submission of any proposal by, or
entering into any discussions or negotiations with, a third party relating to a
competing acquisition transaction. A competing acquisition transaction includes
any of the following:
- a merger or consolidation of Bayard or its subsidiaries;
- the sale or other disposition of all or substantially all of the
properties and assets of Bayard or any other material properties and
assets; or
- a tender or exchange offer for more than 15% of the outstanding shares of
Bayard common stock.
If, however, the Bayard Board, after consulting with legal counsel,
determines in good faith that it must do so in order to comply with its
fiduciary duties, then Bayard may, in response to an unsolicited competing
acquisition proposal meeting specified criteria, participate in discussions and
negotiations regarding the proposal. See "The Merger Agreement and Related
Agreements -- Covenants -- No Solicitation."
CONDITIONS TO THE MERGER
The conditions to the obligations of all parties to consummate the merger
include:
- the adoption of the merger agreement by the stockholders of Bayard;
- the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976; and
- the absence of any injunction or other legal restraint prohibiting the
merger.
The conditions to the obligations of each party to consummate the merger
include:
- that the other party not have suffered a material adverse effect in its
business or operations since the date of the merger agreement;
- that the representations and warranties of the other party in the merger
agreement be true, except where the failure to be true would not have a
material adverse effect on the other party; and
- that the other party have complied in all material respects with its
covenants in the merger agreement.
See "The Merger Agreement and Related Agreements -- Closing Conditions."
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TERMINATION; FEES AND EXPENSES
The merger agreement may be terminated if any of the following occurs:
- the merger agreement is not adopted by Bayard's stockholders;
- either Bayard or Nabors intentionally breaches any of its covenants or
agreements contained in the merger agreement;
- the representations and warranties of Bayard or Nabors contained in the
merger agreement are or become untrue;
- the merger is not consummated by September 30, 1999;
- the Bayard Board withdraws its recommendation of the merger agreement or
recommends that a competing acquisition proposal be adopted by the
stockholders of Bayard; or
- the Bayard Board determines that proceeding with the merger would be
inconsistent with its fiduciary duties because of the existence of a
competing acquisition proposal.
If the merger agreement is terminated under specified circumstances, then either
Bayard or Nabors may become obligated to make a payment to the other party. In
particular, if the merger agreement is terminated because a party breaches a
covenant, agreement, representation or warranty, then the breaching party must
make a payment in cash to the other party in the amount of $7.5 million (if
Bayard is the breaching party) or $15.0 million (if Nabors is the breaching
party). If the merger agreement is terminated for specified reasons involving a
competing acquisition proposal, Bayard must make a payment to Nabors in the
amount of $5.0 million, plus up to $500,000 for reasonable third party costs.
See "The Merger Agreement and Related Agreements -- Termination" and " -- Fees,
Expenses and Other Payments."
CLOSING
Bayard and Nabors expect to consummate the merger promptly after the
conditions to closing set forth in the merger agreement are fulfilled or waived.
It is anticipated that the last of the conditions to be fulfilled will be either
the expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 or the adoption of the merger agreement by
the Bayard stockholders. Bayard and Nabors are working towards completing the
merger as quickly as possible and expect to consummate this transaction early in
the second quarter of 1999. See "The Merger -- Effective Time."
SURRENDER OF STOCK CERTIFICATES; PAYMENT FOR SHARES
Promptly after the merger is consummated, Nabors will mail a transmittal
form to each record holder of shares of Bayard common stock, describing the
procedure for surrendering Bayard stock certificates. STOCKHOLDERS SHOULD NOT
SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
Stockholders who submit their certificates and a completed transmittal form will
receive:
- the cash portion of the consideration to be paid by Nabors;
- certificates for the whole number of shares of Nabors common stock which
the holder has the right to receive; and
- cash instead of fractional shares of Nabors common stock.
No interest will be paid on any cash payable upon surrender of certificates. See
"The Merger -- Exchange of Certificates" and "The Merger Agreement and Related
Agreements -- Conversion of Securities."
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THE SPECIAL MEETING
GENERAL
The special meeting of the stockholders of Bayard will be held at the date,
time and place set forth on the cover page of this document.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, the stockholders of Bayard will vote on whether to
adopt the merger agreement. THE BAYARD BOARD UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF BAYARD VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT.
RECORD DATE; REQUIRED VOTE
The Bayard Board has fixed the close of business on January 15, 1999 as the
record date for determining which stockholders are entitled to notice of, and to
vote at, the special meeting. Only holders of record of shares of Bayard common
stock on the record date will be entitled to vote at the special meeting.
As of the record date, there were 18,200,765 shares of Bayard common stock
issued and outstanding. The presence, in person or by proxy, of holders of
record of 9,100,383 shares, representing a majority of the outstanding shares of
Bayard common stock, will constitute a quorum at the special meeting for
purposes of adopting the merger agreement. The affirmative vote of holders
representing a majority of the outstanding shares of Bayard common stock is
required to adopt the merger agreement. See "The Special Meeting -- Record Date;
Shares Entitled to Vote" and "-- Quorum."
VOTING YOUR SHARES
Holders of shares of Bayard common stock are entitled to one vote for each
share held. Stockholders need not be physically present at the special meeting
to vote their shares. Instead, stockholders may simply mail their signed proxy
cards in the enclosed return envelopes.
If a stockholder's shares are held in "street name" by a broker, the
stockholder should instruct the broker to vote the shares. If the stockholder
does not instruct the broker to vote, the broker will have no discretion to vote
the shares on its own.
Stockholders who mail signed proxy cards can change their votes at any time
before their proxy cards are voted at the special meeting. Stockholders can do
this in any of the following ways:
- send a written statement to the Secretary of Bayard revoking the proxy
card;
- send a new proxy card to the Secretary of Bayard; or
- attend the special meeting and vote in person.
SHARES OWNED BY BAYARD MANAGEMENT; STOCKHOLDER AGREEMENTS
As of the record date, directors and executive officers of Bayard and their
affiliates were beneficial owners of an aggregate of 2,687,740 shares of Bayard
common stock, excluding shares purchasable upon exercise of options or warrants.
Such shares represent approximately 14.8% of the total shares then outstanding.
As an inducement to Nabors entering into the merger agreement, certain
directors of Bayard and their affiliates, who as of the record date held the
right to vote approximately 14.5% of the shares of Bayard common stock, have
entered into agreements with Nabors requiring these stockholders to vote in
favor of the adoption of the merger agreement. These stockholders are James E.
Brown, Carl B. Anderson, III, AnSon Partners L.L.C., Energy Spectrum Partners LP
and Wil-Cas Investments, L.P. The remaining directors and executive officers of
Bayard have indicated that they also intend to vote the shares
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beneficially owned by them in favor of the adoption of the merger agreement. See
"The Merger Agreement and Related Agreements -- The Stockholder Agreements."
OFFICERS' AND DIRECTORS' INTERESTS IN THE MERGER
Some of Bayard's officers and directors may have interests in the merger
that differ from the interests of the Bayard stockholders generally. For
example:
- Nabors has agreed to cause one of its subsidiaries to hire James E.
Brown, the Chairman of the Board, President and Chief Executive Officer
of Bayard, as the subsidiary's Vice President -- Central Division. Under
the terms of the proposed employment agreement, Mr. Brown would receive a
$300,000 signing bonus, options for 200,000 shares of Nabors common stock
and an annual base salary of $175,000.
- Merrill A. Miller, Jr., a director of Bayard, is an officer of National
Oilwell, L.P., a company that has conducted a significant amount of
business with Nabors. National Oilwell, L.P. has advised Bayard that
Nabors is one of its top ten customers in terms of revenue.
- Existing indemnification arrangements for Bayard's directors and officers
will continue in effect after the merger.
See "The Merger -- Interests of Certain Persons in the Merger."
QUESTIONS REGARDING THE SPECIAL MEETING OR THE MERGER
You may call Morrow & Co., Inc., the proxy solicitor for Bayard, at (800)
662-5200, if you have any questions about the voting process or if you need
another proxy card or additional copies of this document.
RISK FACTORS
In determining whether to vote to adopt the merger agreement, stockholders
should carefully consider the matters set forth under "Risk Factors," among
others.
FORWARD-LOOKING STATEMENTS
The statements in this document and the documents incorporated by reference
that relate to matters that are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in this document,
words such as "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "could," "may," "predict" and similar expressions are
intended to identify forward-looking statements. Future events and actual
results may differ materially from the results set forth in or implied in the
forward-looking statements. Factors that might cause such a difference include
the following: fluctuations in worldwide prices and demand for oil and gas,
fluctuations in levels of oil and gas exploration and development activities,
fluctuations in the demand for contract drilling services, the existence of
competitors, technological changes and developments in the industry, the
existence of operating risks inherent in the contract drilling industry, the
existence of regulatory uncertainties, the possibility of political instability
in any of the countries in which Bayard and Nabors do business, year 2000 issues
and general economic conditions, in addition to the other matters discussed
under "Risk Factors." In addition, actual benefits resulting from the merger may
be less than those anticipated by the two companies as a result of unanticipated
events that may occur in the integration of the business of Bayard into the
business of Nabors.
7
<PAGE> 13
SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following tables present selected historical financial data of Nabors
and Bayard and unaudited selected pro forma combined financial data after giving
effect to the acquisition of all of the outstanding capital stock of Bayard by
Nabors under the purchase method of accounting. The companies derived the data
for Nabors for each of the five fiscal years ended September 30, 1997 and the
data for Bayard or its predecessors for each of the four years ended December
31, 1997 from audited financial statements filed in each company's Annual
Reports on Form 10-K. The companies derived the data for Bayard for the year
ended December 31, 1993 from unaudited financial statements. The companies
derived the data for the nine months ended September 30, 1998 and 1997 from
unaudited financial statements filed in each company's Quarterly Report on Form
10-Q. In the opinion of management of Nabors and Bayard, such unaudited
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position and
results of operations of such interim periods.
The historical financial data for Bayard for the year ended December 31,
1997 include the results of Bayard's consolidated subsidiaries as follows: Trend
Drilling Co., beginning May 1, 1997; Ward Drilling Company, Inc., beginning May
30, 1997; and Bonray Drilling Corporation, beginning October 16, 1997. The
historical financial data for Bayard for the three years ended December 31, 1996
relate to the operations of Anadarko Drilling Company, the predecessor of
Bayard, and generally include the financial results of the operation of eight
rigs. The selected historical financial data for each entity coincides with its
respective historical annual reporting period. Nabors changed its fiscal year
end from September 30 to December 31, effective for the fiscal year beginning
January 1, 1998. A three-month transition period from October 1, 1997 through
December 31, 1997 preceded the start of Nabors' new fiscal year. Nabors has
recast its financial data to conform to the presentation of the twelve months
ended December 31, 1997 by adjusting its audited results for the year ended
September 30, 1997 to exclude the unaudited results for the quarter ended
December 31, 1996 and to include the unaudited results for the quarter ended
December 31, 1997. Upon consummation of the merger, the fiscal year of the
combined company will end on December 31.
The companies derived or prepared the unaudited selected pro forma combined
financial data consistently with the unaudited pro forma combined condensed
financial statements included in this document. The unaudited selected pro forma
combined financial data does not indicate what the combined results of
operations of Nabors and Bayard would have been had the merger occurred as of
the dates indicated or the results of operations that the combined company may
obtain in the future. The unaudited selected pro forma combined financial data
does not reflect the anticipated cost savings resulting from integration of the
operations of Nabors and Bayard.
Stockholders should read the following selected historical and unaudited
pro forma combined financial data in conjunction with the historical and pro
forma combined financial statements and notes incorporated by reference or
included in this document.
8
<PAGE> 14
SUMMARY SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
THREE TWELVE
MONTHS MONTHS
YEAR ENDED SEPTEMBER 30, ENDED ENDED
-------------------------------------------------------- DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1997 1997 1997
---------- -------- -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NABORS -- HISTORICAL
Revenues................. $419,406 $484,268 $572,788 $719,743 $1,029,303 $ 302,806 $1,115,032
Net income from
continuing
operations............. 38,558 1,350 51,104 70,500 114,808 41,327 136,020
Comprehensive income..... -- -- 50,191 73,852 130,542 31,227 138,242
Earnings per diluted
share from continuing
operations............. .50 .02 .57 .75 1.08 .37 1.24
Dividends per common
share.................. -- -- -- -- -- -- --
Book value per common
share at end of
period................. 7.61
Total assets............. 493,927 490,273 593,272 871,274 1,234,232 1,281,306 1,281,306
Long-term obligations.... 73,109 61,879 51,478 229,504 229,507 226,299 226,299
Stockholders' equity..... 307,583 317,424 368,750 457,822 727,843 767,340 767,340
<CAPTION>
UNAUDITED NINE
MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
NABORS -- HISTORICAL
Revenues................. $ 812,226 $ 759,917
Net income from
continuing
operations............. 94,693 103,962
Comprehensive income..... 107,015 88,194
Earnings per diluted
share from continuing
operations............. .87 .96
Dividends per common
share.................. -- --
Book value per common
share at end of
period................. 8.45
Total assets............. 1,234,232 1,411,950
Long-term obligations.... 229,507 217,431
Stockholders' equity..... 727,843 851,035
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED NINE
YEAR ENDED DECEMBER 31, MONTHS ENDED
-------------------------------------------------------- SEPTEMBER 30,
UNAUDITED -----------------------
1993 1994 1995 1996 1997 1997 1998
---------- -------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BAYARD -- HISTORICAL
Revenues.................. $ 8,349 $ 9,910 $ 7,708 $ 9,853 $ 55,747 $ 33,214 $ 64,802
Net income (loss) from
continuing operations... (1,540) (657) (222) 267 1,916 663 1,043
Earnings per diluted share
from continuing
operations.............. -- -- -- -- .17 .07 .06
Dividends per common
share................... -- -- -- -- -- -- --
Book value per common
share at end of
period.................. 9.81 9.85
Total assets.............. 6,791 6,149 8,054 34,673 240,488 128,064 339,842
Long-term obligations..... -- -- -- 6,053 25,160 40,359 113,222
Stockholders' equity...... (913) (54) (276) 26,251 178,462 48,496 179,256
</TABLE>
UNAUDITED SUMMARY SELECTED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
PRO FORMA COMBINED
Revenues.................................................... $1,196,405 $ 824,719
Net income from continuing operations....................... 141,719 108,197
Earnings per diluted share from continuing operations....... 1.23 .94
Dividends per common share.................................. -- --
Book value per common share at end of period................ 7.87 8.66
Total assets................................................ 1,617,239
Long-term obligations....................................... 330,653
Stockholders' equity........................................ 925,985
Bayard equivalents:
Earnings per diluted share from continuing operations....... .42 .32
Dividends per common share.................................. -- --
Book value per common share at end of period................ 2.66 2.92
</TABLE>
9
<PAGE> 15
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this document, the stockholders of Bayard should carefully consider the
following risk factors before submitting a proxy card or voting at the special
meeting.
RISKS RELATING TO THE TRANSACTION
Changes in the relationship between the Bayard common stock trading price
and the Nabors common stock trading price may cause the value of the merger
consideration to decrease. The merger agreement does not provide Bayard
stockholders with any protection against changes in the relative prices of
Nabors common stock and Bayard common stock. The merger consideration of 0.3375
shares of Nabors common stock and $0.30 cash per share of Bayard common stock is
fixed by the merger agreement. As a result, neither the number of shares of
Nabors common stock to be issued in exchange for each share of Bayard common
stock nor the $0.30 cash per share of Bayard common stock will be adjusted. The
trading prices of Nabors common stock and Bayard common stock at the time that
the merger is consummated may vary from their prices at the date of this
document. If the trading price of the Nabors common stock decreases relative to
the trading price of the Bayard common stock or the trading price of the Bayard
common stock increases relative to the trading price of the Nabors common stock,
the value of the merger consideration may be less than would be expected based
on current prices. Nevertheless, there will be no adjustment to the merger
consideration in either circumstance. We encourage you to obtain current market
quotations for the shares of Bayard common stock and Nabors common stock.
If Nabors breaches the merger agreement, its payments to Bayard may not
cover Bayard's losses. The merger agreement provides Bayard with limited
monetary remedies in the event that the merger agreement is terminated because
of a breach by Nabors. Under certain circumstances, the limited monetary
remedies could be significantly less than Bayard's actual damages arising out of
the breach. Furthermore, if the merger agreement is terminated, Bayard may be
unable to procure another bidder that will offer to Bayard's stockholders
consideration of equivalent value to the merger consideration. The merger
agreement provides that if it is terminated by Bayard because:
- Nabors intentionally breaches any covenant or agreement set forth in the
merger agreement; or
- any material representation or warranty of Nabors in the merger agreement
is or becomes untrue, unless there is no material adverse effect on
Nabors;
then Bayard's sole remedy will be to receive a payment from Nabors in the amount
of $15.0 million in cash. See "The Merger Agreement and Related
Agreements -- Termination" and "-- Fees, Expenses and Other Payments."
The termination fee may deter potentially more favorable competing offers;
if Bayard must pay the termination fee, the payment will reduce its cash and
could reduce the trading price for its common stock. If the merger agreement is
terminated under specified circumstances, Bayard will be obligated to pay Nabors
a termination fee of $5.0 million, plus up to $500,000 for third party expenses.
This fee may deter third parties from making offers to acquire Bayard in a
competing acquisition transaction. Furthermore, the payment of such a fee would
reduce Bayard's cash and could result in a lower trading price for Bayard common
stock. The principal circumstances under which Bayard would be required to pay
the termination fee include if:
- the Bayard stockholders fail to adopt the merger agreement at the special
meeting;
- the Bayard Board withdraws or adversely amends its recommendation that
the Bayard stockholders vote to adopt the merger agreement;
- the Bayard Board recommends that the stockholders vote for, fails to
recommend that the stockholders vote against, or takes no position with
respect to, a competing acquisition proposal; or
10
<PAGE> 16
- Bayard takes action under its stockholder rights plan to allow a person
other than Nabors to acquire beneficial ownership of 15% of Bayard's
common stock without triggering the provisions of such plan.
See "The Merger Agreement and Related Agreements -- Termination" and " -- Fees,
Expenses and Other Payments."
The 19.9% lock-up option Bayard granted to Nabors may deter or delay
competing offers. Bayard has granted to Nabors the option to acquire up to 19.9%
of the total number of outstanding shares of Bayard common stock at a per share
exercise price of $5.50. This option may deter third parties from making offers
to Bayard to enter into an acquisition transaction. In addition, Nabors'
exercise of its rights may delay the consummation of, or make it more difficult
or expensive to consummate, a competing acquisition transaction. One
circumstance under which the option would become exercisable is if the merger
agreement is terminated as a result of the failure of the Bayard stockholders to
adopt the merger agreement and, within 180 days after the termination of the
merger agreement, Bayard authorizes, or announces an intention to enter into, a
competing acquisition transaction with a third party. A competing acquisition
transaction includes a merger, a sale of material assets or a tender offer for
15% or more of the outstanding shares of Bayard common stock. See "The Merger
Agreement and Related Agreements -- Stock Option Agreement."
RISKS RELATING TO NABORS AND ITS BUSINESS
If the merger agreement is adopted by the stockholders of Bayard and the
merger is consummated, the stockholders of Bayard will receive shares of Nabors
common stock and cash. Ownership of Nabors common stock involves risks and
uncertainties. In determining whether to adopt the merger agreement, Bayard
stockholders should consider the following risks associated with an investment
in Nabors common stock. The existence of these risks may materially and
adversely affect Nabors business, results of operations and financial condition.
Decreased oil and gas prices could adversely affect drilling activity and
Nabors' revenues, cash flows and profitability. Nabors' operations are
materially dependent upon the level of activity in oil and gas exploration and
production. Both short-term and long-term trends in oil and gas prices affect
the level of such activity. Oil and gas prices and, therefore, the level of
drilling, exploration and production activity, can be volatile. Worldwide
military, political and economic events, including initiatives by the
Organization of Petroleum Exporting Countries, affect both the demand for, and
the supply of, oil and gas. Fluctuations during the last year in the demand and
supply of oil and gas have contributed to, and are likely to continue to
contribute to, price volatility. Nabors believes that any prolonged reduction in
oil and gas prices would depress the level of exploration and production
activity. This would likely result in a corresponding decline in the demand for
Nabors' services and could have a material adverse effect on Nabors' revenues,
cash flows and profitability. There can be no assurances as to the future level
of demand for Nabors' services or future conditions in the drilling industry.
Beginning in early 1998, domestic land drillers, including Nabors, experienced a
significant downturn in demand for their drilling rigs. Nabors believes the
downturn is attributable in large part to sharp drops in oil prices that began
in late 1997 and have continued through 1998 and into 1999. The decline in crude
oil prices negatively impacted the revenues of oil companies, who have responded
by reducing exploration and development activity. Decreased demand has adversely
affected Nabors by lowering utilization of Nabors' rigs and reducing the day
rates Nabors can charge for its rigs.
Nabors operates in a highly competitive industry with excess drilling
capacity, which may adversely affect Nabors' results of operations. The drilling
and workover industry in which Nabors operates is very competitive. Contract
drilling companies compete primarily on a regional basis, and competition may
vary significantly from region to region at any particular time. In many markets
in which Nabors operates, the number of rigs available for use exceeds the
demand for rigs, resulting in price competition. Most drilling and workover
contracts are awarded on the basis of competitive bids, which also results in
intense price
11
<PAGE> 17
competition. The land drilling market generally is more competitive than the
offshore drilling market because there are a larger number of rigs and
competitors.
In all of the markets in which Nabors operates, price and the availability
and condition of equipment are the most significant factors in determining which
drilling contractor is awarded a job. Other factors include the availability of
trained personnel possessing the required specialized skills, the overall
quality of service and safety record and the ability to offer ancillary
services. In international markets, experience in operating in certain
environments and customer alliances also have been factors in the selection of
Nabors.
Certain competitors are present in more than one of Nabors' regions,
although no one competitor operates in all of these areas. In the lower 48
United States, the next largest competitors have over 100 rigs, based on
industry reports, and several hundred competitors have smaller national,
regional or local rig operations. In the Alaska market, Nabors has approximately
six major competitors. In the Gulf of Mexico, Nabors is among approximately five
principal competitors providing workover/maintenance services. In Canada and
other offshore areas, Nabors competes with several companies of varying size,
many of which have more significant operations in those areas than Nabors.
Internationally, Nabors competes directly with various competitors at each
location where it operates. Nabors believes that the market for land drilling
contracts will continue to be competitive for the foreseeable future. Although
Nabors believes it has a strong competitive position in the domestic land
market, certain of its competitors internationally and offshore may be better
positioned in these markets and have newer and more desirable equipment,
allowing them to compete more effectively.
The nature of Nabors' operations present inherent risks of loss that, if
not insured or indemnified against, could adversely affect its results of
operations. Nabors' operations are subject to many hazards inherent in the
drilling, workover and well servicing industries, including blowouts, cratering,
explosions, fires, loss of well control, loss of hole, damaged or lost drilling
equipment and damage or loss from inclement weather, any of which could result
in personal injury or death, damage to or destruction of equipment and
facilities, suspension of operations, environmental damage and damage to the
property of others. Nabors' offshore operations are also subject to the hazards
of marine operations including capsizing, grounding, collision, damage from
heavy weather or sea conditions and unsound bottom conditions. In addition,
Nabors' international operations are subject to risks of war, civil disturbances
or other political events. Generally, drilling contracts provide for the
division of responsibilities between a drilling company and its customer, and
Nabors seeks to obtain indemnification from its customers by contract for
certain of these risks. To the extent that Nabors is unable to transfer such
risks to customers by contract or indemnification agreements, Nabors seeks
protection through insurance which its management considers to be adequate.
However, there is no assurance that such insurance or indemnification agreements
will adequately protect Nabors against liability from all of the consequences of
the hazards described above. The occurrence of an event not fully insured or
indemnified against, or the failure of a customer to meet its indemnification
obligations, could result in substantial losses to Nabors. In addition, there
can be no assurance that insurance will be available to cover any or all of
these risks, or, even if available, that it will be adequate or that insurance
premiums or other costs will not rise significantly in the future, so as to make
such insurance prohibitive.
The profitability of Nabors' international operations could be adversely
affected by war, civil disturbance or economic turmoil. Nabors' business is
subject to additional risks of loss associated with conducting business abroad.
Unlike Bayard, Nabors derives a significant portion of its business from
international markets, including major operations in Canada, the Middle East,
the former Soviet republics and South and Central America. These operations are
subject to various risks, including the risk of war, civil disturbances and
governmental activities, that may limit or disrupt markets, restrict the
movement of funds or result in the deprivation of contract rights or the taking
of property without fair compensation. In certain countries, Nabors' operations
may be subject to the additional risk of fluctuating currency values and
exchange controls. In the international markets in which Nabors operates, it is
subject to various laws and regulations that govern the operation and taxation
of its business and the import and export of its equipment from country to
country, the imposition, application and interpretation of which can prove to be
uncertain.
12
<PAGE> 18
Exposure to environmental liabilities could adversely affect Nabors'
results of operations. The drilling of oil and gas wells is subject to various
federal, state, local and foreign laws, rules and regulations. The cost to
Nabors of compliance with these laws and regulations may be substantial. For
example, federal law imposes specific design and operational standards on rigs
and platforms. Failure to comply with these requirements could subject Nabors to
substantial civil and criminal penalties as well as potential court injunctions.
In addition, federal law imposes a variety of regulations on "responsible
parties" related to the prevention of oil spills and liability for damages from
such spills. Nabors, as an owner and operator of onshore and offshore rigs, may
be deemed to be a responsible party under federal law. Federal law assigns
liability to a responsible party of oil removal costs and subjects a responsible
party to a variety of public and private damages. In some circumstances, federal
law imposes liability without regard to negligence or fault, resulting in
substantial costs to the party upon whom such liability is imposed. Nabors
generally tries to require its customers to contractually assume responsibility
for compliance with environmental regulations. However, Nabors is not always
successful in shifting all of these risks.
Nabors could be adversely affected if it loses the services of Mr.
Isenberg, Mr. Petrello or Mr. Stratton. Nabors' business is dependent to a
significant extent upon the performance of certain key individuals, including
Eugene M. Isenberg, Anthony G. Petrello and Richard A. Stratton. Each of these
individuals has entered into an employment agreement with Nabors. The loss of
the services of Mr. Isenberg, Mr. Petrello or Mr. Stratton could have a material
adverse effect on Nabors.
The market price of Nabors common stock could be adversely affected by the
sale of the large number of shares that are available for sale in the
future. The sale, or availability for sale, of substantial amounts of Nabors
common stock in the public market from the exercise of options and the
conversion of convertible notes could adversely affect the prevailing market
price of Nabors common stock and could impair Nabors' ability to raise
additional capital through the sale of equity securities. As of February 9,
1999, there were 100,792,426 shares of Nabors common stock outstanding. As of
that date, an additional 18,313,517 shares of Nabors common stock were reserved
for issuance under options and warrants and 9,517,132 shares of Nabors common
stock were reserved for issuance upon the conversion of convertible notes of
Nabors. The exercise of certain of these options may cause Nabors to issue to
the exercising holders additional options to purchase shares of Nabors common
stock at an exercise price equal to the fair market value of Nabors common stock
on the date of issuance, and Nabors may issue additional options in the future
under stock option plans or otherwise. Certain of the shares to be issued upon
the exercise of options may be "restricted securities," as that term is defined
in Rule 144 promulgated under the Securities Act of 1933.
The absence of dividends limits the ability of stockholders to recognize a
return on an investment in Nabors common stock. Nabors does not anticipate that
it will pay any dividends on the shares of Nabors common stock in the
foreseeable future. Certain of Nabors' debt instruments restrict Nabors' ability
to pay dividends or to make certain other distributions to stockholders. If
Nabors does not pay dividends, holders of Nabors common stock will be required
to sell their shares to realize a return on their investment.
Nabors has implemented anti-takeover measures that could prevent Nabors'
stockholders from recognizing a possible premium on their shares. Nabors has
implemented various measures which could hinder, delay or prevent a takeover of
Nabors. These anti-takeover measures could prevent Nabors' stockholders from
realizing a possible premium on their shares. The Board of Directors of Nabors
is divided into three classes of directors, with each class serving a staggered
three-year term. In addition, the Board of Directors of Nabors has the authority
to issue up to 10,000,000 shares of preferred stock and to determine the price,
voting and other rights, conversion ratios, preferences and privileges of that
stock without any vote or action by the holders of Nabors common stock. Although
Nabors has no present plans to issue shares of preferred stock, the classified
board and the ability of the Nabors Board to issue additional shares of
preferred stock may discourage, delay or prevent changes in control of Nabors
that are not approved by the Nabors Board.
13
<PAGE> 19
WHERE YOU CAN FIND MORE INFORMATION
Bayard and Nabors file annual, quarterly, and special reports, proxy
statements and other information with the Securities and Exchange Commission as
required by the Securities Exchange Act of 1934. These reports, proxy statements
and other information can be inspected and copied at the Public Reference Room
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You
may obtain information on the operation of the Public Reference Room of the
Commission by calling 1-800-SEC-0330. Copies of material filed with the
Commission may be obtained through the Commission's Internet Web Site at
http://www.sec.gov. In addition, material filed by Bayard and Nabors can be
inspected at the offices of the American Stock Exchange, 86 Trinity Place, New
York, New York 10006.
Nabors has filed a registration statement on Form S-4 with the Commission
relating to the shares of Nabors common stock that Nabors will issue in the
merger. This document does not contain all the information set forth in Nabors'
registration statement. You may obtain the additional information in the
registration statement from the Commission in any of the ways set forth above.
Descriptions of the contents of contracts or other documents found in this
document are not necessarily complete and such descriptions are qualified by
reference to the copy of the contract or other document filed as an exhibit to
Nabors' registration statement. If you would like more information, please read
the copies of the contracts and documents filed as exhibits to the registration
statement.
The Commission allows Nabors to "incorporate by reference" into this
document the information which Nabors already has on file. This means that
Nabors can disclose important information to you by referring you to other
documents filed separately with the Commission. Any information "incorporated by
reference" from other documents is deemed to be part of this document, unless
the information in this document directly supersedes the information in the
other.
Nabors has previously filed the following documents with the Commission,
which are incorporated by reference:
- Nabors' Annual Report on Form 10-K for the fiscal year ended September
30, 1997;
- Nabors' Transition Report on Form 10-Q for the transition period from
October 1, 1997 through December 31, 1997;
- Nabors' Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998, June 30, 1998 and September 30, 1998;
- Nabors' Current Reports on Form 8-K dated December 4, 1997, October 12,
1998, October 30, 1998, January 10, 1999 and February 2, 1999;
- Nabors' Proxy Statement relating to its 1998 Annual Meeting of
Stockholders; and
- the description of Nabors common stock contained in Amendment No. 1 to
the Registration Statement on Form 8-A (File No. 1-9245) filed with the
Commission on May 20, 1992 and any subsequent amendment to the
registration statement filed for the purposes of updating such
description.
Documents filed by Nabors as required by Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 after the date of this document and before
the effective time of the merger will also be deemed to be incorporated by
reference into this document.
THE DOCUMENTS INCORPORATED BY REFERENCE ARE AVAILABLE, WITHOUT CHARGE, UPON
ORAL OR WRITTEN REQUEST BY ANY PERSON TO WHOM THIS DOCUMENT HAS BEEN DELIVERED,
FROM NABORS INDUSTRIES, INC., 515 WEST GREENS ROAD, SUITE 1200, HOUSTON, TEXAS
77067 ATTENTION: DANIEL MCLACHLIN, CORPORATE SECRETARY OF NABORS; TELEPHONE
NUMBER (281) 775-8023. EXHIBITS TO SUCH DOCUMENTS ARE NOT AVAILABLE, UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THIS DOCUMENT. IN ORDER
TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS BEFORE THE SPECIAL MEETING, YOU
SHOULD MAKE A REQUEST BY MARCH 9, 1999.
14
<PAGE> 20
COMPARATIVE MARKET PRICE DATA
The following table sets forth the range of high and low sale prices for
Nabors common stock and Bayard common stock for the periods indicated, as
reported on AMEX. Bayard common stock has traded on the AMEX since November 4,
1997 under the symbol "BDI."
<TABLE>
<CAPTION>
NABORS BAYARD
------------------- -------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
TWELVE MONTHS ENDED DECEMBER 31, 1996
Quarter ended March 31, 1996............................. $ 15 1/4 $ 10 1/4 -- --
Quarter ended June 30, 1996.............................. 16 5/8 13 7/8 -- --
Quarter ended September 30, 1996......................... 17 3/8 13 1/8 -- --
Quarter ended December 31, 1996.......................... 21 1/2 13 3/8 -- --
TWELVE MONTHS ENDED DECEMBER 31, 1997
Quarter ended March 31, 1997............................. $ 22 $ 14 3/4 -- --
Quarter ended June 30, 1997.............................. 25 1/16 17 3/4 -- --
Quarter ended September 30, 1997......................... 40 3/4 24 7/8 -- --
Quarter ended December 31, 1997.......................... 46 13/16 26 $ 28 1/4 $ 13 1/2
TWELVE MONTHS ENDED DECEMBER 31, 1998
Quarter ended March 31, 1998............................. $31 9/16 $19 5/16 $ 16 1/2 $ 11 1/8
Quarter ended June 30, 1998.............................. 27 3/8 19 3/4 16 8 1/8
Quarter ended September 30, 1998......................... 21 7/16 11 3/4 8 3 5/8
Quarter ended December 31, 1998.......................... 20 11/16 12 1/16 7 5/8 3 1/16
QUARTER ENDED MARCH 31, 1999
(through February 12, 1999).............................. $ 16 1/2 $ 11 5/8 $ 5 7/8 $ 3 3/4
</TABLE>
The following table sets forth the closing sale prices for Nabors common
stock and Bayard common stock as of (a) October 16, 1998, the last trading day
before the public announcement of the merger, and (b) the last trading day
before the date upon which this document was first mailed to Bayard
stockholders, which was February 12, 1999 for Nabors common stock and February
11, 1999 for Bayard common stock.
<TABLE>
<CAPTION>
NABORS BAYARD
------ ------
<S> <C> <C>
PRE-ANNOUNCEMENT DATE....................................... $17 5/8 $4 15/16
PRE-MAILING DATE............................................ 11 7/8 3 7/8
</TABLE>
15
<PAGE> 21
THE SPECIAL MEETING
GENERAL
This document is being furnished to stockholders of Bayard in connection
with the solicitation of proxies on behalf of the Bayard Board for use at the
special meeting of Bayard stockholders to be held on March 16, 1999 at the time
and place specified below, and at any reconvened meeting after any adjournment
or postponement of the special meeting.
NOTICE OF MEETING
The special meeting will be held on March 16, 1999 at 10:00 a.m., local
time, at the Hotel Sofitel, located at 425 North Sam Houston Parkway East,
Houston, Texas 77060, to consider and vote upon:
- a proposal to adopt the Agreement and Plan of Merger, dated as of October
19, 1998, as amended on January 15, 1999 and February 12, 1999, by and
among Nabors, Nabors Acquisition Corp. VII, a wholly owned subsidiary of
Nabors formed for purposes of the acquisition, and Bayard, which provides
for the merger of Nabors' acquisition subsidiary with and into Bayard;
and
- such other business as may properly come before the special meeting or
any adjournment or postponement of such meeting.
This notice is being given to holders of record of Bayard common stock at
the close of business on the record date. A complete list of such stockholders
will be available for examination by any stockholder for any purpose germane to
the special meeting at Bayard's Houston office, located at 600 Kendrick, Suite
C-29, Houston, Texas 77060, for a period of at least ten days before such
meeting.
THE BAYARD BOARD HAS UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT AND
THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY SUCH AGREEMENT, TAKEN
TOGETHER, ARE ADVISABLE AND IN THE BEST INTERESTS OF, AND ARE FAIR TO, THE
STOCKHOLDERS OF BAYARD AND HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED BY SUCH AGREEMENT. ACCORDINGLY, THE BAYARD BOARD
UNANIMOUSLY RECOMMENDS THAT ALL BAYARD STOCKHOLDERS VOTE FOR THE ADOPTION OF THE
MERGER AGREEMENT.
RECORD DATE; SHARES ENTITLED TO VOTE
The Bayard Board has fixed the close of business on January 15, 1999 as the
record date for determining the Bayard stockholders entitled to receive notice
of and to vote at the special meeting. As of the record date, 18,200,765 shares
of Bayard common stock were outstanding and held of record by approximately 130
holders. Each outstanding share of Bayard common stock is entitled to one vote
on all matters coming before the special meeting. Bayard also has outstanding
warrants and stock options. The holders of these derivative securities have no
voting rights with respect to the merger agreement.
QUORUM
A quorum is necessary in order for a vote to be taken on the proposals
presented at the special meeting. The presence, either in person or by proxy, of
the holders of 9,100,383 shares, representing a majority of the issued and
outstanding shares of Bayard common stock on the record date, is necessary to
constitute a quorum for the transaction of business at the special meeting.
VOTE REQUIRED
Under Delaware law, the affirmative vote of the holders of at least
9,100,383 shares, representing a majority of the outstanding shares of Bayard
common stock, is required to adopt the merger agreement.
16
<PAGE> 22
EFFECT OF ABSTENTIONS AND BROKER NON-VOTES
The inspectors of election will treat shares of Bayard common stock
represented by properly executed proxies that reflect abstentions as shares that
are present and entitled to vote for purposes of determining the presence of a
quorum at the special meeting and for purposes of determining the outcome of any
question submitted to the stockholders for a vote. The inspectors of election
will treat "broker non-votes" as shares that are present and entitled to vote
for purposes of establishing a quorum. "Broker non-votes" are shares held by
brokers that are represented at a meeting but with respect to which the broker
has not received instructions from the customer or otherwise does not have
discretionary authority to vote. For purposes of determining the outcome of any
question as to which the broker has physically indicated on the proxy that it
does not have discretionary authority to vote, these shares will be treated as
not present and not entitled to vote with respect to that question, even though
those shares are considered entitled to vote for quorum purposes and may be
entitled to vote on other questions. Abstentions and broker non-votes will have
the same effect as votes against the adoption of the merger agreement.
VOTING OF PROXIES
Shares of Bayard common stock represented by properly executed proxies
received at or before the special meeting, and which have not been revoked, will
be voted at the special meeting, or any reconvened meeting after any adjournment
or postponement of the special meeting, in accordance with the instructions of
such proxies. If a proxy is properly executed and returned by a stockholder of
Bayard without indicating any voting instructions, the shares of Bayard common
stock represented by such proxy will be voted at the special meeting FOR the
adoption of the merger agreement.
If any other matters are properly presented for consideration at the
special meeting, including, among other things, consideration of a motion to
adjourn or postpone the special meeting to another time or place, then James E.
Brown and David E. Grose, III, the persons named on the enclosed proxy card as
the proxies for Bayard common stock, will have discretion to vote on these
matters in accordance with their best judgment.
REVOCATION OF PROXIES
A stockholder executing and returning a proxy has the power to revoke it at
any time before it is exercised either by executing and delivering a later-dated
proxy to the Secretary of Bayard, by delivering a duly executed written
revocation of such proxy to the Secretary of Bayard, or by voting in person at
the special meeting. Attendance at the special meeting will not in and of itself
revoke a proxy.
SOLICITATION OF PROXIES; EXPENSES
In connection with the special meeting, proxies are being solicited by, and
on behalf of, the Bayard Board. Bayard will bear the cost of the solicitation of
proxies from its stockholders; however, Nabors has agreed in the merger
agreement to bear one-half of the costs of filing, printing and mailing this
document. In addition to the solicitation of proxies by use of mail, the
directors, officers and employees of Bayard may solicit proxies from
stockholders personally or by telephone, facsimile or other means of
communication. Such directors, officers and employees will not be additionally
compensated for such solicitation but may be reimbursed for out-of-pocket
expenses incurred in connection with the solicitation. In addition, Bayard has
engaged Morrow & Co., Inc. for a fee of $6,500, plus expenses, to aid in the
solicitation of proxies and to verify certain records related to the
solicitation. Arrangements will also be made with brokerage houses, banks,
fiduciaries and other custodians for the forwarding of solicitation material to
the beneficial owners of stock held of record by such persons, and Bayard will
reimburse such persons for their reasonable out-of-pocket expenses in connection
with the solicitation.
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES WITH THEIR PROXY
CARD.
17
<PAGE> 23
SHARES HELD BY BAYARD MANAGEMENT; STOCKHOLDER AGREEMENTS
As of the record date, the directors and executive officers of Bayard as a
group may be deemed to own beneficially an aggregate of 2,687,740 outstanding
shares of Bayard common stock. This amount excludes shares purchasable upon the
exercise of outstanding options or warrants and represents approximately 14.8%
of the total shares outstanding as of the record date.
As a condition and an inducement to Nabors entering into the merger
agreement, James E. Brown, Carl B. Anderson, III, AnSon Partners L.L.C., Energy
Spectrum Partners LP, and Wil-Cas Investments, L.P., who are directors of the
Company or entities affiliated with directors, have entered into stockholder
agreements with Nabors. These individuals and entities are sometimes referred to
in this document as the "consenting stockholders." The stockholder agreements
were approved by the Bayard Board and require the consenting stockholders to
vote all of their shares of Bayard common stock for the adoption of the merger
agreement and against any competing acquisition transaction. As of the record
date, these stockholders beneficially owned in the aggregate a total of
2,645,725 outstanding shares of Bayard common stock. This amount represents
approximately 14.5% of the total shares outstanding as of the record date. In
addition, the remaining directors and executive officers of Bayard have
indicated that they intend to vote shares beneficially owned by them in favor of
the proposal to adopt the merger agreement.
18
<PAGE> 24
THE MERGER
GENERAL
Bayard, Nabors and Nabors' acquisition subsidiary have entered into the
merger agreement, which provides that Nabors will acquire Bayard and each
outstanding share of Bayard common stock will be converted into the right to
receive (a) 0.3375 shares of Nabors common stock, and (b) $0.30 in cash, without
interest. Bayard will be the surviving corporation in the merger and will become
a wholly owned subsidiary of Nabors.
BACKGROUND OF THE MERGER
Bayard was formed in December 1996 through a series of affiliated entity
transactions in which Bayard became the successor to Anadarko Drilling Company,
the contract drilling subsidiary of AnSon Partners Limited Partnership. From May
1997 through October 1997, Bayard completed three significant acquisitions which
increased its land drilling fleet by a total of 33 additional rigs.
Before November 1997, Bayard received overtures from two other major
contract drilling companies, Company A and Company B, who expressed interest in
a business combination with Bayard. At the time, Bayard rejected these overtures
because the Bayard Board believed that its business objectives could best be
achieved through an initial public offering of its securities.
On November 7, 1997, Bayard completed its initial public offering of shares
of Bayard common stock. In its initial public offering, Bayard and certain of
its existing and former stockholders sold an aggregate of 11,040,000 shares of
Bayard common stock to the public through an underwriting syndicate led by DLJ.
The initial public offering price was $23.00 per share.
Since November 1997, Bayard and other drilling companies have experienced
the effects of weakening demand for contract drilling services, primarily as a
result of declines in oil and gas prices and a reduction in oil and gas
exploration and development activity. As a result of these conditions, Bayard's
rig utilization rates declined from approximately 93% in 1997 to 48% for the
three months ended September 30, 1998. Due in large part to conditions affecting
the land drilling industry, the market price of Bayard common stock experienced
a pronounced decline from the initial public offering price of $23.00 per share
to a low of approximately $3.63 in early October 1998.
On various occasions during the first six months of 1998, Bayard was
contacted by Company A concerning its interest in a business combination with
Bayard. On each occasion, Bayard elected not to pursue a business combination
with Company A because management believed that such a transaction was
inconsistent with Bayard's strategic direction. This concern related primarily
to the fact that the company resulting from a combination of Bayard and Company
A would be subject to a substantial degree of financial leverage and would not
have significant operations outside of the continental United States.
In May 1998, Nabors made an unsolicited overture to Bayard regarding a
possible business combination between Bayard and Nabors. Bayard elected not to
pursue this initial overture by Nabors.
On June 26, 1998, Bayard acquired 25 additional land drilling rigs from
TransTexas Gas Corporation. In order to finance the acquisition of these rigs,
Bayard issued $100 million of Senior Notes due 2005 in a private placement under
Rule 144A under the Securities Act of 1933. As a result of this acquisition,
Bayard established a significant presence in the South Texas land drilling
market. However, the related senior notes offering resulted in a significant
increase in Bayard's financial leverage and heightened its exposure to adverse
conditions in the domestic land drilling industry.
In July 1998, management of Bayard determined that, in light of the
continued adverse conditions in the domestic land drilling industry, it should
consider new initiatives in order to ensure that Bayard would be able to
continue to execute its business strategy. Among the initiatives considered by
management were a private placement of equity securities to raise additional
working capital and a business combination with another large contract drilling
company. The perceived advantages of a business combination included
19
<PAGE> 25
greater financial resources, increased revenue development opportunities,
increased economies of scale and other cost saving opportunities.
In August 1998, James E. Brown, Chairman of the Board, President and Chief
Executive Officer of Bayard, contacted Company B to discuss whether Company B
may have an interest in exploring a possible business combination with Bayard.
In preliminary discussions between the parties, Mr. Brown and senior management
of Company B discussed the feasibility of such a business combination and the
relative valuations that might be placed on the companies' businesses. Neither
company made a proposal as to the financial terms of a business combination, and
discussions between the parties terminated in August 1998.
On August 21, 1998, Bayard entered into a rights agreement with Norwest
Bank Minnesota, N.A., as rights agent, in order to protect against the potential
of abusive takeover tactics. In light of the adverse conditions in the domestic
land drilling industry, the Bayard Board believed that Bayard might at that time
be particularly vulnerable to an inadequate takeover offer. At the time the
Bayard rights agreement was adopted, the market price of Bayard common stock had
declined over the prior three months from a high of approximately $12.00 to a
low of less than $5.00.
In late September 1998, Mr. Brown was contacted by senior management of
Company A who stated that Company A still had an interest in pursuing a business
combination with Bayard. On October 2, 1998, a member of the senior management
of Company A met with Mr. Brown and made a preliminary proposal regarding a
stock-for-stock merger between the two companies. Under the terms of this
preliminary proposal, shares of Bayard common stock would have been converted
into shares of Company A common stock at an exchange ratio based upon a premium
of approximately 35% to the then market price of Bayard common stock. Mr. Brown
responded that he believed that the terms proposed by Company A would not be
acceptable to the Bayard Board, but indicated that he would discuss the matter
with members of the Bayard Board.
On October 1, 1998, Bayard received a proposal from an investment fund,
Fund A, which contemplated an investment of approximately $20 to $25 million in
Bayard in the form of a new series of preferred stock that would be convertible
into Bayard common stock at an effective price of $5.50 per share. The directors
of Bayard were advised of the terms of this proposal, and a meeting of the
Bayard Board was scheduled to be held on October 7, 1998 to review this proposal
and any other proposals regarding strategic transactions received by Bayard.
On October 1, 1998, Eugene M. Isenberg, Chairman of the Board of Nabors,
contacted Mr. Brown and stated that he would like to meet with Mr. Brown to
discuss the strategic directions of Bayard and Nabors. Mr. Brown invited Mr.
Isenberg to meet with him on October 6, 1998.
On October 6, 1998, Mr. Brown met with Mr. Isenberg. Mr. Isenberg proposed
to Mr. Brown a merger between Nabors and Bayard in which the stockholders of
Bayard would receive shares of Nabors common stock based on an exchange ratio
representing a substantial premium to the recent trading ratios of the stocks of
the two companies. Later that day, Mr. Brown consulted with certain directors of
Bayard regarding the transaction proposed by Nabors. In telephone conversations
taking place in the afternoon on October 6, 1998 and the morning of October 7,
1998, Mr. Brown and Mr. Isenberg discussed possible exchange ratios for a
stock-for-stock merger between the two companies. At the conclusion of these
conversations, Mr. Isenberg proposed that the two companies be merged based on
an exchange ratio of 0.375 shares of Nabors common stock for each share of
Bayard common stock. Mr. Brown responded that he would discuss this proposal
with the Bayard Board.
At the meeting of the Bayard Board held on October 7, 1998, the Bayard
Board considered the strategic alternatives available to Bayard. These
alternatives included the proposed sale of a new series of preferred stock to
Fund A, a possible stock-for-stock merger with Company A and a possible
stock-for-stock merger with Nabors. The Bayard Board believed that each of these
alternatives could enable Bayard to continue to implement its core business
strategy, although, in the case of a stock-for-stock merger, Bayard's operations
would be combined with those of another operator. After weighing the
alternatives, the Bayard Board determined that it might be in the best interests
of Bayard and its stockholders to pursue a
20
<PAGE> 26
stock-for-stock merger with Nabors. Among other things, the Bayard Board noted
that there was a close strategic fit between Bayard and Nabors, especially in
view of the fact that both companies had a focus on technologically advanced
rigs capable of deep drilling applications. In addition, the Bayard Board
considered as positive strategic factors the strong financial condition of
Nabors, its low level of debt, the large size of its contract drilling fleet and
the fact that it conducts significant international operations. Accordingly, the
Bayard Board instructed Mr. Brown to engage in further negotiations with Nabors
with a view towards obtaining an offer on improved terms.
In the afternoon of October 7, 1998, Mr. Brown spoke with Richard Stratton,
Vice Chairman of the Board of Nabors, regarding the terms of a possible
stock-for-stock merger with Nabors. Mr. Stratton stated that Nabors was
unwilling to offer an exchange ratio greater than 0.375 shares of Nabors common
stock. However, he indicated that Nabors would be willing to offer additional
cash consideration in an amount to be determined based in part on a joint
analysis to be undertaken regarding the amount of severance costs expected to be
incurred in connection with the integration of the operations of the two
companies. Mr. Brown responded that he would seek authority from the Bayard
Board to propose a transaction incorporating these financial terms.
Later on October 7, 1998, Mr. Brown discussed the latest Nabors offer with
certain directors who indicated that the Bayard Board would be willing to
consider the proposal.
Also on October 7, 1998, Bayard contacted DLJ to discuss engaging DLJ as
financial advisor for the purpose of rendering an opinion as to the fairness
from a financial point of view to the holders of the shares of Bayard common
stock of the consideration to be received by such holders in a business
combination with Nabors. Among other reasons, DLJ was contacted by Bayard
because it was familiar with Bayard's business, financial condition and results
of operations as a result of having acted as underwriter in the initial public
offering of Bayard common stock and as initial purchaser in the Bayard senior
notes offering.
On October 9, 1998, Nabors delivered to Bayard an initial draft of the
definitive agreements governing the transaction proposed by Nabors, including
the merger agreement and the stock option agreement.
On October 13, 1998, the Bayard Board held a meeting to discuss in detail
the terms and conditions of the transaction proposed by Nabors. At such meeting,
the Bayard Board received presentations from, and reviewed the terms of the
proposed transaction with, Bayard's management, counsel and financial advisors.
The Bayard Board authorized management of Bayard to continue negotiations with
Nabors and instructed management and counsel to seek certain changes to the
proposed terms of the transaction.
On October 15, 1998, Bayard formally engaged DLJ to act as financial
advisor for the purposes of rendering an opinion to the Bayard Board as to the
fairness to the holders of shares of Bayard common stock of the merger
consideration from a financial point of view.
Beginning on October 12, 1998, the legal advisors and management of Bayard
and Nabors began to discuss in detail the terms of the agreements governing the
proposed transaction. The parties met from October 14, 1998 through October 16,
1998 to negotiate the terms of the merger agreement and the stock option
agreement, and agreement was reached on the principal terms on October 16, 1998.
On October 17, 1998, counsel for Bayard and Nabors resolved the remaining open
issues and completed preparation of definitive agreements.
On October 18, 1998, the Bayard Board met to consider the terms of the
proposed transaction, as revised in the course of negotiations during the prior
week. Under the revised transaction terms, each share of Bayard common stock was
to be converted into (a) 0.375 shares of Nabors common stock and (b) $0.30 in
cash. The amount of cash consideration reflected the joint analysis undertaken
by Bayard and Nabors regarding the amount of severance costs expected to be
incurred in connection with the integration of the operations of the two
companies. The Bayard Board reviewed and discussed, and received a presentation
from counsel regarding, the terms of the definitive agreements. In addition, the
Bayard Board received a presentation from DLJ explaining the bases of its
opinion that the merger consideration was fair
21
<PAGE> 27
from a financial point of view to Bayard's stockholders. After discussion of
such presentations and information, the meeting was adjourned.
The meeting of the Bayard Board was reconvened on October 19, 1998. At the
reconvened meeting, DLJ delivered its opinion to the Bayard Board to the effect
that, as of such date, based on the matters described in the opinion, the merger
consideration was fair to the stockholders of Bayard from a financial point of
view. After considering DLJ's opinion, the Bayard Board unanimously authorized
and approved the merger agreement and the stock option agreement, subject, in
the case of the merger agreement, to the adoption of such agreement by the
stockholders of Bayard.
On October 22, 1998, Bayard and Nabors filed their respective Premerger
Notification and Report forms as required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. On November 20, 1998 the Antitrust Division of the
Department of Justice requested that Bayard and Nabors provide additional
information and documents regarding the competitive effects of the merger. In
response, Bayard and Nabors have provided additional information to, and engaged
in extensive discussions with, the Antitrust Division. As of the date that this
document was first mailed to the Bayard stockholders, the merger has not yet
received clearance from the Antitrust Division.
The merger agreement, the stock option agreement and the stockholder
agreements were executed by the parties on October 19, 1998, and a joint press
release announcing the merger was issued by the parties on the same date.
On January 15, 1999, an amendment to the merger agreement was executed by
the parties to eliminate Nabors' obligation to enter into an employment
agreement with Edward S. Jacob, III. Mr. Jacob was an executive officer of
Bayard before his employment terminated on January 15, 1999. In connection with
the amendment to the merger agreement, Nabors consented to the execution and
performance of a severance arrangement between Bayard and Mr. Jacob and waived
any breaches of the merger agreement that may result from that severance
arrangement.
On February 9, 1999, Mr. Isenberg, Mr. Stratton and Anthony Petrello,
President and Chief Operating Officer of Nabors, contacted Mr. Brown and
informed him that Nabors was unwilling to proceed with the merger because, under
the terms of the merger agreement, Nabors believed it no longer had an
obligation to close. Mr. Isenberg, however, stated that Nabors would be willing
to proceed with the merger if Bayard were willing to accept a lower exchange
ratio.
On February 9 and 10, 1999, Mr. Brown discussed the fact that Nabors was
unwilling to proceed with the transaction with certain members of the Bayard
Board. These directors generally indicated that they would support a modest
decrease in the exchange ratio, but would require additional assurances from
Nabors that it would proceed to consummate the merger.
On February 10, 1999, Mr. Brown had various conversations with Mr. Isenberg
and Mr. Stratton in which possible exchange ratios were discussed. At the
conclusion of these discussions, Mr. Isenberg stated that Nabors would be
willing to offer an exchange ratio of 0.3375, with the cash portion of the
merger consideration to remain unchanged. Mr. Brown indicated that he would be
willing to propose these terms to the Bayard Board.
On February 11, 1999, Bayard delivered to Nabors a draft of a second
amendment to the merger agreement. This draft incorporated the proposed
reduction of the exchange ratio to 0.3375 and sought certain assurances from
Nabors that it would proceed to consummate the merger. The terms of the second
amendment to the merger agreement were discussed and negotiated by Mr. Brown,
Mr. Petrello and Mr. Stratton during the afternoon and evening of February 11,
1999 and the morning of February 12, 1999.
On February 12, 1999 the Bayard Board held a meeting to discuss the terms
of the proposed second amendment to the merger agreement. All members of the
Bayard Board were present at the meeting, except for Mark Liddell, who was not
available at the time. Representatives of DLJ and Bayard's counsel also attended
the meeting. Under the terms of the second amendment, the exchange ratio of
Bayard
22
<PAGE> 28
common stock to Nabors commons stock was to be reduced to 0.3375. In addition,
the second amendment contemplated that:
- the definition of the term "material adverse effect" would be limited so
as to exclude actual or anticipated events that were known by or
disclosed to a party before or on the date of the amendment;
- the termination fee payable by Nabors in the event the merger agreement
were terminated due to a breach of any covenant or agreement or material
representation or warranty by Nabors would be increased to $15.0 million;
and
- the date upon which the merger agreement would become terminable by
either party would be extended from May 1, 1999 to September 30, 1999.
At the meeting, the Bayard Board received a presentation from DLJ regarding the
bases of its updated opinion that the merger consideration, as modified by the
second amendment, was fair to Bayard's stockholders from a financial point of
view. The Bayard Board also received a presentation from counsel regarding
Bayard's legal options and rights under the merger agreement as then in effect
and the terms of the proposed second amendment. After a discussion of the
matters covered by these presentations, DLJ delivered its opinion to the effect
that, as of February 12, 1999, based on the matters described in the opinion,
the merger consideration, as modified by the second amendment, was fair to the
stockholders of Bayard from a financial point of view. After considering DLJ's
opinion, the Bayard Board determined by a unanimous vote of the directors
present at the meeting that the merger agreement, as amended by the second
amendment, was advisable and in the best interests of, and was fair to, the
stockholders of Bayard. The Bayard Board then authorized and approved the second
amendment to the merger agreement, and recommended by a unanimous vote of the
members present at the meeting that the stockholders of Bayard vote FOR the
adoption of the merger agreement, as amended. This approval was subsequently
ratified by the entire Bayard Board, including Mr. Liddell, in a unanimous
written consent dated February 12, 1999.
The second amendment to the merger agreement was executed by the parties
following the meeting of the Bayard Board on February 12, 1999, and a joint
press release announcing the new terms was issued by Bayard and Nabors on the
same date.
REASONS FOR THE MERGER
Bayard's primary reason for seeking to consummate a business combination
with Nabors is the belief of the Bayard Board and management that the
combination of the resources and operations of Bayard and Nabors is a good
strategic fit, especially in view of the fact that both companies have a focus
on technologically advanced rigs capable of deep drilling applications. In
addition, the Bayard Board considered as positive strategic factors the strong
financial condition of Nabors, its low level of debt, the large size of its
contract drilling fleet and the fact that it conducts significant international
operations. Accordingly, the Bayard Board concluded that Nabors, after giving
effect to the acquisition of Bayard in the merger, is likely to be a stronger
competitor in the short-term and long-term than either Nabors or Bayard as an
independent company.
In determining that the merger agreement, the stock option agreement and
the merger and the other transactions contemplated by such agreements, taken
together, are advisable and in the best interests of, and are fair to, the
stockholders of Bayard, the Bayard Board considered a number of factors,
including the following:
- the strategic courses of action which Bayard might have elected to pursue
instead of the merger, which were rejected by the Bayard Board for the
reasons described in detail under "-- Background of the Merger" above;
- the information obtained by the Bayard Board in the course of
presentations by Bayard's management regarding the business, financial
condition and results of operations of Bayard and
23
<PAGE> 29
Nabors, including information as to the short-term and long-term effects
of adverse conditions in the domestic land drilling industry;
- the knowledge of the members of the Bayard Board of the risks and
uncertainties associated with a decision to continue to operate Bayard as
an independent company, including, but not limited to, the risks
associated with cyclical market conditions in the domestic land drilling
industry and the degree of leverage to which Bayard had become subject as
a result of its senior notes offering;
- the belief of the Bayard Board and management that increased revenue
development opportunities, economies of scale and other cost savings
obtainable from the combination would, if realized, create additional
value for the former stockholders of Bayard;
- the opinion of DLJ to the effect that the merger consideration to be
received by the stockholders of Bayard in the merger was fair to such
holders from a financial point of view;
- the belief of the Bayard Board that the capital structure of Nabors after
the merger would afford sufficient flexibility to enable Nabors to pursue
its business strategy without being subject to the limitations associated
with a substantial degree of leverage;
- the fact that the Bayard stockholders would obtain in the merger an
equity investment in Nabors on a tax-free basis;
- the fact that, as stockholders of Nabors, the former stockholders of
Bayard would not be foreclosed from participating in any control premium
that may be realized in connection with any future transactions involving
a sale or change of control of Nabors;
- the fact that James E. Brown, a member of the Bayard Board, had financial
incentives to support the merger that were in addition to and different
from those of the other directors and stockholders of Bayard as a result
of the employment agreement proposed to be entered into between Nabors
and Mr. Brown, as described below under "-- Interests of Certain Persons
in the Merger;"
- the fact that the consenting stockholders were willing to enter into the
stockholder agreements in order to induce Nabors to enter into the merger
agreement;
- the fact that the merger agreement is structured in such a way as to
permit Bayard, subject to certain procedures and limitations, to disclose
nonpublic information to, and to engage in discussions and negotiations
with, third parties who have made bona fide, unsolicited, written
proposals with respect to competing acquisition transactions if the
fiduciary duties of the Bayard Board so require; and
- the fact that the merger agreement, subject to certain procedures and
limitations, gives Bayard the right to terminate such agreement if the
fiduciary duties of the Bayard Board so require in connection with a
competing acquisition proposal, together with the fact that the ability
of Bayard to do so is affected by the termination fee provisions of the
merger agreement and the provisions of the stock option agreement, which
could have the effect of deterring a competing acquisition proposal, and
the belief of the Bayard Board that it was necessary to accept these
provisions in order to obtain other terms, principally the favorable
exchange ratio at which Bayard common stock is to be converted into
Nabors common stock, from Nabors.
In view of the variety of factors considered, the Bayard Board did not find
it practicable to, and did not, quantify or otherwise attempt to assign specific
or relative weights to the factors considered in making its determination. In
addition, individual members of the Bayard Board may have given different
weights to different factors.
RECOMMENDATION OF THE BAYARD BOARD
FOR THE REASONS DISCUSSED ABOVE, THE BAYARD BOARD UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS OF BAYARD VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
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<PAGE> 30
OPINION OF BAYARD'S FINANCIAL ADVISOR
DLJ was engaged by Bayard to render a written opinion to the Bayard Board
as to the fairness to the stockholders of Bayard, from a financial point of
view, of the merger consideration to be received by the holders of Bayard common
stock. On February 12, 1999, DLJ delivered an oral opinion to the Bayard Board
to the effect that, as of such date, the merger consideration was fair to the
holders of Bayard common stock from a financial point of view. DLJ also
delivered to the Bayard Board a written opinion, dated February 12, 1999, to the
effect that, as of such date and based upon and subject to the assumptions,
limitations and qualifications set forth in the opinion, the merger
consideration was fair to the holders of Bayard common stock from a financial
point of view.
THE FULL TEXT OF THE WRITTEN OPINION OF DLJ, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN
CONNECTION WITH THE OPINION, IS ATTACHED TO THIS DOCUMENT AS ANNEX B. BAYARD
STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION IN ITS ENTIRETY FOR THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF
THE REVIEW OF DLJ.
The opinion was prepared for the Bayard Board and is directed only to the
fairness of the merger consideration to be received by the holders of Bayard
common stock from a financial point of view and does not constitute a
recommendation to any Bayard stockholder as to how such stockholder should vote
at the special meeting.
The written opinion prepared for the Bayard Board does not constitute an
opinion as to the fairness of any terms of the merger agreement, the stockholder
agreements or the stock option agreement other than the fairness of the merger
consideration to be received by the holders of Bayard common stock. Similarly,
DLJ's opinion does not constitute an opinion as to the price at which Nabors
common stock will actually trade at any time. The merger consideration was
determined through arm's-length negotiations between Bayard and Nabors.
In arriving at its opinion, DLJ reviewed drafts of the amended merger
agreement, the stockholder agreements and the stock option agreement. DLJ also
reviewed financial and other information that was publicly available or
furnished to DLJ by Bayard and Nabors, including information provided during
discussions with their respective managements. DLJ was also provided with
certain financial projections of Bayard for the period beginning January 1, 1998
and ending December 31, 2002. In addition, DLJ compared certain financial and
securities data of Bayard and Nabors with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of Bayard common stock and Nabors common stock, reviewed
prices and premiums paid in certain other business combinations and conducted
such other financial studies, analyses and investigations as DLJ deemed
appropriate for purposes of the opinion. DLJ was not requested to, nor did DLJ,
solicit the interest of any other party in acquiring Bayard.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources and that was provided to DLJ by Bayard and Nabors or
their respective representatives. In particular, DLJ relied upon the estimates
of management of Bayard and Nabors of the operating synergies achievable as a
result of the merger and its discussion of such synergies with the management of
Nabors. With respect to the financial projections supplied to DLJ, DLJ assumed
that such projections were reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the management of Bayard as to
the future operating and financial performance of Bayard. DLJ did not assume any
responsibility for making an independent evaluation of Bayard's and Nabors'
assets or liabilities or for making any independent verification of any of the
information reviewed by DLJ.
The opinion is necessarily based on economic, market, financial and other
conditions as they existed on, and on the information made available to DLJ as
of, February 12, 1999.
Set forth below is a summary of the material analyses performed by DLJ in
connection with the preparation of its opinion and included in the presentation
made by DLJ to the Bayard Board on February 12, 1999. With regard to the
calculation of implied per share values of Bayard common stock in
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<PAGE> 31
the following analyses, certain results were determined to be "not meaningful"
or "NM" because, in certain periods, estimated results for Bayard included a net
loss or negative "After-Tax Cash Flow," as defined below. Additionally, in
certain periods, Bayard's net debt was greater than certain multiple values of
estimated EBITDA. Therefore, values implied for Bayard common stock in those
periods are negative and not meaningful. The following table sets forth the
results of certain of these analyses, which should be considered together with
the more detailed information set forth below.
<TABLE>
<CAPTION>
IMPLIED BAYARD PER SHARE
ANALYSIS VALUE RANGE
-------- ------------------------
<S> <C>
Analysis of Certain Other Publicly Traded Companies......... $1.54-$3.85
Transaction Analysis........................................ $2.69-$9.92
Discounted Cash Flow Analysis............................... $3.31-$5.52
* * * * * *
Implied Value of Merger Consideration on February 11,
1999...................................................... $4.41
</TABLE>
Analysis of Certain Other Publicly Traded Companies. To provide contextual
data and comparative market information, DLJ compared selected share price,
earnings and operating and financial ratios for Bayard to the corresponding data
and ratios of certain other companies whose securities are publicly traded.
Although no company used in the comparable company analysis is identical to
Bayard, DLJ believes the selected companies to be appropriate comparisons to
Bayard because of similar operating characteristics, size or geographical focus
believed to be comparable to such characteristics of Bayard. These selected
companies included: Grey Wolf Inc., Nabors, Parker Drilling Company, Patterson
Energy Inc., Pride International Inc. and UTI Energy Corp.
Such data and ratios included measures of value defined by market
capitalization of common stock plus total debt assumed less cash and cash
equivalents of the comparable companies ("Enterprise Value") as a multiple of
the last twelve-month reporting period before the announcement ("LTM"), earnings
before interest, taxes and depreciation and amortization ("EBITDA"), 1998
estimated EBITDA, 1999 estimated EBITDA and 2000 estimated EBITDA. In addition,
ratios included equity value as a multiple of LTM net income plus deferred
taxes, depreciation and amortization ("After-Tax Cash Flow"), 1998 estimated
After-Tax Cash Flow, 1999 estimated After-Tax Cash Flow and 2000 estimated
After-Tax Cash Flow. The comparable company analysis was conducted based upon
closing prices on February 11, 1999.
Based upon an exchange ratio of 0.3375 Nabors shares and $0.30 cash per
share of Bayard common stock at Nabors' February 11, 1999 closing price of
$12.19, the implied per share transaction value to Bayard was $4.41 per share.
DLJ examined the adjusted mean multiple of Enterprise Value to 1998
estimated EBITDA, 1999 estimated EBITDA and 2000 estimated EBITDA for the
comparable companies which were 5.6x, 7.1x and 5.0x, respectively. These
multiples implied valuations of Bayard common stock per share which were NM in
the first two cases and $1.54 in the third. The maximum and minimum values for
comparable company Enterprise Value multiples were 9.5x and 3.4x for 1998
estimated EBITDA, 9.7x and 5.7x for 1999 estimated EBITDA and 8.0x and 3.3x for
2000 estimated EBITDA. This compares with implied Enterprise Value multiples of
1998 estimated EBITDA, 1999 estimated EBITDA and 2000 estimated EBITDA for
Bayard based upon the proposed merger consideration of 15.1x, 21.9x and 6.8x,
respectively.
DLJ also examined the adjusted mean multiple of equity value to 1998
estimated After-Tax Cash Flow, 1999 estimated After-Tax Cash Flow and 2000
estimated After-Tax Cash Flow for the comparable companies which were 4.0x, 6.3x
and 3.8x, respectively. These multiples implied Bayard per share values of
$1.87, NM and $3.85, respectively. The maximum and minimum values for comparable
company equity value multiples were 7.1x and 1.8x for 1998 estimated After-Tax
Cash Flow, 8.1x and 2.3x for 1999 estimated After-Tax Cash Flow and 5.7x and
1.7x for 2000 estimated After-Tax Cash Flow. This compares with implied equity
value multiples of 1998 estimated After-Tax Cash Flow, 1999 estimated After-Tax
Cash Flow and 2000 estimated After-Tax Cash Flow for Bayard based upon the
proposed merger consideration of 9.3x, NM and 4.4x, respectively.
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<PAGE> 32
DLJ's analysis of certain other publicly traded companies is summarized in
the following table:
<TABLE>
<CAPTION>
ADJUSTED IMPLIED BAYARD
MULTIPLES MAXIMUM MEAN MINIMUM PER SHARE VALUE
- --------- ------- -------- ------- ---------------
<S> <C> <C> <C> <C>
Enterprise Value to:
1998 Estimated EBITDA.................. 9.5x 5.6x 3.4x NM
1999 Estimated EBITDA.................. 9.7x 7.1x 5.7x NM
2000 Estimated EBITDA.................. 8.0x 5.0x 3.3x $1.54
Equity Value to:
1998 Estimated After-Tax Cash Flow..... 7.1x 4.0x 1.8x $1.87
1999 Estimated After-Tax Cash Flow..... 8.1x 6.3x 2.3x NM
2000 Estimated After-Tax Cash Flow..... 5.7x 3.8x 1.7x $3.85
</TABLE>
The Bayard per share value range implied by this analysis was $1.54 to
$3.85. Because $4.41, the implied per share transaction value to Bayard from the
merger, was above this range, this analysis supported DLJ's opinion.
Transaction Analysis. DLJ reviewed publicly available information for a
number of selected transactions involving the combination of contract drilling
companies completed since November 1996. The transactions selected were not
intended to represent a complete list of contract drilling transactions which
have occurred during the last three years; rather they included transactions
involving combinations of companies with operating characteristics, size or
geographical focus believed to be comparable to such characteristics of Bayard.
These selected transactions include: Nabors/Pool Energy Services; Key Energy
Group/Dawson Production Services; R&B Falcon Corporation/Cliffs Drilling
Company; Parker Drilling Company/Hercules Offshore; Bayard/Bonray Drilling
Corporation; Pride Petroleum Services/Forasol-Foramer; Dawson Production
Services/Pride Petroleum Services; and Parker Drilling Company/Mallard Bay
Drilling. Although these transactions were used for comparison purposes, none of
such transactions is directly comparable to the merger. An analysis of
comparable transactions is not purely mathematical, rather it involves complex
considerations and judgments concerning similarities and differences in
financial, operational and other characteristics of potentially comparable
transactions.
DLJ reviewed the consideration paid in such comparable transactions in
terms of the Enterprise Value in such transactions as a multiple of LTM and
estimated forward fiscal year EBITDA. The adjusted mean multiple of Enterprise
Value to LTM EBITDA was 10.8x with a high of 30.1x and a low of 4.4x. The
adjusted mean multiple of Enterprise Value to estimated forward fiscal year
EBITDA was 7.0x with a high of 12.0x and a low of 4.2x. Based upon these
adjusted mean multiples, the implied valuation of Bayard common stock per share
was $5.18 and NM, respectively.
DLJ also reviewed the consideration paid in such transactions in terms of
the equity value in such transactions as a multiple of LTM After-Tax Cash Flow
and estimated forward fiscal year After-Tax Cash Flow. The adjusted mean
multiple of equity value to LTM After-Tax Cash Flow was 13.8x with a high of
32.5x and a low of 4.1x. The adjusted mean multiple of equity value to estimated
forward fiscal year After-Tax Cash Flow was 5.7x with a high of 16.3x and a low
of 4.2x. Based upon these adjusted mean multiples, the implied value range of
Bayard common stock per share was $9.92 to $2.69.
DLJ's transaction analysis is summarized in the following table:
<TABLE>
<CAPTION>
ADJUSTED IMPLIED BAYARD
MULTIPLES MAXIMUM MEAN MINIMUM PER SHARE VALUE
- --------- ------- -------- ------- ---------------
<S> <C> <C> <C> <C>
Enterprise Value to:
LTM EBITDA............................. 30.1x 10.8x 4.4x $5.18
1998 Estimated EBITDA.................. 12.0x 7.0x 4.2x NM
Equity Value to:
LTM After-Tax Cash Flow................ 32.5x 13.8x 4.1x $9.92
1998 Estimated After-Tax Cash Flow..... 16.3x 5.7x 4.2x $2.69
</TABLE>
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<PAGE> 33
The Bayard per share value range implied by this analysis was $2.69 to
$9.92. Because $4.41, the implied per share transaction value to Bayard from the
merger, was within this range, this analysis supported DLJ's opinion.
Discounted Cash Flow Analysis. DLJ also performed a discounted cash flow
analysis of Bayard using Bayard's projections.
DLJ calculated the discounted present value of future net cash flows
attributable to contract drilling operations by applying various assumptions
regarding capital expenditures, sales and direct costs. Terminal values in the
year 2003 were assumed in three separate cases to be multiples of After-Tax Cash
Flow of 4.0x, 5.0x and 6.0x, based upon analysis of historical industry
valuations. Finally, these net cash flows were discounted back to present value
based upon a range of discount factors utilizing the Capital Asset Pricing
Model.
DLJ calculated equity values ranging from a low of $60.3 million to a high
of $100.5 million, based upon the discounted cash flow analysis. With 18.3
million fully diluted shares of Bayard common stock outstanding, the implied
values of Bayard common stock per share ranged from $3.31 to $5.52.
Because $4.41, the implied per share transaction value to Bayard from the
merger, was within this range, the discounted cash flow analysis supported DLJ's
opinion.
Pro Forma Merger Analysis. DLJ also performed a pro forma merger analysis
to determine the impact of the merger on Nabors' net income per share ("EPS")
and After-Tax Cash Flow per share. DLJ performed the analysis for each of the
three years ended December 31, 1998 through 2000 as if the merger had been
completed on January 1 of each year. Based upon this pro forma analysis, DLJ
determined that the merger was dilutive to After-Tax Cash Flow per share in both
1998 and 1999 by approximately 1.6% and 5.1%, respectively, and accretive to
After-Tax Cash Flow per share in 2000 by 1.7%. The analysis determined that the
merger was dilutive to EPS in 1998 and 1999 by approximately 5.0% and 13.4%,
respectively, and accretive to EPS in 2000 by 1.6%. DLJ included synergies equal
to $2 million per year in its analysis.
Because the analysis assumed that Bayard would produce negative net income
and cash flow in 1999, the transaction was dilutive to Nabors and, conversely,
accretive to Bayard in those periods. However, in 2000, the first actual full
year of the merger and a year in which the projections assume an improvement in
the business, the transaction was slightly accretive to Nabors. Based upon this
analysis, the pro forma merger analysis support DLJ's opinion.
Relative Contribution Analysis. In addition, DLJ conducted a relative
contribution analysis of Bayard's LTM and projected operating performance with
respect to the combined company.
The relative contribution of each of Bayard and Nabors to the combined
company of certain financial measures were reviewed, including EBITDA, net
income and After-Tax Cash Flow and compared with the amount of common equity,
5.7%, being distributed to Bayard's stockholders in the merger.
Bayard's contribution of LTM EBITDA, 1998 estimated EBITDA, 1999 estimated
EBITDA and 2000 estimated EBITDA was 6.1%, 4.6%, 3.8% and 8.2%, respectively.
Bayard's contribution of LTM net income, 1998 estimated net income, 1999
estimated net income and 2000 estimated net income was 1.2%, NM, NM and 1.3%,
respectively. Finally, Bayard's contribution of LTM After-Tax Cash Flow, 1998
estimated After-Tax Cash Flow, 1999 estimated After-Tax Cash Flow and 2000
estimated After-Tax Cash Flow was 4.6%, 3.9%, NM and 6.6%, respectively.
Because the relative contribution by Bayard in each of these measures
ranged from 1.2% to 8.2% and the amount of common equity being distributed to
Bayard's stockholders in the merger was 5.7%, the relative contribution analysis
supported DLJ's opinion.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ in connection with the preparation of its
opinion. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
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<PAGE> 34
application of these methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Each of the
analyses conducted by DLJ was carried out in order to provide a different
perspective on the transaction and add to the total mix of information
available. DLJ did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support an opinion as to
fairness from a financial point of view. Rather, in reaching its conclusion, DLJ
considered the results of the analyses in light of each other and ultimately
reached its opinion based on the results of all analyses taken as a whole. DLJ
did not place particular reliance or weight on any individual analysis, but
instead concluded that its analyses, taken as a whole, supported its
determination. Accordingly, DLJ believes that its analyses must be considered as
a whole and that selecting portions of its analysis and the factors considered
by it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying the opinion. The analyses performed by
DLJ are not necessarily indicative of actual values of future results, which may
be significantly more or less favorable than suggested by such analyses.
Under the terms of an engagement letter dated October 15, 1998, Bayard
agreed to pay DLJ $500,000, payable in cash, for rendering the fairness opinion.
Bayard also agreed to reimburse DLJ promptly for certain out-of-pocket expenses,
including reasonable fees and out-of-pocket expenses of counsel, incurred by DLJ
in connection with its engagement, and to indemnify DLJ and certain related
persons against certain liabilities in connection with its engagement, including
liabilities under the federal securities laws. The terms of the fee arrangement
with DLJ, which DLJ and Bayard believe are customary in transactions of this
nature, were negotiated at arm's length between Bayard and DLJ and the Bayard
Board was aware of such arrangement. DLJ has been engaged to perform investment
banking services for Bayard in the past and has been compensated for such
services. Those services have included acting as lead managing underwriter for
the initial public offering of Bayard common stock in November 1997. DLJ and
Bayard are currently involved in class action litigation relating to such
offering. In addition, DLJ was the initial purchaser in Bayard's senior notes
offering in June 1998 and advised Bayard with respect to the adoption of the
Bayard rights agreement in August 1998.
The Bayard Board selected DLJ as its financial advisor because it is a
nationally recognized investment banking firm and the principals of DLJ have
substantial experience in transactions similar to the merger and are familiar
with Bayard and its business. In the ordinary course of business, DLJ may trade
the securities of both Bayard and Nabors for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities. DLJ, as part of its investment banking services, is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
EFFECTIVE TIME
Subject to the terms and conditions of the merger agreement, the closing of
the merger will occur on the first business day immediately following the day on
which the conditions to closing set forth in the merger agreement are fulfilled
or waived unless Bayard and Nabors agree otherwise. It is anticipated that the
last of the conditions to the closing to be fulfilled will be either the
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, or the adoption of the merger
agreement by the Bayard stockholders. Promptly after such conditions are
fulfilled, a certificate of merger relating to the merger will be filed with the
Delaware Secretary of State. The time when the certificate of merger is filed,
or such later time as is specified in the certificate of merger, is referred to
as the "effective time" of the merger.
EXCHANGE OF CERTIFICATES
As of the effective time, Nabors will deposit with an exchange agent
certificates representing the aggregate whole number of shares of Nabors common
stock to be issued in the merger and cash in an amount equal to the aggregate
cash portion of the merger consideration plus the estimated amount to be paid
instead of fractional shares of Nabors common stock. As soon as is reasonably
practicable after the
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<PAGE> 35
effective time, Nabors will instruct the exchange agent to mail to each holder
of record of certificates formerly representing Bayard common stock transmittal
materials for use in exchanging such Bayard certificates for certificates
representing shares of Nabors common stock, the cash portion of the merger
consideration and, if applicable, cash instead of a fractional share of Nabors
common stock.
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE
A TRANSMITTAL FORM.
FEDERAL SECURITIES LAW CONSEQUENCES
The shares of Nabors common stock to be issued to the former stockholders
of Bayard in the merger have been registered under the Securities Act of 1933.
Accordingly, all such shares of Nabors common stock will be freely transferable
under the Securities Act of 1933, except that shares of Nabors common stock
received by persons who are deemed to be "affiliates," as such term is defined
under the Securities Act of 1933, of Bayard before the merger or who become
"affiliates" of Nabors after the merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act of 1933 or as otherwise permitted under the Securities Act of
1933. Rule 145 generally provides that "affiliates" of an acquired company may
not sell securities of the issuer unless the securities are sold:
- in accordance with the volume, manner of sale and public information
requirements of Rule 144; or
- without regard to the volume or manner of sale requirements of Rule 144,
but subject to its public information requirements, if the persons do not
become "affiliates" of the acquiror after the merger and have held the
shares acquired in the merger for at least one year.
Rule 144 generally requires that the quantity of shares sold in any three-month
period not exceed the greater of 1% of the outstanding shares of the issuer or
the average weekly reported volume of trading in such shares for the four weeks
preceding the notice of sale. Rule 144 also requires that such sales be made in
unsolicited, open market "brokers' transactions." Persons who may be deemed to
be "affiliates" of Nabors or Bayard generally include individuals or entities
that control, are controlled by, or are under common control with, such party
and may include certain officers and directors of such party as well as
principal stockholders of such party. The merger agreement requires Bayard to
use its best efforts to obtain from each of its "affiliates" a written agreement
to the effect that such person will not sell, transfer or otherwise dispose of
any of the shares of Nabors common stock issued to such person in the merger in
violation of the Securities Act of 1933 or the rules and regulations promulgated
by the Commission. Bayard estimates that approximately 1,000,000 shares of
Nabors common stock will be affected by these restrictions.
Nabors has agreed in the merger agreement that, before the merger, it will
enter into an agreement with those persons who will receive shares of Nabors
common stock in the merger which will be subject to the resale restrictions of
Rule 144 and Rule 145 under the Securities Act of 1933. In such agreement,
Nabors will be required to grant to such persons the right to demand a single
registration under the Securities Act of 1933 of not less than 1,000,000 shares
of Nabors common stock received by them in the merger.
AMERICAN STOCK EXCHANGE LISTING OF NABORS COMMON STOCK
In the merger agreement, Nabors has agreed to use its best efforts to cause
the shares of Nabors common stock to be issued in the merger to be approved for
listing on AMEX before the merger. The obligations of Bayard, Nabors and Nabors'
acquisition subsidiary to close the merger are conditioned upon, among other
things, such shares of Nabors common stock being listed on AMEX.
CERTAIN EFFECTS OF THE MERGER
If the merger is consummated, Bayard will become a wholly owned subsidiary
of Nabors. As a result, public trading of the shares of Bayard common stock will
cease, the shares of Bayard common stock will
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<PAGE> 36
cease to be listed and traded on AMEX and the registration of the shares of
Bayard common stock under the Securities Exchange Act of 1934 will be
terminated.
For information concerning the federal income tax consequences of the
merger, see "Federal Income Tax Consequences."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Bayard Board with respect to the
merger, Bayard stockholders should be aware that certain of the directors and
executive officers of Bayard have the following interests in the merger that
differ from, or are in addition to, the interests of the stockholders of Bayard
generally.
Employment Agreement with Bayard Executive
In the merger agreement, Nabors has agreed to cause Nabors Drilling USA,
Inc., a wholly owned subsidiary of Nabors, to enter into an employment agreement
with James E. Brown, the Chairman of the Board, President and Chief Executive
Officer of Bayard. The Brown employment agreement with NDUSA will replace, and
cause the termination of, the employment agreement previously entered into
between Bayard and Mr. Brown.
The Brown employment agreement provides for a two-year term of employment
beginning on the date of the merger. Following the initial two-year term, the
agreement is subject to renewal upon the mutual agreement of Mr. Brown and
NDUSA. Mr. Brown will be elected initially as Vice President -- Central Division
of NDUSA and will receive base annual cash compensation of $175,000 and an
annual bonus determinable at the discretion of the board of directors of NDUSA.
Mr. Brown will be entitled to the use of a company-owned vehicle or an $800 per
month automobile allowance as well as paid vacation and will be eligible to
participate in all benefit programs provided by NDUSA in accordance with their
terms. In consideration of Mr. Brown's agreement to waive his rights under his
prior employment agreement with Bayard, Mr. Brown will also receive a lump sum
signing bonus of $300,000. Mr. Brown will receive options to acquire 200,000
shares of Nabors common stock, exercisable at the closing price for Nabors
common stock on the date of commencement of employment. Such options will vest
annually in four equal installments beginning on the first anniversary of the
date of grant, will have a ten-year term and will be subject to the terms of
Nabors' standard form stock option agreement and the applicable stock option
plan.
The Brown employment agreement provides that NDUSA may terminate Mr. Brown
for any of the following reasons:
- Mr. Brown's death;
- total or partial disability of Mr. Brown which renders him permanently
unable to perform his duties;
- total or partial disability of Mr. Brown which renders him temporarily
unable to perform his duties for a period of 180 consecutive days;
- "cause," which is defined in the Brown employment agreement to include
such acts as fraud, theft, felony conviction or willful or repeated
failure to perform the duties of his employment in any material respect;
or
- any reason, without cause, upon 30 days' prior written notice.
Mr. Brown may voluntarily terminate his employment at any time upon 30 days'
prior written notice. If NDUSA terminates Mr. Brown's employment for any of the
first three reasons noted above, NDUSA will be required to pay Mr. Brown's base
salary for six months or the time remaining in the term of employment, whichever
is less. If NDUSA terminates Mr. Brown for cause, no further unaccrued payment
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<PAGE> 37
will be made. If NDUSA terminates Mr. Brown without cause, he will be entitled
to receive his base salary for the time remaining in the term of employment.
Mr. Brown has agreed that for the period of time that NDUSA is making
payments as required under the respective employment agreement, he will not
engage in any business that is also conducted by NDUSA or its affiliates, or,
subject to certain limitations, own or become employed by a business that
competes with NDUSA or its affiliates in any geographic area in which NDUSA or
its affiliates has significant business activities, including but not limited to
the continental United States and Mexico. During that period, Mr. Brown is
prohibited from interfering with the customer and employee relationships of
NDUSA and its affiliates.
Transactions between Nabors and National Oilwell, L.P.
Merrill A. Miller, Jr., a director of Bayard, is Vice President of National
Oilwell, L.P., an oilfield services company, and President of its Products &
Technology Group. National Oilwell, L.P. is a significant supplier to Nabors,
providing Nabors with construction services and various related products and
equipment. National Oilwell, L.P. has advised Bayard that Nabors is one of its
top ten customers in terms of revenue.
Options
As shown in the following table, Bayard officers and directors hold options
to purchase a total of 770,000 shares of Bayard common stock, of which 199,835
were exercisable as of, or will become exercisable within 60 days after, January
15, 1999.
<TABLE>
<CAPTION>
CURRENT VALUE OF IN-THE-MONEY
OPTIONS BASED ON THE $5.3125 CLOSING
OPTIONS HELD AS OF PRICE OF BAYARD COMMON STOCK
JANUARY 15, 1999 ON JANUARY 15, 1999
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- ------------------------------------
<S> <C> <C>
James E. Brown.................... 160,000 / 440,000 $37,500 / $87,500
David E. Grose, III............... 14,000 / 56,000 625 / 2,500
Carl B. Anderson, III............. 5,167 / 14,833 0 / 0
Mark Liddell...................... 5,167 / 14,833 0 / 0
Merrill A. Miller................. 5,167 / 14,833 0 / 0
Sidney L. Tassin.................. 5,167 / 14,833 0 / 0
Lew O. Ward....................... 5,167 / 14,833 0 / 0
</TABLE>
The merger agreement provides that each outstanding option to purchase
Bayard common stock will be converted into an option to purchase Nabors common
stock. Each converted option will be exercisable for that number of whole shares
of Nabors common stock equal to the product of the number of shares of Bayard
common stock covered by such option immediately before the merger multiplied by
0.3375, rounded up to the nearest whole number of shares of Nabors common stock.
The per share exercise price for the shares of Nabors common stock issuable upon
the exercise of such Nabors stock option will be an amount determined by
dividing (i) the amount obtained by subtracting (a) $0.30 from (b) the exercise
price per share of Bayard common stock for such Bayard stock option, by (ii)
0.3375 and rounding the resulting exercise price up to the nearest whole cent.
The Nabors stock options granted upon conversion of Bayard stock options
outstanding immediately before the merger will have the same schedule of vesting
and same period for exercise as applies to such Bayard stock options. However,
Nabors stock options received upon such conversion by employees of Bayard who
are terminated by the surviving corporation without cause during the one-year
period immediately following the merger will immediately and fully vest upon
such termination.
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Warrants
Energy Spectrum Partners LP and Wil-Cas Investments, L.P. hold warrants for
the purchase of 112,000 and 169,400 shares of Bayard common stock, respectively.
Sidney L. Tassin, a director of Bayard, is also the President and a member of
Energy Spectrum LLC, which is the ultimate general partner of Energy Spectrum
Partners LP. Lew O. Ward, a director of Bayard, is an officer and director of
Ward Petroleum Corporation. Wil-Cas Investments, L.P. is controlled by Ward
Petroleum Corporation and family trusts for the benefit of Mr. Ward's children.
The merger agreement provides that all outstanding warrants for the purchase of
Bayard common stock, including the warrants held by Energy Spectrum Partners LP
and Wil-Cas Investments, L.P., will remain outstanding on the same terms as in
effect immediately before the merger. After the merger, the warrants will be
exercisable for:
- a number of whole shares of Nabors common stock equal to the product of
the number of shares of Bayard common stock covered by the warrant
multiplied by 0.3375, rounded up to the nearest whole number of shares of
Nabors common stock; and
- an amount of cash equal to the product of the number of shares of Bayard
common stock covered by the warrant multiplied by $0.30.
Severance Arrangements; Continuing Employment Agreement
The merger agreement provides that, under certain circumstances, Nabors
will make cash severance payments to certain identified employees of Bayard,
including David E. Grose, III, the Vice President and Chief Financial Officer of
Bayard. Nabors will incur these severance obligations if the applicable
employees remain employed by Bayard immediately before the merger and Nabors
terminates their employment within one year after the merger. Any such payments
would be made instead of amounts otherwise payable by Bayard under any other
severance agreement.
In the case of Mr. Grose, Nabors would pay $105,000 in cash to Mr. Grose if
it terminates his employment within one year after the merger and if Mr. Grose
waives the right to severance payments under his existing employment agreement.
This employment agreement, dated as of July 16, 1997, entitles Mr. Grose to
continue to receive his base salary and other employee benefits through the
remaining term of the agreement and to receive a cash payment in an amount equal
to any earned but unpaid quarterly bonus for the previous quarter if, as a
result of a change of control, Mr. Grose is terminated without due cause or if
Mr. Grose elects to terminate his employment for any reason. The merger would
constitute a "change of control." Mr. Grose's base salary is currently $105,000.
The Grose employment agreement expires by its terms on June 30, 1999.
Indemnification and Insurance
The Restated Certificate of Incorporation and Amended and Restated Bylaws
of Bayard currently provide for indemnification of directors to the fullest
extent permitted by Delaware law. Nabors has agreed that the Restated
Certificate of Incorporation and Bylaws of the surviving corporation in the
merger will contain the indemnification provisions currently set forth in
Bayard's Certificate of Incorporation and Bylaws and that such provisions will
not be amended, repealed or otherwise modified for a period of six years after
the merger in any manner that would adversely affect the rights of individuals
under Bayard's Certificate of Incorporation or Bylaws who at any time before the
merger were directors or officers of Bayard in respect of actions or omissions
occurring at or before the merger, including, without limitation, the
transactions contemplated by the merger agreement, unless such modification is
required by law.
In addition, from and after the merger, Nabors has agreed that it and the
surviving corporation will jointly and severally indemnify, defend and hold
harmless the present and former officers and directors of Bayard or any of its
subsidiaries against all losses, expenses, claims, damages or amounts paid in
settlement of, or otherwise in connection with, any threatened or actual claim,
action, suit, proceeding or investigation, based in whole or in part on the fact
that such person is or was a director or officer of Bayard or any of its
subsidiaries. This indemnification covers claims arising out of actions or
omissions
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occurring at or before the merger and includes, but is not limited to, the
transactions contemplated by the merger agreement. In each case, the
indemnification will apply to the full extent permitted under Delaware law, and
Nabors will pay expenses, including fees and disbursements of counsel, as
incurred, in advance of the final disposition of any such action or proceeding
to each indemnified party upon receipt from the indemnified party to whom
expenses are advanced of an undertaking to repay such advances, as contemplated
by Delaware law.
Under the terms of the merger agreement, commencing at the merger, the
directors and officers of the surviving corporation will be insured under the
policies of directors and officers insurance currently maintained by Nabors or
maintained by Nabors after the merger. In addition, for a period of four years
after the merger, Nabors will cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by Bayard
and its subsidiaries, or equivalent policies, with respect to claims arising
from facts or events which occurred before the merger; provided that Nabors will
not be required to pay an annual premium for such insurance in excess of two
times the last annual premium paid by Bayard before the date of the merger
agreement, but in such case shall purchase as much coverage as possible for such
amount.
REGULATORY MATTERS
Transactions such as the merger are reviewed by the Antitrust Division of
the Department of Justice and by the Federal Trade Commission to ensure
compliance with antitrust laws. The Hart-Scott-Rodino Antitrust Improvements Act
of 1976, and its interpretive rules, govern this review. Under the Hart-Scott-
Rodino Act, Bayard and Nabors may not consummate the merger until they have
filed a notice with the Antitrust Division and the FTC and the applicable
waiting period expires or is terminated.
On October 22, 1998, Bayard and Nabors filed their respective Premerger
Notification and Report Forms as required by the Hart-Scott-Rodino Act. On
November 20, 1998, the Antitrust Division requested that Bayard and Nabors
provide additional information and documents relevant to the proposed merger.
This request for additional information extends the applicable waiting period.
In particular, under the Hart-Scott-Rodino Act, Bayard and Nabors may not
consummate the merger for a period of 20 days from the date on which they
substantially comply with the information request. After the parties
substantially comply with the information request, the waiting period may be
extended only by court order or by consent of the parties.
Bayard and Nabors are currently engaged in discussions with the Antitrust
Division regarding the competitive effects of the merger. At any time before or
after the merger, the Antitrust Division could take action to enjoin the merger
or to force divestiture of substantial assets of Bayard or Nabors or their
subsidiaries. Private parties and state attorneys general could also bring an
action under the antitrust laws in certain circumstances. Bayard and Nabors
cannot guarantee that the Antitrust Division, the FTC or others will not
challenge the merger and cannot predict the result should such a challenge
occur.
SOURCE AND AMOUNT OF FUNDS
Nabors intends to finance its obligations to pay the cash portion of the
aggregate merger consideration with its working capital. The total cash cost to
Nabors of the merger consideration will be approximately $5.5 million.
MANAGEMENT OF NABORS FOLLOWING THE MERGER
It is not anticipated that any of the members of the Bayard Board will
serve on the Board of Directors of Nabors and, accordingly, the composition of
the Board of Directors of Nabors will not change as the result of the merger.
Likewise, it is not anticipated that any officers of Bayard will become officers
of Nabors after the consummation of the merger. However, one executive officer
of Bayard is expected to enter into an employment agreement with Nabors Drilling
USA, Inc., a wholly owned subsidiary of Nabors. See "-- Interests of Certain
Persons in the Merger."
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<PAGE> 40
RIGHTS OF DISSENTING STOCKHOLDERS
A holder of record of shares of Bayard common stock on the record date who
complies with the procedures set forth in Section 262 of the Delaware General
Corporation Law will be entitled to appraisal rights in connection with the
merger. Holders of warrants and options issued by Bayard are not entitled to
appraisal rights in connection with the merger. The following discussion is not
a complete statement of the law pertaining to appraisal rights under the
Delaware General Corporation Law and is qualified in its entirety by the full
text of Section 262, which is reprinted in its entirety as Annex C to this
document. Except as set forth in Section 262, Bayard's stockholders will not be
entitled to appraisal rights in connection with the merger.
Under Section 262, record holders of Bayard common stock who comply with
the procedures set forth in Section 262 will be entitled to have their shares
appraised by the Delaware Court of Chancery and to receive payment of the "fair
value" of their shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, as determined by the court.
Under Section 262, where a merger agreement is to be submitted for adoption
at a meeting of stockholders, as in the case of the special meeting, not less
than 20 days before the meeting, a company must notify each of its stockholders
of record at the close of business on the record date for the meeting that
appraisal rights are available and include in each such notice a copy of Section
262. THIS DOCUMENT CONSTITUTES THE REQUIRED NOTICE TO HOLDERS OF BAYARD COMMON
STOCK. Any stockholder who wishes to exercise appraisal rights should review the
following discussion and Annex C carefully, because failure to timely and
properly comply with the procedures specified in Section 262 will result in the
loss of appraisal rights.
A STOCKHOLDER WISHING TO EXERCISE APPRAISAL RIGHTS MUST DELIVER TO BAYARD,
BEFORE THE VOTE ON THE ADOPTION OF THE MERGER AGREEMENT AT THE SPECIAL MEETING,
A WRITTEN DEMAND FOR APPRAISAL OF THE HOLDER'S SHARES OF STOCK. The demand must
inform Bayard of the identity of the stockholder and must state that the
stockholder intends to demand an appraisal of his or her shares of Bayard common
stock. A vote against the adoption of merger agreement will not satisfy this
requirement. ALL WRITTEN DEMANDS FOR APPRAISAL OF SHARES SHOULD BE MAILED OR
DELIVERED TO BAYARD, 4005 NORTHWEST EXPRESSWAY, SUITE 550E, OKLAHOMA CITY,
OKLAHOMA 73116, ATTENTION: SECRETARY, SO AS TO BE RECEIVED BEFORE THE VOTE ON
THE ADOPTION OF THE MERGER AGREEMENT.
A STOCKHOLDER WISHING TO EXERCISE APPRAISAL RIGHTS MUST HOLD OF RECORD THE
SHARES IN QUESTION ON THE RECORD DATE AND MUST CONTINUE TO HOLD SUCH SHARES
THROUGH THE TIME OF THE MERGER. Accordingly, a holder of shares of Bayard common
stock who is the record holder of shares of Bayard common stock on the record
date, but who transfers such shares of Bayard common stock before the
consummation of the merger, will lose any right to appraisal in respect of such
shares of Bayard common stock.
A holder of record of shares of Bayard common stock is entitled to assert
appraisal rights only with respect to the shares registered in that holder's
name. A demand for appraisal should be executed by or on behalf of the holder of
record fully and correctly, as the holder's name appears on the stock
certificates. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, execution of the demand should be made in
that capacity; if the shares are owned of record by more than one person, as in
a joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a demand for appraisal on behalf of a holder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, the agent is agent for the
record owner or owners. A record holder such as a broker, who holds shares as
nominee for several beneficial owners, may exercise appraisal rights with
respect to the shares held for one or more beneficial owners, while not
exercising appraisal rights with respect to the shares held for other beneficial
owners; in that event, the written demand should set forth the number of shares
as to which appraisal is sought. Where no number of shares is expressly
mentioned, the demand will be presumed to cover all shares held in the name of
the record owner. Stockholders who hold their shares in brokerage accounts or
other nominee forms and who
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<PAGE> 41
wish to exercise appraisal rights are urged to consult with their brokers to
determine the appropriate procedures for the making of a demand for appraisal by
the nominee.
STOCKHOLDERS ELECTING TO EXERCISE THEIR APPRAISAL RIGHTS UNDER SECTION 262
MUST NOT VOTE FOR ADOPTION OF THE MERGER AGREEMENT. Accordingly, a vote against
adoption of the merger agreement, or an abstention with respect to the merger
agreement, will not prevent a holder of Bayard common stock from exercising
appraisal rights, but a vote in favor of adoption of the merger agreement will
prevent such holder from exercising appraisal rights. However, IF A HOLDER OF
BAYARD COMMON STOCK RETURNS A SIGNED PROXY CARD, BUT DOES NOT SPECIFY A VOTE
AGAINST ADOPTION OF THE MERGER AGREEMENT OR A DIRECTION TO ABSTAIN, THEN THE
PROXY CARD, IF NOT REVOKED, WILL BE VOTED FOR THE MERGER, WHICH WILL HAVE THE
EFFECT OF WAIVING THAT STOCKHOLDER'S APPRAISAL RIGHTS.
Within ten days after the merger, Bayard, as the surviving corporation in
the merger, must send a notice as to the effectiveness of the merger to each
person who has satisfied the appropriate provisions of Section 262. Within, but
not more than, 120 days after the merger, Bayard, or any holder of shares
entitled to appraisal rights under Section 262 who has complied with the
statutory procedures summarized above, may file a petition in the Delaware Court
of Chancery demanding a determination of the fair value of such shares. Bayard
is not under any obligation, and has no present intention, to file a petition
with respect to the appraisal of the fair value of the shares. Accordingly, it
is the obligation of the stockholders to initiate all necessary action to
perfect their appraisal rights within the time prescribed in Section 262.
Within 120 days after the merger, any record holder of shares who has
complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from Bayard a statement setting forth
the aggregate number of shares of Bayard common stock with respect to which
demands for appraisal have been received and the aggregate number of holders of
such shares. The statements must be mailed within ten days after Bayard receives
a written request therefor.
If a petition for an appraisal is timely filed, then, after a hearing on
the petition, the Delaware Court of Chancery will determine the holders of
shares entitled to appraisal rights. The Delaware Court of Chancery may require
the stockholders who have demanded an appraisal for their shares and who hold
stock represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings. If any stockholder fails to comply with such direction, the
Delaware Court of Chancery may dismiss the proceedings as to such stockholder.
The Delaware Court of Chancery will appraise the "fair value" of the shares
of stockholders entitled to appraisal rights, exclusive of any element of value
arising from the accomplishment or expectation of the merger, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. Holders considering seeking appraisal should be aware that the fair
value of their shares as determined under Section 262 could be more than, the
same as or less than the value of the merger consideration that they would
otherwise receive if they did not seek appraisal of their shares. The Delaware
Supreme Court has stated that "proof of value by any techniques or methods which
are generally considered acceptable in the financial community and otherwise
admissible in court" should be considered in the appraisal proceedings. More
specifically, the Delaware Supreme Court has stated that: "Fair value, in an
appraisal context, measures 'that which has been taken from the shareholder,
viz., his proportionate interest in a going concern.' In the appraisal process
the corporation is valued 'as an entity,' not merely as a collection of assets
or by the sum of the market price of each share of its stock. Moreover, the
corporation must be viewed as an on-going enterprise, occupying a particular
market position in the light of future prospects." In addition, Delaware courts
have decided that the statutory appraisal remedy, depending on factual
circumstances, may or may not be a stockholder's exclusive remedy. The Delaware
Court of Chancery will also determine the amount of interest, if any, to be paid
upon the amounts to be received by persons whose shares have been appraised. The
costs of the action may be determined by the court and taxed upon the parties as
the court deems equitable. The court may also order that all or a portion of the
expenses incurred by any stockholder in connection with an appraisal, including
reasonable attorneys fees and the fees and expenses of experts utilized in the
appraisal proceeding, be charged pro rata against the value of all of the shares
entitled to appraisal.
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Any holder of shares who has duly demanded an appraisal in compliance with
Section 262 will not, after the effective time, be entitled to vote the shares
subject to the demand for appraisal for any purpose, and will not be entitled to
the payment of dividends or other distributions on those shares, except
dividends or other distributions payable to holders of record of shares of the
same class or series of stock as of a date before the merger.
If any stockholder who demands appraisal of shares under Section 262 fails
to perfect, or effectively withdraws or loses, the right to appraisal, then the
shares held by such holder will be converted into the merger consideration. A
holder of shares will fail to perfect, or will effectively lose, the right to
appraisal if no petition for appraisal is filed within 120 days after the
merger. A holder may withdraw a demand for appraisal by delivering to Bayard a
written withdrawal of the demand for appraisal and acceptance of the merger,
except that any such attempt to withdraw made more than 60 days after the merger
will require the written approval of Bayard and no appraisal proceeding may be
dismissed as to any stockholder without the approval of the court.
Failure to follow the steps required by Section 262 for perfecting
appraisal rights may result in the loss of appraisal rights. If a stockholder
fails to perfect a right to appraisal, the stockholder will still receive
consideration with respect to such shares of Bayard common stock in accordance
with the merger agreement. In view of the complexities of the foregoing
provisions of the Delaware General Corporation Law, Bayard stockholders who are
considering dissenting from the merger may wish to consult legal counsel.
ACCOUNTING TREATMENT
The merger will be treated by Nabors as a "purchase," as that term is used
under United States generally accepted accounting principles, for accounting and
financial reporting purposes. Under this method of accounting, the purchase
price of Bayard, including direct costs of the merger, will be allocated to
assets and liabilities of the acquired company based upon their estimated fair
values, with the excess purchase consideration allocated to goodwill. The
results of Nabors' operations will include the results of operations of Bayard
commencing at the time of the merger. The Unaudited Pro Forma Financial
Statements appearing elsewhere in this document are based upon certain
assumptions and allocate the purchase price to assets and liabilities based upon
a preliminary allocation of the purchase price. The unaudited pro forma
adjustments and consolidated amounts are included for information purposes only.
If the merger is consummated, Nabors' consolidated financial statements will
reflect the effects of acquisition adjustments only from the effective time.
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THE MERGER AGREEMENT AND RELATED AGREEMENTS
The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Annex A to this document. This summary
is qualified in its entirety by reference to the full text of the merger
agreement.
THE MERGER
Upon the terms and conditions of the merger agreement, and in accordance
with the Delaware General Corporation Law, at the effective time, Nabors'
acquisition subsidiary will be merged with and into Bayard and Bayard will
continue as the surviving corporation in the merger. As a result of the merger,
Bayard will become a wholly owned subsidiary of Nabors.
CONVERSION OF SECURITIES
The Merger Consideration. Upon the consummation of the merger, each issued
and outstanding share of Bayard common stock, other than treasury shares held by
Bayard or its subsidiaries, shares held by Nabors or its subsidiaries and shares
held by persons who perfect and exercise appraisal rights, will be converted
into the right to receive 0.3375 shares of Nabors common stock and $0.30 in
cash. The share exchange ratio will be adjusted to reflect any changes in Bayard
common stock or Nabors common stock from any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares, or
if certain events described in the Bayard rights agreement occur.
Exchange of Certificates. Promptly after the merger, transmittal forms will
be mailed to each holder of record of shares of Bayard common stock to be used
in forwarding his or her certificates evidencing such shares for surrender and
exchange for the merger consideration. After receipt of such transmittal form,
each holder of Bayard certificates should surrender the holder's Bayard stock
certificates to the exchange agent, and each holder will receive in exchange
certificates representing the whole number of shares of Nabors common stock to
which such holder is entitled, together with the cash consideration of $0.30 per
share for such holder's Bayard shares and any cash which may be payable instead
of a fractional share of Nabors common stock. Such transmittal forms will be
accompanied by instructions specifying other details of the exchange.
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE
A TRANSMITTAL FORM.
Fractional Shares. No shares of Bayard common stock will be converted into
fractional shares of Nabors common stock. Each holder of Bayard certificates
which would otherwise represent the right to receive a fractional share of
Nabors common stock shall, at the time of surrender, be paid by the exchange
agent an amount in cash equal to the value of such fractional share based on the
average closing price per share of Nabors common stock as reported by the
Northeast edition of The Wall Street Journal for the ten consecutive trading
days ending on and including the fifth trading day before the closing of the
merger. All the fractional shares to which a single holder of Bayard common
stock would be entitled will be aggregated.
Rights with Respect to Unexchanged Shares. After the merger, each Bayard
certificate, until properly surrendered and exchanged, will, for all purposes,
represent only the right to receive the number of shares of Nabors common stock
which the holder of the Bayard certificate is entitled to receive, together with
the cash consideration of $0.30 per share and any cash payment instead of a
fractional share of Nabors common stock. The holder of an unexchanged Bayard
certificate will not be entitled to receive dividends or other distributions, if
any, by Nabors with a record date after the effective time until the certificate
is surrendered, at which time such dividends and distributions, together with
the cash consideration and any cash payment instead of a fractional share of
Nabors common stock, will be paid to the holder without interest.
Dissenting Shares. Any holders of Bayard common stock who have properly
perfected appraisal rights will not receive the merger consideration, but will
instead be entitled to receive a payment determined as provided by Section 262
of the Delaware General Corporation Law. However, if a holder of Bayard
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common stock fails to perfect, withdraws or loses the right to appraisal, then
those holder's shares will be deemed to have been converted into the right to
receive the merger consideration as of the effective time. See "The
Merger -- Rights of Dissenting Stockholders."
Stock Options. At the effective time, each of the outstanding Bayard stock
options will be converted into a Nabors stock option as follows:
- each converted stock option will be exercisable for that number of whole
shares of Nabors common stock equal to (1) the number of shares of Bayard
common stock covered by the Bayard stock option, multiplied by (2) the
share exchange ratio, rounded up to the nearest whole number of shares;
and
- the per share exercise price for the shares of Nabors common stock
issuable upon the exercise of each converted stock option will be the
quotient determined by (1) subtracting the cash consideration of $0.30
per share from the exercise price per share of Bayard common stock for
the Bayard stock option and dividing by (2) the share exchange ratio,
rounding the resulting exercise price up to the nearest whole cent.
Nabors has agreed to reserve for issuance the number of shares of Nabors
common stock that will become issuable upon the exercise of the converted Bayard
stock options. The new options will have the same vesting schedule and period of
exercise as applied to the Bayard stock options before the date of the merger
agreement, except that any converted option held by an employee of Bayard will
be fully vested if the employee is terminated without cause by Bayard within one
year after the merger. Nabors has agreed to file a registration statement with
the Securities and Exchange Commission with respect to the shares of Nabors
common stock subject to the converted options, and to use its best efforts to
keep the registration statement effective for so long as the converted options
remain outstanding.
Where the merger agreement does not state otherwise, the converted Bayard
stock options will be subject to the terms and conditions of Nabors' 1998
Employee Stock Option Plan or a similar plan, and the form of stock option
agreement will be Nabors' standard form as is in effect on the date of the
merger agreement. At Nabors' request, Nabors and Bayard will negotiate in good
faith to allow Nabors to adopt Bayard's stock option plans, instead of
converting Bayard stock options into Nabors stock options.
Warrants. Immediately following the merger, each of the outstanding
warrants to purchase shares of Bayard common stock will remain outstanding on
the same terms as in effect immediately before the merger, except that each
warrant will be exercisable for:
- that number of whole shares of Nabors common stock equal to (1) the
number of shares of Bayard common stock covered by the Bayard warrant,
multiplied by (2) the share exchange ratio, rounded up to the nearest
whole number of shares; and
- the amount of cash equal to (1) the number of shares of Bayard common
stock covered by the Bayard warrant, multiplied by (2) the cash
consideration of $0.30 per share.
Nabors has agreed to reserve for issuance the number of shares of Nabors
common stock that will become issuable upon the exercise of Bayard warrants.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties by
Nabors, Nabors' acquisition subsidiary and Bayard with respect to, among other
things:
- organization, good standing and corporate power;
- capitalization;
- corporate authority relative to the merger agreement;
- Securities and Exchange Commission reports and financial statements;
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- absence of undisclosed liabilities;
- absence of violations of law;
- environmental laws and regulations;
- benefit plans;
- absence of certain changes or events;
- litigation;
- lack of ownership of the other party's stock;
- tax matters;
- insurance;
- intellectual property;
- material contracts;
- required vote of stockholders to approve the merger; and
- brokers' fees.
In addition, Bayard has also made certain representations and warranties
with respect to the Bayard rights agreement and the opinion of its financial
advisor. Nabors and Nabors' acquisition subsidiary have also made certain
representations and warranties with respect to the ownership of Nabors'
acquisition subsidiary and its activities.
A number of the representations and warranties made by Bayard and Nabors in
the merger agreement contain qualifications which limit the scope of the
representations and warranties to matters which would have a material adverse
effect on the applicable company and its subsidiaries, taken as a whole. In
general, the merger agreement provides that a material adverse effect will be
deemed to have occurred if there is a change or effect which has caused, or may
be reasonably likely to cause, actual monetary loss which exceeds $75.0 million,
in the case of Nabors, or $7.5 million, in the case of Bayard. Actual or
anticipated events or effects which were disclosed to or known by the parties
prior to or on February 12, 1999 are not considered material adverse effects for
purposes of the merger agreement. Similarly, effects attributable to general
economic conditions or the oil and gas or contract drilling industries in
general are not considered material adverse effects.
COVENANTS
Covenants of Bayard. Bayard has agreed that until the merger, except as
contemplated in the merger agreement or with the consent of Nabors, it will,
among other things:
- conduct its business in the usual and ordinary course consistent with
past practice;
- use its commercially reasonable efforts to preserve substantially intact
its business organizations, maintain its rights and franchises, retain
the services of its officers and key employees and maintain its material
relationships with its customers and suppliers;
- use its commercially reasonable efforts to maintain and keep its
properties and assets in their current condition in all material
respects, allowing for ordinary wear and tear; and
- use its commercially reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that
currently maintained.
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In addition, Bayard has agreed that, except as contemplated by the merger
agreement, as set forth in the disclosure schedules delivered by Bayard to
Nabors or with the consent of Nabors, it will not take any of the following
actions:
- increase the compensation payable to any director or officer, grant or
agree to grant any severance or termination pay, other than as provided
by any normal severance policy in effect on the date of the merger
agreement, or adopt or amend any employee benefit plan;
- declare or pay any dividend or other distribution in respect of
outstanding shares of capital stock, subject to certain exceptions;
- redeem, purchase or otherwise acquire its shares or options, warrants or
other rights to acquire securities of Bayard or any of its subsidiaries,
subject to certain exceptions, or effect any recapitalization, or split,
combination or reclassification of any of the stock of Bayard or any of
its subsidiaries;
- issue any shares or any security that is convertible into or exercisable
for Bayard's stock or that of any of its subsidiaries, subject to certain
exceptions, or amend or otherwise modify the terms of any option, warrant
or other security so as to create terms more favorable for the holder, or
accelerate the vesting of any Bayard stock options;
- acquire any equity interest in excess of $1.0 million or acquire any
assets which are material, except in accordance with ordinary business
operations;
- dispose of any material assets, subject to certain exceptions;
- amend its Restated Certificate of Incorporation or amend its Amended and
Restated Bylaws in a manner that might have an adverse impact on the
transactions contemplated by the merger agreement;
- change any of its methods of accounting or tax reporting, subject to
certain exceptions;
- change any election relating to taxes, or settle or compromise any matter
relating to taxes over $250,000;
- spend more than $1.0 million in the aggregate on the purchase of
equipment or supplies, subject to certain exceptions;
- incur any debt, with certain exceptions; and
- take any action that would, or is reasonably likely to, result in any of
its representations or warranties being untrue or in any of the
conditions to the merger not being satisfied.
Covenants of Nabors. Nabors has agreed that, until the merger, except as
contemplated in the merger agreement or with the consent of Bayard, it will not,
and will cause Nabors' acquisition subsidiary not to, among other things:
- amend any of the material terms or provisions of Nabors common stock;
- knowingly take any action which would result in Nabors common stock not
being traded on AMEX;
- declare or pay any dividends or distributions on outstanding shares of
stock; or
- take any action that would, or is reasonably likely to, result in any of
Nabors' or Nabors' acquisition subsidiary's representations or warranties
being untrue or in any of the conditions to the merger not being
satisfied.
Registration Rights. Nabors has agreed to grant certain registration rights
to holders of Bayard common stock who would be subject to Rule 145 and Rule 144
of the Securities Act of 1933. The grant of registration rights will be
evidenced by an agreement to be entered into before the effective time. This
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agreement will, among other things, allow the holders subject to Rule 144 or
Rule 145 to collectively demand registration of not less than 1,000,000 shares
of Nabors common stock. See "The Merger -- Federal Securities Law Consequences."
No Solicitation. The merger agreement prohibits Bayard and its subsidiaries
from, directly or indirectly:
- initiating, soliciting or encouraging, including by way of furnishing
information or assistance, or taking any other action to facilitate, the
types of acquisition proposals described below and referred to in this
document as "company acquisition proposals;"
- entering into discussions or negotiating with any person or entity in
furtherance of a company acquisition proposal;
- entering into an agreement with respect to the types of acquisition
transactions described below and referred to in this document as "company
acquisition transactions" or agreeing to or endorsing any company
acquisition proposal; or
- authorizing or permitting any of the officers, directors or employees of
Bayard or any of its subsidiaries or any investment banker, financial
advisor, attorney, accountant or other representative retained by Bayard
or any of its subsidiaries to take any such action.
The merger agreement requires Bayard to advise Nabors of any company
acquisition proposal within two days of receiving such proposal, and to deliver
a copy of any written proposal to Nabors.
However, the merger agreement does not prohibit the Bayard Board from:
- complying with Rule 14e-2 promulgated under the Securities Exchange Act
of 1934 with regard to a company acquisition proposal; or
- furnishing information to, or entering into discussions or negotiations
with, any person or entity in connection with an unsolicited, bona fide,
written company acquisition proposal obtained before stockholder approval
of the merger and recommending the same to Bayard's stockholders or
otherwise communicating with Bayard's stockholders regarding such
proposal in a manner permitted by law, if, and only to the extent that:
(1) the Bayard Board, after consultation with legal counsel,
determines in good faith that such action is required for the
Bayard Board to comply with its fiduciary duties to stockholders
imposed by the Delaware General Corporation Law;
(2) before furnishing such information to, or entering into
discussions or negotiations with, such person or entity, Bayard:
(a) provides two business days' written notice to Nabors of such
action; and
(b) obtains from such person or entity a customary confidentiality
agreement; and
(3) Bayard determines in good faith and after consultation with its
financial advisor that, in light of the information furnished to
it relating to such company acquisition proposal, the company
acquisition transaction contemplated would, if consummated, result
in a more favorable transaction than the transaction contemplated
by the merger agreement, taking into account the long-term
prospects and interests of Bayard and its stockholders.
A "company acquisition proposal" is any inquiry or proposal which relates
to or contemplates a company acquisition transaction.
A "company acquisition transaction" means any of the following
transactions:
- any merger, consolidation, share exchange or other business combination
involving Bayard or any of its subsidiaries, subject to certain
exceptions;
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- any sale, exchange, transfer or other disposition to any person other
than Nabors or any of its subsidiaries of properties or assets of Bayard
or any of its subsidiaries which constitute:
(1) all or substantially all of the properties and assets of Bayard;
(2) all or substantially all of the properties and assets of any
significant subsidiary, or a material division or other business
unit of Bayard or any significant subsidiary; or
(3) properties and assets which are material to the business or
operations of Bayard and its subsidiaries, taken as a whole;
- any tender offer or exchange offer by any person other than Nabors or any
of its subsidiaries for 15% or more of the outstanding shares of Bayard
common stock; or
- any acquisition of shares of Bayard common stock by any person or group
other than Nabors or any of its subsidiaries which would require an
amendment, waiver, termination or alteration of the Bayard rights
agreement so that such acquisition would not result in such person
becoming an "acquiring person" under the terms of the Bayard rights
agreement.
Access and Information. Both Nabors and Bayard have agreed, subject to
certain limitations, to allow one another reasonable access to information
concerning its business, properties, contracts, records and personnel.
Confidentiality. Between the date of the merger agreement and the effective
time, Bayard and Nabors have agreed to maintain in confidence, and to cause
their representatives to maintain in confidence, and not to use to the detriment
of a party to the merger agreement, any information obtained from a party to the
merger agreement or its subsidiaries in connection with the merger agreement or
any related transactions, with certain exceptions. Upon any termination of the
merger agreement, Bayard and Nabors will return or destroy all confidential
information provided by the other.
CLOSING CONDITIONS
Conditions Applicable to All Parties. The following conditions, among
others, must be satisfied before the merger, unless waived by the parties to the
merger agreement:
- No stop order or proceeding shall have been initiated which suspends or
seeks to suspend the effectiveness of the registration statement of which
this document is a part;
- the merger agreement and the merger shall have been approved and adopted
by the holders of a majority of the outstanding shares of Bayard common
stock;
- there shall be no order, injunction, or other legal restraint or
prohibition making illegal or prohibiting the consummation of the merger;
- Bayard and Nabors shall have received certain opinions as to tax matters
from their counsel;
- the applicable waiting period under the Hart-Scott-Rodino Act shall have
expired or have been terminated; and
- the shares of Nabors common stock to be issued in the merger shall have
been approved for listing on AMEX, subject to notice of issuance.
Conditions Applicable to Nabors. Nabors' obligations to effect the merger
and the other transactions contemplated by the merger agreement are subject to
the satisfaction or waiver of certain additional conditions, including:
- the accuracy of Bayard's representations and warranties, with such
exceptions as would not have a material adverse effect on Bayard;
- Bayard's performance in all material respects of its obligations under
the merger agreement;
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- the effectiveness of certain agreements with affiliates of Bayard
relating to resales of Nabors common stock as provided by Rule 145 under
the Securities Act of 1933; and
- the lack of, since the date of the merger agreement, an event having a
material adverse effect on Bayard.
Conditions Applicable to Bayard. Bayard's obligations to effect the merger
and the other transactions contemplated by the merger agreement are subject to
the satisfaction or waiver of certain additional conditions, including:
- the accuracy of Nabors' and Nabors' acquisition subsidiary's
representations and warranties, with such exceptions as would not have a
material adverse effect on Nabors;
- Nabors' performance in all material respects of its obligations under the
merger agreement; and
- the lack of, since the date of the merger agreement, an event having a
material adverse effect on Nabors.
TERMINATION
The merger agreement may be terminated at any time before the merger, only
in the following ways:
(1) by mutual written consent of Nabors and Bayard;
(2) by Nabors, upon an intentional breach by Bayard of any of its covenants
or agreements, or if a material representation or warranty of Bayard is
untrue, in either case causing certain conditions not to be satisfied;
except that Bayard shall have an opportunity to cure the breach by
exercising its reasonable best efforts;
(3) by Bayard, upon an intentional breach by Nabors of any of its covenants
or agreements, or if a material representation or warranty of Nabors is
untrue, in either case causing certain conditions not to be satisfied;
except that Nabors shall have an opportunity to cure the breach by
exercising its reasonable best efforts;
(4) by either Nabors or Bayard, if certain final, nonappealable orders,
decrees or rulings prevent the consummation of the merger;
(5) by either Nabors or Bayard, if the merger does not occur before
September 30, 1999, unless the failure to consummate the merger by such
date results from the action or failure to act of the party seeking to
terminate the merger agreement;
(6) by either Nabors or Bayard, if Bayard holds the special meeting but the
merger agreement does not receive the required stockholder approval;
(7) by Nabors, if:
(a) the Bayard Board withdraws, or materially modifies or materially
changes, its recommendation of the merger agreement or the merger in
a manner adverse to Nabors or Nabors' acquisition subsidiary, or
resolves to do so;
(b) the Bayard Board recommends a company acquisition proposal or, after
ten business days following the public announcement, or, in the case
of a tender offer, following the commencement of such tender offer,
of any company acquisition proposal, has not recommended against
accepting such company acquisition proposal or has taken no position
with respect to such company acquisition proposal; or
(c) Bayard changes the provisions of the Bayard rights agreement in such
a manner that any person other than Nabors or Nabors' acquisition
subsidiary has been permitted to acquire beneficial ownership of, or
the right to acquire beneficial ownership of, or any group has been
formed that beneficially owns, or has the right to acquire
beneficial ownership of, more
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than 15% of the then outstanding shares of capital stock of Bayard,
in each case without triggering the Bayard rights agreement; or
(8) by Bayard, if the Bayard Board determines that proceeding with the
merger would be inconsistent with its fiduciary obligations under
certain circumstances; however, Bayard must give Nabors five days'
advance notice of its intention to terminate, must consider any new
proposals made by Nabors and must pay to Nabors the sum of $5.0
million, plus up to $500,000 in reasonable third party costs referred
to below under "-- Fees, Expense and Other Payments."
FEES, EXPENSES AND OTHER PAYMENTS
Nabors and Bayard will bear their own costs and expenses in connection with
the merger agreement and the related transactions, except as follows:
- Nabors and Bayard will share equally the costs and expenses related to
printing, filing and mailing all Securities and Exchange Commission and
other regulatory filings related to these transactions;
- upon completion of the merger, all costs borne by Nabors and Bayard will
be borne by the surviving corporation;
- Bayard must pay Nabors a fee of $5.0 million, plus up to $500,000 in
reasonable third party costs incurred by Nabors, if the merger agreement
is terminated as described in item (6), (7) or (8) under
"-- Termination"; and
- if the merger agreement is terminated by either party as described in
item (2) or (3) under "-- Termination," then the breaching party must pay
the terminating party a fee of $7.5 million (if Bayard is the breaching
party) or $15.0 million (if Nabors is the breaching party).
AMENDMENT; WAIVER
The merger agreement may be amended by Nabors or Bayard by action of their
respective Boards of Directors at any time before the merger. However, after the
adoption of the merger agreement by the stockholders of Bayard, no amendment may
be made which by the Delaware General Corporation Law requires the further
approval of stockholders.
At any time before the merger, Nabors and Bayard may extend the time for
the performance of any of the obligations or other acts of the other, waive any
inaccuracies in the representations and warranties of the other party, or waive
compliance by the other parties with any of the agreements or conditions.
STOCK OPTION AGREEMENT
In the stock option agreement, Bayard granted Nabors an option to purchase
up to 3,620,595 shares, but no more than 19.9% of the outstanding shares, of
Bayard's common stock at a price of $5.50 per share. If Bayard issues any
additional shares after the date of the stock option agreement, then the number
of shares issuable upon exercise of the option will be adjusted to reflect 19.9%
of the outstanding shares of Bayard.
Subject to certain exceptions, Nabors is entitled to exercise all or any
part of the option, at any one time, if the following occurs:
- the merger agreement is terminated as described in item (6) under
"-- Termination" and, within 180 days of the date of such termination,
Bayard authorizes, recommends, publicly proposes, or enters into an
agreement to effect a company acquisition transaction, or publicly
announces an intention to do so; or
- the merger agreement is terminated as described in item (2), (7) or (8)
under "-- Termination."
Upon the exercise of the option, Nabors will pay to Bayard an amount in
cash equal to the product of $5.50 and the number of shares of Bayard common
stock to be purchased by Nabors. The stock option
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agreement does not contain a "put" or "cashless exercise" feature that would
permit Nabors to realize the economic benefit of the option without payment of
the exercise price to Bayard.
The option will expire, subject to certain exceptions, on the earliest of:
- the time of the merger;
- one year after termination of the merger agreement as described in item
(2), (7) or (8) under "-- Termination";
- 180 days after termination of the merger agreement as described in item
(6) under "-- Termination"; and
- the date of termination of the merger agreement as described in item (1),
(3), (4) or (5) under "-- Termination."
The stock option agreement also grants certain registration rights to
Nabors with respect to any shares of Bayard common stock acquired upon exercise
of the option. In addition, the stock option agreement imposes certain
restrictions on the transfer of those shares. These restrictions prohibit any
transfer of the shares by Nabors, except in an underwritten public offering or
to any person who would not, to the knowledge of Nabors after reasonable
inquiry, hold more than 4.9% of the total voting power of Bayard stock after
giving effect to such transfer.
STOCKHOLDER AGREEMENTS
Carl B. Anderson, AnSon Partners, L.L.C., as successor in interest to AnSon
Partners Limited Partnership, James E. Brown, Energy Spectrum Partners LP and
Wil-Cas Investments, L.P. have each entered into a stockholder agreement with
Nabors. These stockholders hold as of the record date 2,645,725 shares of Bayard
common stock, which represent approximately 14.5% of the outstanding shares of
such class. See "Principal Stockholders of Bayard."
The stockholder agreements require these stockholders to vote all of their
shares in favor of the merger, the merger agreement and the transactions
contemplated by the merger agreement. In addition, these stockholders are
required to vote against any action or agreement that would result in a breach
in any material respect of any covenant, representation or warranty or any other
material obligation or agreement of Bayard under the merger agreement. These
stockholders are further required to vote against any company acquisition
transaction and against any proposal regarding any change in a majority of the
Bayard Board, the present capitalization of Bayard, any amendment of Bayard's
Certificate of Incorporation or Bylaws, or any other material change in Bayard's
corporate structure or business, to the extent that any such proposal is
intended to, or could reasonably be expected to, impede, interfere with, delay,
postpone or materially adversely affect the merger or the transactions
contemplated by the merger agreement or the stockholder agreements or could
implement or lead to any company acquisition transaction.
The consenting stockholders have also irrevocably appointed Nabors as their
proxy to demand a special meeting of the stockholders of Bayard to consider any
action related to the merger agreement or the merger, and to vote their shares
with respect to any matters described in the above paragraph.
The stockholder agreements will terminate at the time of the merger or if
the merger agreement is terminated in accordance with its terms. They will also
terminate if there is an amendment to the merger agreement which is materially
adverse to the consenting stockholders.
AMENDMENT OF BAYARD RIGHTS AGREEMENT
Under the terms of the Bayard rights agreement, upon the occurrence of
certain events, including transactions of the type contemplated by the merger
agreement and the stock option agreement, the holder of a Right issued under the
Bayard rights agreement, other than an "acquiring person," as defined in the
Bayard rights agreement, is entitled to receive, upon exercise of such Right, a
number of shares of Bayard
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common stock having a current market price equal to two times the exercise price
of the Right. For additional information regarding the Bayard rights agreement,
see "Comparison of Stockholder Rights -- Bayard Rights Agreement."
Immediately before the execution of the merger agreement, the Bayard rights
agreement was amended so that the distribution and exercise of the Rights would
not be triggered by Nabors solely as a result of entering into and consummating
the transactions contemplated by the merger agreement, the stock option
agreement and the stockholder agreements. Specifically, the amendment to the
Bayard rights agreement provides, among other things, that:
- the Expiration Date, as defined in the Bayard rights agreement, shall
occur immediately before the time of the merger;
- neither Nabors nor any of its affiliates or associates will be considered
to be an Acquiring Person, as defined in the Bayard rights agreement,
unless Nabors or any of its affiliates or associates acquires beneficial
ownership of 20% or more of the outstanding shares of Bayard common
stock, subject to certain exceptions; and
- the consummation of the merger, any transaction contemplated by the
merger agreement, the stock option agreement or the stockholder
agreements will not:
(1) constitute a Flip-In Event, Flip-Over Event, Stock Acquisition
Date, Flip-In Trigger Date or Distribution Date, as such terms are
defined in the Bayard rights agreement;
(2) cause Nabors or any of its subsidiaries to be deemed an Acquiring
Person, as defined in the Bayard rights agreement; or
(3) cause the Rights provided for in the Bayard rights agreement to be
exercisable.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material United States federal
income tax consequences of the merger. Such discussion deals only with persons
that are citizens or residents of the United States or are entities formed under
the laws of the United States or any state or locality within the United States.
This summary assumes that the holders of Bayard common stock have held such
stock as a capital asset. The discussion does not address all aspects of federal
income taxation that may be important to particular stockholders and may not be
applicable to certain special classes of stockholders, including without
limitation, stockholders who are not citizens or residents of the United States,
stockholders who acquired their stock through the exercise of employee stock
options or otherwise as compensation, stockholders that are corporations subject
to the alternative minimum tax, insurance companies, tax-exempt organizations,
financial institutions, securities dealers, broker-dealers, or foreign
partnerships or foreign corporations. The following discussion also does not
discuss tax consequences to holders of outstanding Bayard warrants or stock
options. No information is provided in this document with respect to the tax
consequences, if any, of the merger under applicable foreign, state and local
laws.
This summary is based on statutes, regulations, rulings, and judicial
decisions in effect at the date of this document. Future legislative, judicial
or administrative changes or interpretations could alter or modify these
statements and conclusions. Any such changes or interpretations could be
retroactive and could affect the tax consequences to stockholders as described
in this document. Neither Nabors nor Bayard has requested a ruling from the
Internal Revenue Service with regard to any of the federal income tax
consequences of the merger, and the discussion as to the federal income tax
consequences of the merger set forth below will not be binding on the IRS. EACH
STOCKHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER DESCRIBED IN THIS
DOCUMENT, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND OF CHANGES TO APPLICABLE TAX LAWS.
QUALIFICATION OF MERGER AS A REORGANIZATION
Based upon certain representations of Bayard and Nabors, and the
assumptions identified below:
- the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986;
- each of Nabors, Nabors' acquisition subsidiary and Bayard will be a party
to a reorganization within the meaning of Section 368(b) of the tax code;
- no gain or loss will be recognized by Nabors, Nabors' acquisition
subsidiary or Bayard as a result of the merger; and
- except as described below with respect to fractional shares, Bayard
stockholders will not recognize any loss as a result of the merger and
will recognize gain as a result of the merger only to the extent of the
lesser of the amount of cash received in the merger, other than cash
received instead of fractional shares, or the amount, if any, by which
the value of the merger consideration, other than cash received instead
of fractional shares, exceeds the stockholder's tax basis in the Bayard
shares surrendered in the merger.
These conclusions are based on the following assumptions:
- the representations of Bayard and Nabors remain true as of the date of
the closing;
- as of the date of the closing, Nabors common stock continues to represent
at least 80% of the value of the total consideration furnished by Nabors
and Nabors' acquisition subsidiary in the merger; and
- the merger and related transactions take place as described in the merger
agreement.
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It is a condition to the merger that Bayard shall have received a tax
opinion of Baker & Botts, L.L.P., counsel to Bayard, and that Nabors shall have
received a tax opinion of Baker & McKenzie, counsel to Nabors, each to the
effect of the foregoing. Such tax opinions, as well as the description of tax
consequences set forth in this document, will be based on assumptions relating
to certain facts and circumstances of, and the intentions of the parties to, the
merger. These assumptions either will have been made with the consent of Bayard
or Nabors or will be based upon certain representations of fact made by Bayard
or Nabors, or certain members of management of Bayard or Nabors. These
assumptions and representations of fact will primarily relate to the type and
value of the consideration to be received by Bayard stockholders in the merger,
the continued operation and level of retention of Bayard's historic business and
assets by Bayard or Nabors after the merger, the continued ownership and control
of Bayard by Nabors after the merger, and continuity of Bayard stock ownership
before the merger, and Nabors' stock ownership after the merger, by Bayard
stockholders. An opinion is not binding on the IRS or the courts and, therefore,
the delivery of such tax opinions cannot assure that the IRS or the courts will
treat the merger as a reorganization within the meaning of Section 368(a) of the
tax code.
If it were determined that the merger did not qualify for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the tax
code, a stockholder of Bayard generally would recognize capital gain or loss for
tax purposes.
The following discussion assumes that the merger will be treated as a
reorganization within the meaning of Section 368(a) of the tax code.
CONSEQUENCES OF MERGER TO NABORS, NABORS' ACQUISITION SUBSIDIARY AND BAYARD
No gain or loss will be recognized by Nabors, Nabors' acquisition
subsidiary or Bayard or by any of their respective subsidiaries as a result of
the consummation of the merger.
CONSEQUENCES OF MERGER TO BAYARD STOCKHOLDERS
Except as described in the following paragraph with respect to fractional
shares, Bayard stockholders will not recognize any loss as a result of the
merger. A Bayard stockholder will recognize gain as a result of the merger only
to the extent of the lesser of:
- the amount of cash received by such Bayard stockholder in the merger,
other than cash received instead of fractional shares; or
- the amount, if any, by which the value of the merger consideration
received by the Bayard stockholder exceeds the stockholder's tax basis in
the Bayard shares surrendered in the merger.
Any such gain will generally be capital gain, provided that the Bayard
stockholder owns less than 1% of the outstanding shares of Nabors common stock
before the merger. The tax basis of Nabors common stock received in the merger
will equal the tax basis of Bayard common stock surrendered in the merger, plus
the amount of gain recognized by the stockholder under the rules described above
in this paragraph, less the amount of cash received by the stockholder, other
than cash received instead of a fractional share.
The holding period of Nabors common stock received will include the holding
period of Bayard common stock surrendered in exchange for the Nabors common
stock.
A holder of Bayard common stock who receives cash in the merger instead of
a fractional share of Nabors common stock will be treated as having received
that fractional share of stock through the merger and then as having received
the cash in a redemption of the fractional share of stock. Such a holder will
generally recognize capital gain or loss on the deemed redemption equal to the
difference between the amount of cash received and the holder's adjusted tax
basis in the fractional share of Nabors common stock deemed surrendered in
exchange for such cash.
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CONSEQUENCES OF PRE-MERGER SALE OF BAYARD STOCK
Bayard stockholders who sell shares of Bayard common stock in the market
before the merger would generally recognize capital gain or loss in an amount
equal to the difference between the amount received in the sale and the
stockholder's tax basis in the shares that are sold. Any such capital gain or
loss would be long-term capital gain or loss if the shares have been held for
more than 12-months at the time of the sale.
BACKUP WITHHOLDING
A Bayard stockholder may be subject to backup withholding at the rate of
31% with respect to cash payments received in the merger unless either:
- the stockholder is an entity that is exempt from withholding, including
corporations, tax-exempt organizations and certain qualified nominees,
and demonstrates this fact when required; or
- the stockholder provides its taxpayer identification number, which for an
individual would be the stockholder's social security number, certifies
that the identification number provided is correct and that the
stockholder has not been notified by the IRS that it is subject to backup
withholding because it has under reported interest or dividends, and
otherwise complies with applicable requirements of the backup withholding
rules.
A Bayard stockholder who does not provide its correct taxpayer identification
number may be subject to penalties imposed by the IRS. Backup withholding is not
an additional tax but, rather, is a method of tax collection. Bayard
stockholders will be entitled to credit any amounts withheld under the backup
withholding rules against their actual tax liabilities.
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the acquisition of all of the outstanding capital stock of Bayard
by Nabors. The pro forma combination of Nabors and Bayard has been accounted for
under the purchase method of accounting.
The Unaudited Pro Forma Combined Condensed Balance Sheet is derived from
the unaudited condensed consolidated balance sheets of Nabors and Bayard and is
presented as if the merger was consummated on the balance sheet date. The
Unaudited Pro Forma Combined Condensed Statements of Operations for the nine
months ended September 30, 1998 and the twelve months ended December 31, 1997
are presented as if the merger was consummated as of January 1, 1997. Nabors
results have been recast to conform to the presentation of the twelve months
ended December 31, 1997 by adjusting Nabors audited results for the year ended
September 31, 1997 to exclude the unaudited results for the quarter ended
December 31, 1996 and to include the unaudited results for the quarter ended
December 31, 1997. The Pro Forma Statement of Operations for the twelve months
ended December 31, 1997 also gives effect to the results of operations for Trend
Drilling Co., Ward Drilling Company, Inc., and Bonray Drilling Corporation
before their acquisition by Bayard, all of which occurred at various dates in
1997, as if such acquisitions occurred on January 1, 1997.
The unaudited pro forma financial statements do not purport to indicate
what the combined results of operations of Nabors and Bayard would have been had
the merger occurred as of the dates indicated or the results of operations that
may be obtained in the future. The Unaudited Pro Forma Combined Condensed
Statements of Operations do not reflect the anticipated cost savings resulting
from integration of the operations of Nabors and Bayard. The pro forma
adjustments described in the accompanying notes are based on estimates derived
from information currently available.
The unaudited pro forma financial information should be read in conjunction
with the consolidated financial statements and related notes of Nabors and
Bayard contained in the Annual Report on Form 10-K of Nabors for the year ended
September 30, 1997 and the Annual Report on Form 10-K of Bayard for the year
ended December 31, 1997 and each company's Quarterly Report on Form 10-Q for the
period ended September 30, 1998. The Form 10-K and Form 10-Q of Nabors are
incorporated by reference into this document. The consolidated financial
statements of Bayard and related notes are included in this document.
Additionally, reference should be made to Nabors' Transition Period Report on
Form 10-Q for the three month period ended December 31, 1997, which is
incorporated into this document by reference.
51
<PAGE> 57
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- --------------------------
NABORS BAYARD ADJUSTMENTS COMBINED
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 3,737 $ 19,148 $ (5,458)(a) $ 17,427
Marketable securities...................... 9,062 9,062
Accounts receivable, net................... 180,136 15,750 195,886
Inventory and supplies..................... 28,204 28,204
Prepaid expenses and other current
assets.................................. 29,625 4,227 33,852
---------- -------- ---------- ----------
Total current assets............... 250,764 39,125 (5,458) 284,431
Property, plant and equipment, net........... 1,120,265 283,659 (112,590)(b) 1,291,334
Marketable securities........................ 9,330 9,330
Other long-term assets....................... 31,591 17,058 (16,505)(b) 32,144
---------- -------- ---------- ----------
Total assets....................... $1,411,950 $339,842 $ (134,553) $1,617,239
========== ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations... $ 14,242 $ 6,000 $ $ 20,242
Short-term borrowings...................... 61,931 61,931
Trade accounts payable and accrued
liabilities............................. 144,491 25,707 3,000(a) 173,198
Income taxes payable....................... 16,792 16,792
---------- -------- ---------- ----------
Total current liabilities.......... 237,456 31,707 3,000 272,163
Long-term obligations........................ 217,431 113,222 330,653
Other long-term liabilities.................. 38,385 1,572 9,683(b) 49,640
Deferred income taxes........................ 67,643 14,085 (42,930)(b) 38,798
---------- -------- ---------- ----------
Total liabilities.................. 560,915 160,586 (30,247) 691,254
---------- -------- ---------- ----------
Commitments and contingencies
Stockholders' equity:
Capital stock.............................. 10,136 182 614(a) 10,750
(182)(b)
Capital in excess of par value............. 397,271 180,489 74,336(a) 471,607
(180,489)(b)
Accumulated other comprehensive income..... (9,098) (9,098)
Retained earnings (accumulated deficit).... 457,543 (1,415) 1,415(b) 457,543
Less treasury stock, at cost............... (4,817) (4,817)
---------- -------- ---------- ----------
Total stockholders' equity......... 851,035 179,256 (104,306) 925,985
---------- -------- ---------- ----------
Total liabilities and stockholders'
equity........................... $1,411,950 $339,842 $ (134,553) $1,617,239
========== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
52
<PAGE> 58
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ------------------------
NABORS BAYARD ADJUSTMENTS COMBINED
-------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenues......................................... $759,917 $64,802 $ $824,719
-------- ------- ------ --------
Operating expenses:
Direct costs................................... 487,801 48,447 536,248
General and administrative expenses............ 58,628 2,374 61,002
Depreciation and amortization.................. 62,617 10,352 (4,530)(c) 68,439
-------- ------- ------ --------
Operating expenses.......................... 609,046 61,173 (4,530) 665,689
-------- ------- ------ --------
Operating income................................. 150,871 3,629 4,530 159,030
-------- ------- ------ --------
Other income (expense):
Interest expense............................... (11,839) (3,392) 499(d) (14,732)
Interest income................................ 1,205 1,217 2,422
Other income, net.............................. 24,782 347 25,129
-------- ------- ------ --------
Other income (expense)...................... 14,148 (1,828) 499 12,819
-------- ------- ------ --------
Income from continuing operations before income
taxes.......................................... 165,019 1,801 5,029 171,849
Income taxes..................................... 61,057 758 1,837(e) 63,652
-------- ------- ------ --------
Net income from continuing operations............ $103,962 $ 1,043 $3,192 $108,197
-------- ------- ------ --------
Earnings per share from continuing operations:
Basic.......................................... $ 1.03 $ 1.01
-------- --------
Diluted(f)..................................... $ .96 $ .94
-------- --------
Weighted average number of shares outstanding:
Basic.......................................... 100,811 6,140(g) 106,951
-------- ------ --------
Diluted(f)..................................... 112,969 6,140(g) 119,109
-------- ------ --------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
53
<PAGE> 59
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------------------- --------------------------
BAYARD BAYARD
NABORS BAYARD ACQUISITIONS(H) COMBINED ADJUSTMENTS COMBINED
---------- ------- --------------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $1,115,032 $55,747 $25,626 $81,373 $ $1,196,405
---------- ------- ------- ------- ------- ----------
Operating expenses:
Direct costs.............. 774,856 40,705 18,999 59,704 834,560
General and administrative
expenses............... 72,478 1,868 1,572 3,440 75,918
Depreciation and
amortization........... 72,350 7,943 2,747 10,690 (3,716)(c) 79,324
---------- ------- ------- ------- ------- ----------
Operating
expenses........ 919,684 50,516 23,318 73,834 (3,716) 989,802
---------- ------- ------- ------- ------- ----------
Operating income............ 195,348 5,231 2,308 7,539 3,716 206,603
---------- ------- ------- ------- ------- ----------
Other income (expense):
Interest expense.......... (16,323) (3,065) (545) (3,610) (19,933)
Interest income........... 1,936 597 436 1,033 2,969
Other income, net......... 28,502 581 (67) 514 29,016
---------- ------- ------- ------- ------- ----------
Other income
(expense)....... 14,115 (1,887) (176) (2,063) 12,052
---------- ------- ------- ------- ------- ----------
Income from continuing
operations before income
taxes..................... 209,463 3,344 2,132 5,476 3,716 218,655
Income taxes................ 73,443 1,428 698 2,126 1,367(e) 76,936
---------- ------- ------- ------- ------- ----------
Net income from continuing
operations................ $ 136,020 $ 1,916 $ 1,434 $ 3,350 $ 2,349 $ 141,719
========== ======= ======= ======= ======= ==========
Earnings per share from
continuing operations:
Basic..................... $ 1.39 $ 1.36
========== ==========
Diluted(f)................ $ 1.24 $ 1.23
========== ==========
Weighted average number of
shares outstanding:
Basic..................... 98,180 6,140(g) 104,320
========== ======= ==========
Diluted(f)................ 113,793 6,140(g) 119,933
========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
54
<PAGE> 60
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
The following is a summary of the significant assumptions and adjustments
used in preparing the Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1998 and the Unaudited Pro Forma Combined Condensed Statements of
Operations for the nine months ended September 30, 1998 and for the twelve
months ended December 31, 1997.
(a) To reflect the purchase of Bayard for $5.46 million in cash and the
issuance of 6,140,456 shares of Nabors common stock in exchange for
100% of the issued and outstanding shares of Bayard. These amounts
represent the conversion of each Bayard share into 0.3375 shares of
Nabors common stock and $0.30 in cash. Nabors common stock was valued
at $12.0625 per share, which represents the average market price of
Nabors common stock for the two day period prior to the agreement as to
the final merger terms. Additionally, the purchase price reflects the
issuance by Nabors of 437,603 options and 133,988 warrants to purchase
Nabors common stock, which were valued at their estimated fair market
value using the Black-Scholes option pricing model, in exchange for the
outstanding options and warrants of Bayard.
The purchase price has been calculated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash...................................................... $ 5,458
Nabors common stock, valued at $12.0625 per share......... 74,069
Nabors options and warrants............................... 881
Estimated acquisition costs............................... 3,000
-------
Purchase price, including acquisition costs............... $83,408
=======
</TABLE>
(b) The purchase price including estimated acquisition costs have been
allocated to assets acquired and liabilities assumed based upon their
estimated fair values. The excess of the estimated fair value of the
assets acquired and liabilities assumed over the purchase price has
been accounted for as a reduction of the value assigned to property,
plant and equipment.
The allocation of the purchase price of Bayard is as follows:
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL PRICE PRO FORMA
AMOUNT ALLOCATION ADJUSTMENTS
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current assets........................ $ 39,125 $ 39,125 $ --
Property, plant and equipment......... 283,659 171,069 (112,590)(i)
Other long-term assets................ 17,058 553 (16,505)(ii)
Current liabilities................... (31,707) (31,707) --
Long-term obligations, excluding
current maturities.................. (113,222) (113,222) --
Other long-term liabilities........... (1,572) (11,255) (9,683)(iii)
Deferred income taxes................. (14,085) 28,845 42,930(iv)
Capital stock......................... (182) -- 182
Capital in excess of par value........ (180,489) -- 180,489
Accumulated deficit................... 1,415 -- (1,415)
--------- --------- ---------
$ -- $ 83,408 $ 83,408
========= ========= =========
</TABLE>
- ---------------
(i) The excess of the estimated fair value of the assets acquired and
liabilities assumed over the purchase price has been accounted
for as a reduction of the value assigned to property, plant and
equipment. The resulting amount allocated to property, plant and
equipment does not exceed fair market value based upon the
internal estimates of Nabors management.
55
<PAGE> 61
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) To eliminate Bayard's historical goodwill, as well as deferred
financing costs associated with the Bayard $100 million 11%
Senior Notes due 2005.
(iii) To record debt premium based upon the estimated fair value of
the Bayard senior notes. The fair value of the Bayard senior
notes was estimated based on the present value of amounts to
be paid, discounted at a rate currently available to Bayard
for borrowings with similar terms and maturities.
(iv) To adjust deferred tax obligations for differences between the
financial statement basis (which has been decreased as
described in (b)(i) above) and the tax basis (which will not
be decreased because of the merger) of the assets acquired and
liabilities assumed in accordance with SFAS No. 109.
(c) Depreciation and amortization is adjusted to reflect Nabors
depreciation policy, as well as to reflect the reduction in the value
assigned to property, plant and equipment and the elimination of
goodwill previously recorded by Bayard.
(d) Interest expense is adjusted to reflect both the amortization of the
fair value premium and the elimination of the amortization of the
deferred financing costs recorded on the Bayard senior notes issued on
June 26, 1998.
(e) Income tax expense is adjusted to reflect the tax effect of the pro
forma adjustments, as well as to reflect the combined tax position of
the pro forma combined companies.
(f) For the calculation of diluted earnings per share, net income is
adjusted to add back $4,075,000 and $5,554,000 for the nine months
ended September 30, 1998 and the twelve months ended December 31, 1997,
respectively, of after tax interest expense on the Nabors $172,500,000
5% Convertible Subordinated Notes.
(g) Assumes that 6,140,456 Nabors shares were exchanged for 100% of the
Bayard shares at the beginning of the periods presented.
(h) Represents the results of operations for Trend, Ward and Bonray prior
to their acquisition by Bayard. These results have been included on a
pro forma basis due to their significance to Bayard. Operations
subsequent to the date of purchase of Trend, Ward and Bonray, on May 1,
May 30 and October 16, 1997, respectively, are included in the Bayard
historical results.
56
<PAGE> 62
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA OF BAYARD
The financial data presented in the table below for the period ended and as
of December 31, 1997 are derived from the audited financial statements of Bayard
and include the results of Bayard's consolidated subsidiaries, Trend, beginning
May 1, 1997, Ward, beginning May 30, 1997, and Bonray, beginning October 16,
1997. The financial data presented in the table below for and at the end of each
of the years in the three-year period ended December 31, 1996 are derived from
the audited financial statements of Bayard and relate to the operations of
Anadarko Drilling Company and include, generally, the financial results of the
operation of eight rigs.
The financial data presented in the table below for the year ended December
31, 1993 and at the end of the nine month periods ended September 30, 1997 and
1998 are derived from the unaudited consolidated financial statements of Bayard.
In the opinion of management of Bayard, such unaudited consolidated condensed
financial statements include all normal recurring adjustments necessary for a
fair presentation of the financial data for such periods. The results for the
nine months ended September 30, 1998 are not necessarily indicative of the
results to be achieved for the full year.
The data presented below should be read together with Bayard Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements of Bayard, including the related notes,
included elsewhere in this document.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
----------- ------- ------- -------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract drilling.......................... $ 8,349 $ 9,910 $ 7,405 $ 9,793 $ 55,747 $ 33,214 $ 64,802
Other...................................... -- -- 303 60 -- -- --
------- ------- ------- -------- -------- -------- ---------
Total revenues......................... 8,349 9,910 7,708 9,853 55,747 33,214 64,802
------- ------- ------- -------- -------- -------- ---------
Operating expense:
Drilling................................... 7,690 8,572 6,075 7,653 40,705 24,246 48,447
Depreciation, depletion and amortization... 1,374 1,557 791 1,126 7,943 4,918 10,352
General and administrative................. 819 786 880 658 1,868 1,181 2,374
Other...................................... -- -- 47 46 -- -- --
------- ------- ------- -------- -------- -------- ---------
Total operating costs.................. 9,883 10,915 7,793 9,483 50,516 30,345 61,173
------- ------- ------- -------- -------- -------- ---------
Operating income (loss)...................... (1,534) (1,005) (85) 370 5,231 2,869 3,629
------- ------- ------- -------- -------- -------- ---------
Other income and (expense):
Interest expense and financing cost........ (30) (18) (3) (11) (3,065) (2,172) (3,392)
Interest income............................ -- -- -- -- 597 68 1,217
Gain (loss) on sale of assets.............. -- 366 (131) 54 544 303 354
Other income (expense)....................... 24 -- (3) 17 37 5 (7)
------- ------- ------- -------- -------- -------- ---------
Income (loss) before income taxes.......... (1,540) (657) (222) 430 3,344 1,073 1,801
Income tax expense(1)...................... -- -- -- 163 1,428 410 758
------- ------- ------- -------- -------- -------- ---------
Net income (loss) before extraordinary
loss..................................... $(1,540) $ (657) $ (222) $ 267 $ 1,916 $ 663 $ 1,043
======= ======= ======= ======== ======== ======== =========
Earnings (loss) per share before
extraordinary loss:
Basic.................................... $ (.04) $ .05 $ .21 $ .10 $ .06
======= ======== ======== ======== =========
Diluted.................................. $ (.04) $ .05 $ .17 $ .07 $ .06
======= ======== ======== ======== =========
CASH FLOW DATA:
Operating activities......................... $ (51) $ 445 $ 310 $ (462) $ (1,308) $ 8,612 $ 23,068
Investing activities......................... (1,671) (454) (1,710) (10,441) (86,470) (76,459) (136,974)
Financing activities......................... 1,722 9 1,400 15,866 132,117 62,966 83,752
</TABLE>
57
<PAGE> 63
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
----------- ------- ------- -------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................. $ 6,791 $ 6,149 $ 8,054 $ 34,673 $240,488 $128,064 $ 339,842
Working capital (deficit), excluding current
portion of long-term debt.................. 711 802 12 4,974 56,404 (2,659) 13,418
Total long-term debt, including current
portion.................................... 365 -- -- 7,000 32,610 54,948 119,222
Total stockholders' equity................... (913) (54) (276) 26,251 178,462 48,496 179,256
OTHER FINANCIAL DATA:
EBITDA(2).................................... $ (160) $ 552 $ 706 $ 1,496 $ 13,174 $ 8,163 $ 15,545
Capital expenditures......................... 1,671 1,183 2,088 10,578 86,980 76,510 138,017
DRILLING RIG ACTIVITY DATA (UNAUDITED):
Total rigs at end of period.................. 8 7 8 17 63 41 87
Marketed rigs at end of period............... 8 7 8 8 49 35 73
Average utilization rate of drilling rigs
available for service(3)................... 71% 84% 86% 88% 93% 94% 65%
Average day rate(4).......................... $ 4,332 $ 4,148 $ 4,298 $ 4,731 $ 5,393 $ 5,838 $ 6,329
</TABLE>
- ---------------
(1) Since Bayard's predecessor was a nontaxable entity, income tax expense is
presented on a pro forma basis for the year ended December 31, 1996,
assuming a 38% statutory rate.
(2) EBITDA represents operating income (loss) before depreciation and
amortization. EBITDA is frequently used by securities analysts and is
presented in this document to provide additional information about Bayard's
operations. EBITDA is not a measurement presented in accordance with
generally accepted accounting principles. EBITDA should not be considered in
isolation or as a substitute for net income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity.
(3) Rig utilization rates are calculated on a weighted average basis assuming
365 days availability for all rigs available for service. Rigs acquired have
been treated as added to the rig fleet as of the date of acquisition. Rigs
under contract that generate revenues during moves between locations or
during mobilization/demobilization are also considered to be utilized. Rigs
that are owned but not being marketed, including rigs being refurbished, are
not considered in determining the utilization rate.
(4) Represents total contract drilling revenues, including mobilization, cost
reimbursements and fuel, divided by the total number of rig days worked by
Bayard's drilling rig fleet marketed during the period.
58
<PAGE> 64
BAYARD MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Bayard and related notes included elsewhere
in this document.
GENERAL
Bayard is a leading provider of contract land drilling services to major
and independent oil and gas companies. Bayard was formed in December 1996
through a series of formation transactions that established Bayard as a regional
competitor with ten rigs. Since that time, Bayard has grown to operate the fifth
largest land drilling fleet in the United States with a total of 87 rigs, 73 of
which are currently being marketed. This growth is due primarily to, and
Bayard's operations have been significantly affected by, the following
transactions:
- Trend Acquisition. In May 1997, Bayard completed the acquisition of Trend
Drilling Co. and its 14 rigs for $18 million in cash and 250,000 shares
of Bayard common stock.
- Ward Acquisition. Also in May 1997, Bayard acquired the assets of Ward
Drilling Company, Inc. including six rigs for $8 million in cash, 400,000
shares of Bayard common stock and warrants to purchase an additional
200,000 shares of Bayard common stock.
- Bonray Acquisition. In October 1997, Bayard acquired Bonray Drilling
Corporation from DLB Oil & Gas, Inc. for 3,015,000 shares of Bayard
common stock. In the Bonray acquisition, Bayard acquired 13 rigs,
including seven rigs with depth capacities of 15,000 feet or greater and
two SCR rigs.
- Oliver Acquisition. On January 9, 1998, Bayard purchased six additional
rigs from R. T. Oliver Drilling, Inc. for approximately $14 million in
cash. Bayard expects to refurbish and purchase complementary equipment,
including drill pipe, for these rigs when market conditions warrant.
- Individual Rig Acquisitions. In addition to the Trend, Ward, Bonray and
Oliver acquisitions, Bayard has invested $5.5 million to acquire six rigs
in five transactions involving purchases of individual rigs or rig
components. These transactions are referred to in this document as the
"individual rig acquisitions" and, together with the formation
transactions and the Trend, Ward, Bonray and Oliver acquisitions, are
referred to as the "consolidation transactions." In addition, Bayard has
purchased one rig for approximately $54,000 and has one other rig, which
may be assembled from inventoried components. In August 1997, Bayard sold
one rig.
- Initial Public Offering. In November 1997, Bayard completed an initial
public offering of 11,040,000 shares of Bayard common stock. Bayard sold
4,229,050 shares of Bayard common stock in its initial public offering
and received net proceeds of $89.5 million.
- Refurbishment. The consolidation transactions included a number of rigs
in need of refurbishment. From January 1, 1997 through September 30,
1998, Bayard completed refurbishment of 15 rigs at an average cost of
approximately $2.7 million per rig, including drill pipe. These rigs were
placed in service at various dates between January 1997 and June 1998. At
September 30, 1998, Bayard had 14 additional rigs in various stages of
refurbishment. Bayard recently revised its schedule for rig refurbishment
as a result of changes in market conditions that have caused an
industry-wide decrease in rig utilization. Bayard anticipates
refurbishing and placing the remaining 14 rigs into service as market
conditions warrant.
- TransTexas Acquisition. In June 1998, Bayard completed the acquisition of
25 drilling rigs and certain related equipment and other assets from
TransTexas Gas Corporation for $75 million in cash. This transaction was
financed through Bayard's senior notes offering.
The historical financial results presented in this document include the
effects of the foregoing transactions and the operations of the related rigs
only for the periods after such transactions. In addition,
59
<PAGE> 65
the historical financial results include periods in which a number of rigs were
being refurbished and did not contribute to revenues. Accordingly, Bayard does
not believe that the historical statements of operations presented in this
document are necessarily indicative of Bayard's future operating results, or
that comparisons of financial results between the periods presented in this
document are necessarily meaningful, particularly in light of the magnitude of
Bayard's recent acquisitions and rig refurbishment projects. This discussion and
analysis should be read in conjunction with the consolidated financial
statements of Bayard and notes to the financial statements included elsewhere in
this document and Bayard's Annual Report on Form 10-K for the year ended
December 31, 1997.
DOMESTIC LAND DRILLING INDUSTRY OVERVIEW
Demand for Bayard's contract land drilling services is substantially
dependent upon, and affected by, the level of domestic oil and gas exploration
and development activity. Industry sources estimate that from its peak in 1982,
the supply of domestic rigs has fallen as a result of normal attrition,
cannibalization of components to refurbish rigs, the inability of smaller
competitors to raise capital needed to upgrade and modernize rigs and the export
of rigs to international markets. As a result of these factors, the contract
land drilling industry has been cyclical with significant volatility in
profitability and rig values.
Bayard's operating margins are influenced by contract drilling rates,
operating costs and drilling rig utilization. Although Bayard believes that
improved technologies, the long-term decline in the supply of rigs and stable
oil and gas prices contributed to increased activity in the exploration and
production sector during 1997, there has been a general decline in oil and, to a
lesser extent, gas prices during 1998 and there can be no assurance that such
decline will not continue. This decline in oil and gas prices has contributed to
a decrease in Bayard's rig utilization rates from 88% for the fourth quarter of
1997 to 35% for the fourth quarter of 1998. There can be no assurance that oil
and gas prices will not continue to decline or that any such decline would not
have a material adverse effect on Bayard's utilization rates. In addition,
ongoing movement or reactivation of land drilling rigs, including the movement
of rigs from outside the United States into domestic markets, or new
construction of drilling rigs could increase rig supply and adversely affect
contract drilling rates and utilization levels. Bayard cannot predict the future
level of demand for its contract drilling services, future conditions in the
contract drilling industry or future contract drilling rates.
FINANCIAL CONDITION AND LIQUIDITY
Since December 1996, Bayard has completed the consolidation transactions
and the TransTexas acquisition. Bayard's formation transactions involved the
issuance of an aggregate of 5,600,000 shares of Bayard common stock in
consideration for the contribution to Bayard of 16 rigs and $10 million in cash.
At the time of the formation transactions, Bayard entered into a $24 million
term loan facility with The CIT Group/Equipment Financing, Inc., principally for
the refurbishment of certain of Bayard's rigs. In May 1997, contemporaneously
with the Trend acquisition and in anticipation of the Ward acquisition, Bayard
completed a financing transaction in which it:
- issued to Chesapeake Energy Corporation and Energy Spectrum Partners LP
additional shares of Bayard common stock and two series of warrants
together with Subordinated Notes due May 1, 2003 for $28.5 million in
cash; and
- increased the availability under its debt facilities from $24 million to
$40.5 million.
In November 1997, Bayard consummated its initial public offering, in which
Bayard registered the sale of an aggregate of 11,040,000 shares of Bayard common
stock. In the initial public offering, Bayard issued and sold 4,229,050 shares
of Bayard common stock and certain stockholders of Bayard sold 6,810,950 shares
of Bayard common stock. Bayard received net proceeds of $89.5 million for the
shares
60
<PAGE> 66
sold by it in the initial public offering. Through December 31, 1998, these net
proceeds had been used as follows:
- $50.1 million to purchase machinery and equipment;
- $38.6 million to repay indebtedness; and
- $817,125 to pay CIT in connection with the exercise of certain options to
purchase Bayard common stock.
Currently, Bayard's primary bank debt facilities consist of a term loan
under an agreement with CIT and Fleet Capital Corporation, under which $15.5
million was outstanding as of December 31, 1998, and a $10 million revolving
loan facility under a revolving loan agreement with Fleet, under which Bayard
has no outstanding borrowings other than approximately $1.3 million in letters
of credit as of December 31, 1998. The term loan agreement and the revolving
loan agreement are referred to in this document collectively as the "loan
agreements." On June 26, 1998, Bayard issued $100 million of its senior notes
and used $75 million of such proceeds to fund the TransTexas acquisition.
Further information regarding the loan agreements and Bayard's senior notes is
set forth below under "Financing Activities."
Bayard's principal requirements for capital, in addition to the funding of
ongoing contract drilling operations, have been capital expenditures, including
the refurbishment of existing rigs and acquisitions. From December 1996 through
September 30, 1998, Bayard spent $20.7 million on the Trend acquisition, $11.9
million on the Ward acquisition, $35 million on the Bonray acquisition, $14
million on the Oliver acquisition, $5.5 million on the individual rig
acquisitions, approximately $106.8 million on refurbishments and other related
equipment purchases, including drill pipe, and $75 million on the TransTexas
acquisition. As a result, Bayard's net property and equipment increased from $27
million at December 31, 1996 to $155.7 million at December 31, 1997 and $283.7
million at September 30, 1998. Bayard's principal sources of liquidity have been
the issuance of Bayard common stock, its senior notes, its subordinated notes,
warrants to purchase Bayard common stock and borrowings under the loan
agreements. As of December 31, 1998, Bayard had $100 million principal amount of
its senior notes outstanding, $15.5 million of borrowings outstanding under the
term loan agreement, no borrowings outstanding under the revolving loan
agreement, no outstanding subordinated notes and $3 million of cash and cash
equivalents. Bayard expects to fund its capital requirements during the period
before the expected date of the merger through cash flow from operations, and,
to the extent required, borrowings under the loan agreements. Bayard believes
that such sources of funds will be sufficient to meet Bayard's anticipated uses
through the expected date of the merger. If the merger is not consummated or is
delayed for a significant period of time, Bayard may be required to seek
additional sources of funds to meet is capital requirements in 1999.
The most significant change in Bayard's balance sheet from December 31,
1997 to September 30, 1998 was a $128 million increase in net property and
equipment, and the issuance of $100 million of senior notes. During this same
period, long-term debt, net of current maturities, decreased by $9.8 million and
stockholders' equity increased by $.8 million.
From December 31, 1997 to September 30, 1998, Bayard's working capital
position decreased by $41.5 million to $7.4 million. This was primarily the
result of additions to fixed assets.
Operating Activities
During the year ended December 31, 1996, Bayard required $462,000 of cash
to fund operating activities. This was the result of $1.5 million of cash
provided by operations, partially offset by changes in working capital items
that required $2 million of cash. Cash required for changes in working capital
items included the following:
- increase in accounts receivable of $2.1 million;
- increase in other assets totaling $185,000; and
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- decrease of $383,000 in accounts payable, which were partially offset by
an increase of $663,000 of other current liabilities.
During the year ended December 31, 1997, net cash used in operating
activities totaled $1.3 million. Bayard generated cash from operations of $10.8
million and working capital changes used $12.1 million.
During the nine months ended September 30, 1998, net cash provided from
operating activities totaled $23 million. Bayard generated cash from operations
of $11.5 million and working capital changes provided $11.5 million.
Investing Activities
During the year ended December 31, 1996, Bayard invested $21.7 million in
fixed assets, net of asset sales. The major components of these expenditures
were $10.4 million of cash expenditures to acquire and refurbish five diesel
electric SCR rigs and $9.8 million of Bayard common stock issued to acquire rigs
in the Formation Transactions.
During the year ended December 31, 1997, Bayard invested $135 million in
fixed assets, including the Trend acquisition, the Ward acquisition, the Bonray
acquisition and the individual rig acquisitions. Rig refurbishments consisted of
$51.5 million, and $10.6 million was invested in drill pipe and other drilling
related equipment. The acquisitions of Trend, Ward, and Bonray were partially
funded through the issuance of Bayard common stock valued at $42.3 million.
During the nine months ended September 30, 1998, Bayard invested $138
million in fixed assets, including $11.1 million in the Oliver acquisition, and
$75 million in the TransTexas acquisition. Rig refurbishment costs totaled $38.5
million, including the Oliver acquisition costs, refurbishments of $14.5 million
on rigs currently being marketed, and $13.5 million of equipment for future
refurbishment programs. Total investment in drill pipe was $12.8 million.
Financing Activities
During the year ended December 31, 1996, Bayard raised $15.9 million from
financing activities. Bayard borrowed $7 million during the year under the term
loan as described below. Bayard also issued 3,600,000 shares of Bayard common
stock for assets and cash and made debt payments totaling $900,000 during the
year.
During the year ended December 31, 1997, Bayard obtained $132.1 million
from financing activities, including net borrowing under the loan agreements
totaling $25.8 million and $107.1 million from the issuance of Bayard common
stock. The proceeds from these transactions were used to fund Bayard's working
capital requirements and capital expenditures as discussed above.
During the nine months ended September 30, 1998, Bayard's payments under
the loan agreements totaled $13.7 million.
In April 1998, Bayard redeemed in full the $2.52 million principal amount
of subordinated notes issued to Energy Spectrum Partners LP together with
accrued interest of $47,740. In connection with the redemption, Energy Spectrum
Partners LP waived its rights to require Bayard to redeem the subordinated notes
at 110% of par value. This redemption, coupled with the redemption of $18.0
million principal amount of Bayard's subordinated notes from Chesapeake Energy
Corporation at the time of Bayard's initial public offering, leaves no
subordinated notes outstanding.
On June 26, 1998, Bayard issued $100 million of senior notes and used $75
million of such proceeds to fund the TransTexas acquisition. Bayard intends to
use the remaining proceeds for general corporate purposes, possibly including
acquisitions of additional drilling rigs and related equipment and the
refurbishment of rigs. Bayard's senior notes mature on June 30, 2005. Interest
on Bayard's senior notes is payable semi-annually on June 30 and December 31 of
each year, commencing on December 31, 1998. The senior notes are not redeemable
before June 30, 2003, on or after which they will be redeemable, in
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whole or in part, at the option of Bayard, at the redemption prices set forth in
the indenture relating to the senior notes, plus accrued and unpaid interest and
certain other charges, if any, thereon to the date of redemption. In addition,
at any time on or before June 30, 2001, Bayard may redeem up to 35% of the
original aggregate principal amount of its senior notes with the net proceeds of
certain qualifying equity offerings at a redemption price equal to 111% of the
principal amount of the senior notes, plus accrued and unpaid interest and
certain other charges, if any, thereon to the date of redemption, provided that
at least $65 million in aggregate principal amount of Bayard's senior notes
remains outstanding immediately after the occurrence of such redemption. Upon a
transaction resulting in a change of control, each holder of Bayard's senior
notes will have the right to require Bayard to repurchase all or any part of
such holder's senior notes at a price equal to 101% of the principal amount of
the senior notes, plus accrued and unpaid interest and certain other charges, if
any, thereon to the date of repurchase. Bayard's senior notes are senior
unsecured obligations of Bayard and rank pari passu in right of payment with all
existing and future senior indebtedness and other senior obligations of Bayard,
and senior in right of payment to all future subordinated indebtedness of
Bayard.
Each of Bayard's wholly owned domestic subsidiaries has issued a guarantee
of Bayard's obligations under its senior notes. The guarantees are senior
unsecured obligations of each guarantor and rank pari passu in right of payment
with all other indebtedness and liabilities of such guarantor that are not
subordinated by their terms to other indebtedness of such guarantor, and senior
in right of payment to all subordinated indebtedness of such guarantor.
Bayard had outstanding at September 30, 1998 $16.7 million of long term
debt under the term loan agreement. The term loan was incurred to finance the
purchase of certain land drilling rigs, the refurbishment of such rigs and
equipment and for working capital purposes. On May 14, 1998, in connection with
Bayard's corporate reorganization into a holding company structure:
- Bayard prepaid $6.2 million of the term loan, obtained a release of all
collateral for the term loan, except 12 drilling rigs and related
equipment, and transferred to Bayard Drilling, L.P., Bayard's wholly
owned operating subsidiary, substantially all of its assets, subject to
such liens; and
- Bayard Drilling, L.P. and Bayard Drilling, L.L.C., another wholly owned
subsidiary of Bayard, agreed to guarantee the term loan.
Before such prepayment and collateral release, the term loan was secured by
substantially all of the assets of Bayard and Trend. In connection with Bayard's
senior notes offering, the term loan was further amended to add Bonray as a
guarantor of Bayard's obligations.
The term loan agreement requires Bayard and its subsidiaries to maintain
collateral security for the term loan based on appraised fair market value and
orderly liquidation value of Bayard's drilling rigs and associated rig equipment
equivalent to the balance of the term loan, and adhere to specified cash flow,
leverage and liquidity ratios and minimum net worth and liquidity requirements.
The term loan agreement contains restrictions on, among other things, the
ability of Bayard and its subsidiaries to pay dividends, make investments, incur
indebtedness and liens, and make capital expenditures and requires the
maintenance of liquidity of $3 million through December 31, 1998. The term loan
agreement also contains affirmative covenants typical of secured loan
arrangements with finance companies, such as requiring financial reports,
insurance maintenance, legal, environmental and permit compliance. Bayard is
prohibited from prepaying the term loan until after December 31, 1999.
The term loan bears interest at Bayard's choice of LIBOR plus 4.25% per
annum, 9.89% at September 30, 1998, or the prime rate of The Chase Manhattan
Bank plus 2.00% per annum and requires equal monthly payments of principal,
together with accrued interest, in amounts sufficient to repay borrowings at
maturity on March 31, 2002.
The revolving loan agreement provides revolving credit loans, subject to a
borrowing base comprised of a portion of Bayard's accounts receivable, of up to
$10.0 million, $2.0 million of which is available for letters of credit, for
general corporate purposes. Bayard has not borrowed under the revolving loan
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agreement since November 1997 but has approximately $1.3 million of letters of
credit outstanding under that agreement.
Any borrowings under the revolving loan agreement would bear interest based
on Fleet National Bank's prime rate plus 1.5% or approximately 10.0% at
September 30, 1998. A portion of the proceeds from Bayard's initial public
offering was used to repay all outstanding amounts under the revolving loan
agreement. Bayard pays certain fees under the revolving loan agreement,
including a commitment fee equal to 0.5% of the unused portion of the maximum
commitment. Fleet's commitment to lend under the revolving loan agreement ends
in April 2000. Bayard may terminate the revolving loan agreement upon 60 days'
prior written notice to Fleet and the payment of a termination fee of 2% of the
facility.
The revolving loan agreement is collateralized by certain assets of Bayard
and Trend that were transferred to Bayard Drilling, L.P. during Bayard's
corporate reorganization into a holding company structure, including accounts
receivable, certain equipment and inventory, Bayard's El Reno, Oklahoma yard and
the same 12 drilling rigs that collateralize the term loan agreement, together
with equipment and drilling contracts related to such rigs. The revolving loan
agreement is also secured by the receivables and certain other assets of Bayard,
Bayard Drilling, L.P., Bayard Drilling, L.L.C., Trend and Bonray. Until May 14,
1998, the revolving loan agreement was also collateralized by all drilling rigs
of Bayard and Trend, upon which date Fleet released all but such 12 rigs and
related assets. Bayard Drilling, L.P., Bayard Drilling, L.L.C., Trend and Bonray
have agreed to guarantee the obligations under the revolving loan agreement. The
revolving loan agreement contains customary restrictive covenants that are
substantially similar to the covenants contained in the term loan agreement.
Bayard also has issued three amortizing term notes, referred to as the "top
drive notes," totaling approximately $2.5 million outstanding at September 30,
1998. This debt bears interest at 9.5% per annum and is collateralized by
certain top drive equipment of Bayard and letters of credit in amounts totaling
approximately $700,000. The debt represented by the top drive notes matures in
July, October and November of 2000. The note agreement relating to the top drive
notes does not contain any restrictive financial covenants but contains a cross
default to the term loan agreement and the revolving loan agreement.
Recent Events
In December 1998 and January 1999, Nabors purchased from Bayard several
components of drilling equipment in exchange for promissory notes in the
aggregate principal amount of approximately $457,000.
RESULTS OF OPERATIONS
Comparisons of Bayard's results of operations are set forth below for the
periods identified. As used in the following tables and the related discussion:
- Rig days worked represents the number of rigs being marketed by Bayard,
multiplied by the number of days during which such rigs are being
operated, mobilized, assembled or dismantled while under contract. Rig
days are a common measurement of both utilization rates and fleet size.
- Average revenues per day and per day revenues represent total contract
drilling revenues, including mobilization revenues and reimbursement for
fuel and other costs, divided by the total number of rig days worked by
Bayard's drilling fleet marketed during the period.
- Drilling costs exclude depreciation and amortization and general and
administrative expenses.
- Average costs per day represent direct operating costs divided by the
total number of rig days worked by Bayard's drilling fleet marketed
during the period.
- Average margin per day represents the difference between average revenues
per day and average costs per day.
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Comparison of Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1997 1998
------------------------------------ ---------------------------------------------------
GULF COAST MID-CONTINENT TOTAL GULF COAST MID-CONTINENT SOUTH TEXAS TOTAL
---------- ------------- ------- ---------- ------------- ----------- -------
(IN THOUSANDS, EXCEPT RIG AND PER DAY DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Rig days worked.................. 2,436 3,253 5,689 2,293 7,401 484 10,178
Per day amounts:
Revenues........................ $ 6,581 $ 5,282 $ 5,838 $ 7,629 $ 5,812 $8,074 $ 6,329
Costs........................... 4,713 3,924 4,262 5,633 4,434 4,849 4,724
Margin.......................... 1,868 1,358 1,576 1,996 1,378 3,225 1,605
Drilling revenues................ $16,031 $17,183 $33,214 $17,494 $43,018 $4,290(1) $64,802
Drilling costs................... 11,481 12,765 24,246 12,916 32,815 2,716(2) 48,447
Operating margin................. 4,550 4,418 8,968 4,578 10,203 1,574 16,355
Utilization rate................. 99% 94% 96% 61% 75% 24% 65%
</TABLE>
- ---------------
(1) Includes trucking revenues of approximately $342,000 and other revenues of
approximately $39,000, which are excluded in calculating per day amounts.
(2) Includes trucking costs of approximately $369,000, which are excluded in
calculating per day amounts.
Drilling revenues increased approximately $31.6 million, or 95% to $64.8
million for the nine months ended September 30, 1998, from $33.2 million for the
nine months ended September 30, 1997. This revenue increase was the result of a
4,489 day, or 79%, increase in rig days worked, and a $491, or 8.4%, increase in
the average revenue per day. The increase in days worked was a result of an
increase in the average number of rigs owned and available for service. As of
September 30, 1998, Bayard had 73 rigs available for service. The increase in
rigs available for service was principally the result of the consolidation
transactions. Rig days worked consisted of 2,293 days in the Gulf Coast region,
7,401 days in the Mid-Continent region, and 484 days in the South Texas region.
Increases in revenues per day were a result of the increase in the day rates and
the average number of land drilling rigs being marketed by Bayard, offset by a
decrease in the average utilization rate from 96% to 65%.
Drilling costs increased by approximately $24.2 million, or 100%, to $48.4
million for the nine months ended September 30, 1998, from $24.2 million for the
nine months ended September 30, 1997. The increase in drilling operating
expenses was a direct result of the increase in the number of rigs owned and
available for service and the corresponding 4,489 day increase in the days
worked.
Bayard's operating margin increased by approximately $7.4 million, or 82%,
to $16.4 million for the nine months ended September 30, 1998, as compared to $9
million for the nine months ended September 30, 1997. The increase in operating
margin resulted from the increase in the average revenue per day and the
increase in days worked.
Depreciation and amortization expense increased by $5.4 million, or 110%,
to $10.4 million for the nine months ended September 30, 1998, as compared to
$4.9 million for the nine months ended September 30, 1997. The increase was
primarily the result of additional depreciation associated with the
consolidation transactions.
General and administrative expense increased by $1.2 million, or 101%, to
$2,374,000 for the nine months ended September 30, 1998, from $1,181,000 for the
same period of 1997. This increase was primarily attributable to increased
payroll costs associated with new management and increased corporate staff and
increased legal fees from Bayard's acquisition activities and public status.
Interest expense was $3.4 million for the nine months ended September 30,
1998 as compared to $2.2 million for the nine months ended September 30, 1997.
This increase was primarily attributable to Bayard's senior notes.
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Other income increased for the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997. This increase was
primarily attributable to interest income received on funds being invested in
short-term investments and the gain recognized on the sale of assets.
For the nine months ended September 30, 1998, the income tax provision was
$758,000 compared to $410,000 for the first nine months of 1997. The increase in
pretax income for the first nine months of September 1998 versus the first nine
months of 1997 caused this increase.
For the nine months ended September 30, 1998, Bayard recorded an
extraordinary loss in the amount of $338,000, net of income taxes of $245,000,
from the early extinguishment of certain subordinate debt in the amount of
approximately $2.5 million, and from the payment on term notes in the amount of
$6.2 million using proceeds from Bayard's initial public offering.
Comparison of Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1996 1997
------------- --------------------------------------
MID-CONTINENT GULF COAST MID-CONTINENT TOTAL
------------- ---------- ------------- -------
(IN THOUSANDS, EXCEPT RIG AND PER DAY DATA)
<S> <C> <C> <C> <C>
Rig days worked............................ 2,029 3,672 5,807 9,479
Per day amounts:
Revenues................................. $4,826 $ 6,426 $ 5,536 $ 5,881
Costs.................................... 3,772 5,031 3,828 4,294
Margin................................... 1,054 1,395 1,708 1,587
Drilling revenues.......................... $9,793 $23,598 $32,149 $55,747
Drilling costs............................. 7,653 18,474 22,231 40,705
Operating margin........................... 2,140 5,124 9,918 15,042
Utilization rate........................... 89% 98% 89% 93%
</TABLE>
Drilling revenues increased approximately $46.0 million, or 469%, to $55.7
million for the year ended December 31, 1997, from $9.8 million for the year
ended December 31, 1996. This revenue increase was the result of a 7,450 day, or
367%, increase in rig days worked, and a $1,055, or 22%, increase in the average
revenue per day. The increase in days worked was a result of an increase in the
average number of rigs owned and available for service. As of December 31, 1997,
Bayard had 49 rigs available for service. The increase in rigs available for
service was principally the result of the acquisitions consummated during the
year. Rig days worked consisted of 3,672 days worked in the Gulf Coast region
and 5,807 days worked in the Mid-Continent region. Increases in revenues per day
were a result of the overall increase in demand for land drilling rigs as
reflected in the utilization rate increase from 89% to 93%.
Drilling costs increased by approximately $33.1 million, or 432%, to $40.7
million for the year ended December 31, 1997, as compared to $7.7 million for
the year ended December 31, 1996. The increase in drilling operating expenses
was a direct result of the increase in the number of rigs owned and available
for service and the corresponding 7,450 day increase in the days worked.
Depreciation and amortization expense increased by $6.8 million, or 605%,
to $7.9 million for the year ended December 31, 1997, as compared to $1.1
million for the year ended December 31, 1996. The increase primarily reflects
additional depreciation associated with the acquisitions consummated during the
year.
General and administrative expense increased by $1.2 million, or 184%, to
$1.9 million for the year ended December 31, 1997, from $658,000 for the same
period of 1996. This increase was primarily attributable to increased payroll
costs associated with new management and increased corporate staff and increased
professional fees due to Bayard's acquisition activities.
Interest expense increased to $3.1 million for the year ended December 31,
1997 from $11,000 for the year ended 1996. This expense increased because
Bayard's outstanding debt increased during 1997.
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Other income increased for the year ended December 31, 1997 as compared to
the year ended December 31, 1996. This increase was primarily attributable to
gains on the sale of assets.
Comparison of Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1995 1996
--------- ---------
(IN THOUSANDS, EXCEPT RIG
AND PER DAY DATA)
<S> <C> <C>
Rig days worked............................................. 1,489 2,029
Per day amounts:
Revenues.................................................. $4,973 $4,826
Costs..................................................... 4,080 3,772
Margin.................................................... 893 1,054
Drilling revenues........................................... 7,405 9,793
Drilling costs.............................................. 6,075 7,653
Operating margin............................................ 1,330 2,140
Utilization rate............................................ 86% 88%
</TABLE>
Drilling revenues increased approximately $2.4 million, or 32%, to $9.8
million for the year ended December 31, 1996 from $7.4 million for the year
ended December 31, 1995. This improvement was the net result of an increase in
the number of rig days worked offset by a decrease in the average revenue per
day. Rig utilization also improved from 86% to 89% in 1996, because the contract
drilling market improved overall.
Drilling costs increased by $1.6 million, or 26%, to $7.7 million for the
year ended December 31, 1996, from $6.1 million for the year ended December 31,
1995. This increase resulted primarily from increased utilization and, to a
lesser extent, increased direct labor costs.
Depreciation and amortization expenses increased by $335,000, or 42%, to
$1.1 million for the year ended December 31, 1996 from $791,000 for the year
ended December 31, 1995. The increase in depreciation expense was primarily
attributable to acquisition and refurbishment costs.
General and administrative expenses decreased by $222,000 to $658,000 for
the year ended December 31, 1996, from $880,000 for the year ended December 31,
1995. This decrease occurred because Bayard discontinued allocation of expenses
associated with the predecessor company.
Interest expense remained fairly constant for the year end December 31,
1996, primarily as a result of the outstanding debt level remaining fairly
constant. Interest rates during these periods remained relatively unchanged.
Other income increased $197,000 from 1995 to 1996, primarily as a result of
a loss recorded in 1995 in connection with the sale of certain assets.
Bayard's income tax expense of $163,000 in 1996 was attributable to
Bayard's profitable operations.
Bayard had net income of $267,000 in 1996 as compared to a net loss of
$222,000 in 1995. Bayard's net loss in 1995 includes net losses from the sale of
assets, for which there was no similar transaction in 1996.
RECENT OPERATING RESULTS
Based upon currently available information, Bayard estimates that its total
revenues for the three months ended December 31, 1998 will be approximately 30%
lower than its total revenues for the three months ended September 30, 1998.
Bayard believes that this projected decline in revenues is attributable
principally to the decrease in the rig utilization rate from 65% for the three
months ended September 30,
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1998 to 35% for the three months ended December 31, 1998. In addition, primarily
as a result of the foregoing factors, Bayard estimates that its net loss before
extraordinary items for the three months ended December 31, 1998, which includes
approximately $700,000 in merger-related costs, will exceed by more than 250%
its net loss before extraordinary items for the three months ended September 30,
1998.
INFLATION AND CHANGING PRICES
Contract drilling revenues do not necessarily track the changes in general
inflation as they tend to respond to the level of activity on the part of the
oil and gas industry in combination with the supply of equipment and the number
of competing companies. Capital and operating costs are influenced, to a larger
extent, by specific price changes in the oil and gas industry and, to a lesser
extent, by changes in general inflation.
YEAR 2000 COMPUTER ISSUES
Background. The Year 2000 problem, commonly referred to as the "Y2K"
problem, is the product of a longstanding practice in the computer industry that
permitted the use of only two digits, rather than four, to define yearly dates.
This abbreviation of dates makes it impossible for certain computer systems and
other equipment with embedded microchips or processors, referred to collectively
as "business systems," to distinguish between centuries for a given date. For
example, a business system affected by the Y2K problem would be unable to
distinguish between 1898 and 1998: it would read both as simply "98." Not even
technology experts know with certainty what will happen on January 1, 2000 to
those business systems affected by the Y2K problem. Some anticipate such
business systems to revert to "00," recognizing the date as January 1, 1900.
This could cause miscalculations which could, in turn, disrupt operations, delay
payments or, in extreme conditions, disable those business systems entirely. In
addition, the potential exists for a "cascade effect" in which the problems of
suppliers, customers and other business partners impact the performance of
companies which have already addressed their own Y2K issues. Any or all of these
events could have a material adverse effect on a company's business, financial
condition or results of operations.
Before December 31, 1999, Bayard intends to address any Y2K issues in its
significant business systems and to develop contingency plans for Y2K
disruptions. Bayard has begun an internal Y2K review to meet these goals.
Certain employees of Bayard, assisted by professional consultants, are
conducting this assessment of Bayard's computer systems and operations
infrastructure. Bayard has not hired any new employees specifically to address
Bayard's internal Y2K issues. This assessment should help Bayard determine what
actions are necessary to minimize any business disruptions or other liabilities
related to the Y2K problem.
Y2K Readiness Assessment. Bayard is currently assessing its Y2K readiness
through a plan designed to accomplish the following:
- identify and inventory Y2K problems in significant business systems;
- assign the highest priority to Y2K business systems identified as
critical for continuing operations;
- assess other Y2K risks;
- resolve and correct Y2K problems with repairs, upgrades, or replacements
as necessary;
- test any Y2K repairs, upgrades or replacements;
- conduct Y2K surveys of significant customers, suppliers and other key
business associates; and
- develop and test Y2K contingency plans.
Bayard believes that this Y2K readiness assessment will enable it, before
January 1, 2000, to replace, upgrade or modify any critical business system
affected by the Y2K problem.
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In 1997, Bayard implemented new accounting, payroll and personnel software.
As part of the software purchase agreement, the software vendors agreed to
ensure that their software would be free from Y2K problems. Certain of these
vendors are currently correcting or upgrading their software in keeping with
this pledge. Bayard replaces existing computer hardware with new technology as
needed as a part of its normal business operations. Bayard believes that the Y2K
problem will not have a material adverse effect on its existing computer
hardware; however, Bayard is currently testing its hardware to ensure such
compliance.
As part of its readiness assessment, Bayard is performing an inventory of
each drilling rig's critical business systems. Although Bayard believes that a
majority of its rigs are Y2K-compliant, until finalization of this inventory and
assessment, Bayard will not be able reasonably to assess a likely worst case Y2K
scenario for its drilling rigs. Bayard expects to define such scenario and
establish an appropriate contingency plan following the completion of its
readiness assessment.
Bayard's key business associates include suppliers, who provide essential
capital equipment for the drilling rigs, and customers, who provide Bayard's
source of revenue and cash flow. If Y2K problems with a supplier delay the
purchase of essential equipment, Bayard's rigs could experience idle time
resulting in loss of revenue. Similarly, a customer's Y2K disruption could slow
Bayard's revenue stream, adversely impacting Bayard's cash flow, results of
operations and financial position. Bayard has sought Y2K readiness assurances
from these key business associates. These assurances are intended to aid Bayard
in determining the extent to which the failure of the key business associates to
correct their own Y2K problems could affect Bayard. While some of Bayard's key
business associates have assured Bayard that they are addressing their Y2K
problems, Bayard cannot guarantee that its key business associates will resolve
their Y2K problems in a timely manner; nor can Bayard inspect the Y2K efforts of
these key business associates or independently verify their representations. In
addition, Bayard cannot predict the effect on its business operations of the
failure of systems owned by others, of the delivery of inaccurate information
from other companies, or of the inability of others' systems to interface with
Bayard's systems. Bayard is in the process of assessing these risks; however,
Bayard cannot guarantee that another company's failure to resolve its own Y2K
problems would not materially and adversely affect Bayard.
Costs. Bayard is funding the costs of its Y2K compliance efforts with cash
flows from operations. The ability of Bayard and certain software vendors
successfully to identify and repair or replace critical business systems
affected by the Y2K problem will greatly influence the total Y2K costs. Based
upon its assessment to date, Bayard does not expect the total Y2K costs to
differ substantially from Bayard's normal, recurring costs for systems
development, implementation and maintenance. Thus, Bayard does not expect these
costs to have a material adverse effect on Bayard's overall results of
operations or cash flows.
Contingency Plans. Bayard does not yet have a comprehensive contingency
plan with respect to the Y2K problem. However, Bayard intends to establish such
a plan as part of its Y2K readiness assessment during 1999.
Risks. Bayard is currently unable to predict with certainty the exact risk
which Y2K problems would pose to its operations in a reasonably likely worst
case scenario. Bayard's assessment of the impact of Y2K problems, as discussed
above, is based on Bayard management's understanding and best estimates at the
present time and could change substantially with a change in circumstances. For
example, the inability of key business associates to remedy external Y2K
problems or the failure of Bayard's software vendors to identify or repair
internal Y2K problems could adversely affect Bayard's performance. Thus,
successful avoidance of Y2K issues depends on many factors, some of which are
outside of Bayard's control and some of which are unknown at this time. Bayard
cannot assure that it will not experience any disruptions or other adverse
effects from Y2K problems despite expending reasonable efforts to avoid them.
While Bayard presently does not expect any catastrophic failures of any of its
business systems, it cannot assure that such failures will not occur. No one
should rely on statements to the contrary. These assessments are based upon
numerous assumptions as to future events and, as such, there can be no guarantee
that these estimates and predictions will prove accurate.
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BUSINESS OF BAYARD
GENERAL
Bayard is a leading provider of contract land drilling services to major
and independent oil and gas companies. As of December 31, 1998, Bayard's rig
fleet consisted of 87 rigs, of which 73 were being marketed and 14 were
available for refurbishment. For the three months ended September 30, 1998,
Bayard experienced an overall utilization rate of approximately 48% for its
marketed rigs.
Bayard's fleet consists primarily of rigs capable of deep drilling
applications to well depths of 15,000 feet or greater. Bayard believes that new
technologies, including three-dimensional seismic techniques, increasingly
accurate down hole measurement devices and improved guidance systems and
directional drilling motors for horizontal and directional wells, have made deep
drilling targets more attractive to oil and gas companies. Of Bayard's 87 rigs,
69 are capable of drilling to depths of 15,000 feet or greater and 43 are
capable of drilling to depths of 20,000 feet or greater. Bayard's large
percentage of SCR rigs, comprising 31 of its 87 rigs, positions Bayard's fleet
as one of the most technically advanced in the industry.
Bayard was formed in December 1996 as the successor to Anadarko Drilling
Company, which owned ten rigs. Through December 31, 1998, Bayard had acquired 77
additional rigs, net of sales. Many of the acquired rigs were put into service
in the later months of 1997 and therefore did not contribute significantly to
operating results in 1997.
CORE OPERATING AREAS
Bayard's rig fleet is currently concentrated in three core operating
regions -- the Mid-Continent region, the Gulf Coast region and the South Texas
region. Bayard is among the largest rig suppliers in each of these regions.
Mid-Continent Region
The Mid-Continent region is comprised principally of Oklahoma, North Texas
and the Texas Panhandle. At December 31, 1998, Bayard had 39 rigs marketed in
the Mid-Continent region and was the most active drilling contractor in the
region. Bayard's rigs operated in the Mid-Continent region are generally capable
of drilling to depths of 10,000 feet or greater and are marketed by Bayard to
meet the specific well depths and mobility needs of producers in that region. At
December 31, 1998, 122 rigs were being utilized in this region, making it the
most active domestic onshore drilling market at that time. This area is
characterized by well-defined target formations and long-lived natural gas
reserves.
Gulf Coast Region
The Gulf Coast region is comprised of the onshore Gulf of Mexico areas in
Texas, Louisiana, Mississippi and Alabama. At December 31, 1998, Bayard had 13
rigs marketed in the Gulf Coast region, including 12 diesel electric SCR rigs.
Bayard believes that its high quality equipment, including diesel electric SCR
rigs, powerful mud pumps and high horsepower drawworks, give Bayard a
competitive advantage in attracting premium jobs with customers engaged in
multi-well drilling programs in this region. At December 31, 1998, 79 rigs were
being utilized by Bayard and others in this region, making it the fourth most
active domestic onshore drilling market at that time. The Gulf Coast region is
characterized by significant drilling activity in deep, technically challenging
formations for which Bayard's SCR and deep mechanical rigs are particularly well
suited. While recent results in certain areas of the Gulf Coast have been
disappointing to producers, most notably the Austin Chalk formation in Louisiana
and the Pinnacle Reef in Texas, significant exploration and development activity
is ongoing.
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South Texas Region
The South Texas region is comprised of the southern portion of onshore
Texas. Bayard added South Texas as its third core operating region in June 1998
as a result of the TransTexas acquisition, in which it acquired 25 rigs
previously operated by TransTexas in the South Texas region. At December 31,
1998, Bayard had 21 rigs being marketed in the South Texas region and four rigs
available to be refurbished as market conditions warrant. The TransTexas rigs
acquired by Bayard had been utilized historically only to meet the internal
drilling requirements of TransTexas. With the completion of the TransTexas
acquisition, Bayard began to actively market the acquired rigs not being
utilized by TransTexas under an alliance agreement between Bayard and
TransTexas. At December 31, 1998, 93 rigs were being utilized by Bayard and
others in this region, making it the third most active domestic onshore drilling
market at that time. The South Texas region is predominately a gas producing
region, and, accordingly, its drilling activity levels are less sensitive to
declining oil prices. Bayard believes that its rigs operating in this region are
well suited for the mobility, drilling flexibility and hydraulic efficiency
required for this region's drilling applications.
BUSINESS STRATEGY
Bayard believes that growth in earnings and cash flow can be achieved by
pursuing the following business strategy:
Operating a Technologically Advanced Rig Fleet
Bayard has assembled its existing rig fleet, and will pursue further
acquisitions, with the goal of operating one of the most technologically
sophisticated land drilling fleets in the United States. Many of Bayard's rigs
include engines, pumps and drilling mud systems that represent the best drilling
technology available and that Bayard believes offer greater efficiencies for
customers than many of the rigs available from its competitors. For example, by
deploying its diesel electric SCR rigs with two or three high horsepower pumps
and top drive drilling systems in challenging deep and horizontal drilling
situations, Bayard believes that it can reduce its customers' overall drilling
costs, thus securing and enhancing its relationships with some of the most
active operators in the domestic market. Bayard is committed to making the
capital investments required to maintain and, in appropriate circumstances,
increase the technological sophistication and operational efficiencies of its
fleet.
Developing Deep Drilling Capabilities
Bayard believes there is greater demand for rigs capable of drilling
deeper, more complex wells, including 1,500 horsepower and larger rigs, and has
focused, and will continue to focus, on acquiring rigs with these capabilities.
Of the 25 TransTexas rigs, 12 are 1,500 horsepower or larger rigs and an
additional 10 are 1,000 horsepower or larger rigs. At December 31, 1998, 78% of
Bayard's rig fleet was capable of drilling to 15,000 feet or greater. Management
believes that demand and utilization rates for these types of rigs, particularly
SCR rigs, will remain higher than for rigs with lesser depth capacities because
the deep drilling rigs provide greater operational flexibility and efficiency.
Focusing on Core Markets
Bayard believes that its strong asset position and operating expertise in
the Mid-Continent and Gulf Coast regions enable it to achieve operating
efficiencies and to provide premium service to its customers in these markets.
Bayard is the largest provider of drilling rigs in Oklahoma and is among the
largest operators of deep rigs in the onshore Gulf Coast region. As a result of
the TransTexas acquisition, Bayard is one of the largest suppliers of drilling
rigs in South Texas, positioning Bayard to mobilize additional rigs in that
region as market conditions warrant.
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Developing and Maintaining Relationships with Operators
In order to maximize the utilization rate of its rig fleet and to minimize
exposure to market downturns, Bayard seeks to maintain and build relationships
with operators committed to active domestic drilling programs. Bayard's largest
current customers include Apache Corporation, Chesapeake Energy Corporation,
Enron Oil and Gas Company, Marathon Oil Company, Sonat Exploration Company and
Union Pacific Resources Corporation. Each of these companies was among the most
active onshore operators in the United States during the last three years.
Bayard has entered into an alliance agreement with TransTexas by which Bayard
will make up to 15 rigs available to TransTexas to meet its drilling
requirements, if any, in an area that includes, among others, the South Texas
and Gulf Coast regions. During the nine months ended September 30, 1998, the
three largest customers for Bayard's contract drilling services were Chesapeake,
Union Pacific Resources and Sonat Exploration, which accounted for approximately
14%, 10% and 10% of total revenues, respectively.
Acquiring and Refurbishing Additional Rigs and Related Equipment
Bayard intends to pursue selective acquisitions of additional rigs and
related equipment, including top drive drilling systems, subject to the
limitations on acquisitions set forth in the merger agreement. Additionally,
Bayard has experience in the acquisition of component parts from which rigs can
be assembled or refurbished and intends to continue to seek similar
opportunities for the expansion and enhancement of its rig fleet by such means.
Since its formation and through December 31, 1998, Bayard had acquired 77 land
rigs, net of sales, in eleven transactions.
DRILLING EQUIPMENT AND SUPPLIES
A land drilling rig consists of various components, including engines,
drawworks, a derrick or mast, substructure, pumps to circulate drilling fluid,
blowout preventers, drill pipe and related equipment. The actual drilling
capacity of a rig may be more or less than its rated drilling capacity. Numerous
factors, including the length of a rig's drill pipe and the drilling conditions
of any particular well can cause this variance. The intended well depth and the
drill site conditions determine the rig, drill pipe length and other equipment
needed to complete a well. Bayard's rigs can be relocated to areas where demand,
well specifications and day rates allow for maximization of gross operating
margins and utilization. Generally, land rigs operate with crews of five to six
persons.
As of December 31, 1998, Bayard's fleet included 31 rigs that are diesel
electric SCR rigs and 56 that are mechanical rigs. Mechanical rigs utilize
diesel engines to produce power that is transferred to drilling equipment, such
as drawworks and pumps, by way of a compound consisting of a series of chains,
sprockets and pneumatic clutches. SCR rigs employ diesel engines that generate
alternating current electricity which is converted and transferred into amps as
alternating current or direct current electricity, which in turn drives electric
motors powering the drilling equipment. Bayard believes that SCR rigs offer a
number of advantages over mechanical rigs. SCR rigs enable flexible power
distribution to selected individual drilling equipment components, providing for
more precise drilling control and efficient operation. SCR rigs are also quieter
and safer because the diesel engines are typically located away from the rig
floor and well bore, allowing for better communication among rig crews. SCR rigs
are also more easily adapted to the use of top drive drilling systems which are
typically electrically powered. Bayard has developed a fleet that uses the
advanced drilling technology of diesel electric SCR rigs to provide greater
efficiencies to its customers, especially in deep drilling, horizontal and
directional applications, and uses mechanical rigs primarily in areas such as
the Mid-Continent region where operators target shallower well depths and
require more frequent mobility.
In addition to its SCR rigs, Bayard has focused its acquisitions on rigs
with efficient and flexible drilling mud systems as well as high horsepower
drawworks and mud pumps, features which give Bayard a competitive advantage in
attracting premium jobs with customers engaged in multi-well horizontal drilling
programs. The majority of Bayard's rigs employ diesel engines manufactured by
Caterpillar, Inc. as the rigs' main power sources. Bayard believes that such
engines are lighter and more fuel efficient than other
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available engines, thus saving Bayard and its customers money in terms of lower
trucking costs and reduced fuel consumption.
Finally, Bayard has begun equipping certain of its deep drilling rigs with
top drive drilling systems. Top drives provide Bayard's customers with greater
control in transferring horsepower to the bit, precise orientation of drilling
tools while drilling complex directional wells, and reduced incidence of stuck
drill pipe in high risk areas. Moreover, top drives enable the contractor to
drill in 90 foot sections rather than conventional 45 foot sections, a
capability which reduces connection time, and are safer for rig employees and
equipment during tubular handling operations and in well control situations.
Currently, Bayard has five rigs equipped with top drives and has purchased one
additional top drive.
RIG FLEET
The following table identifies certain information as of December 31, 1998
regarding the rigs owned and operated by Bayard. In this table, rigs identified
as "SCR" are diesel electric silicon controlled rectifier rigs and rigs
identified as "Mechanical" are mechanical rigs powered by diesel engines.
Drawworks horsepower represents the amount of input power required to achieve
the maximum hoisting capability of the rig's drawworks, while total horsepower
represents the maximum horsepower produced by a rig's diesel engines for
consumption by the drilling equipment. The five rigs in the Gulf Coast and
Mid-Continent regions identified with an asterisk (*) are equipped with National
PS350/500 top drives.
<TABLE>
<CAPTION>
HORSEPOWER
-----------------
RIG NO. DEPTH CAPACITY(FT.) DRAWWORKS RIG TYPE DRAWWORKS TOTAL STATUS
- ------- ------------------- --------- -------- --------- ----- ------
<C> <C> <S> <C> <C> <C> <C>
GULF COAST REGION
11 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Working
12 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Available
14 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Available
15 25,000 Mid Continent U-1220-EB* SCR 2,500 3,600 Working
16 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Available
17 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Available
18 25,000 Mid Continent U-1220-EB* SCR 2,500 3,600 Available
22 25,000 National 1320-UE* SCR 2,000 3,300 Working
23 25,000 Gardner Denver 1500-E* SCR 2,000 3,600 Working
40 25,000 National 1320-UE SCR 2,000 3,300 Available
69 25,000 Mid Continent U-1220-EB SCR 2,500 3,975 Working
20 20,000 Oilwell 840-E SCR 1,500 2,700 Available
4 18,000 Mid Continent U-712-A Mechanical 1,200 2,700 Available
MID-CONTINENT REGION
21 30,000 Continental Emsco C-3* SCR 3,000 4,400 Working
10 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Working
52 25,000 National 1320-M Mechanical 2,000 2,700 Available
63 25,000 Gardner Denver 1500-E SCR 2,000 3,300 Available
7 20,000 Mid Continent U-914-C Mechanical 1,500 2,700 Available
19 20,000 Continental EMSCO C-1 SCR 1,500 2,700 Working
35 20,000 National 110-UE SCR 1,500 3,300 Available
36 20,000 National 110-M Mechanical 1,500 2,700 Working
46 20,000 BDW 1350 Mechanical 1,500 2,900 Available
59 20,000 Oilwell 860 Mechanical 1,500 2,700 Working
60 20,000 National 1320-M Mechanical 2,000 2,700 Available
61 20,000 National 110-M Mechanical 1,500 2,700 Available
62 20,000 Mid Continent U914 SCR 1,500 2,700 Working
5 16,000 Gardner Denver 800 Mechanical 1,000 2,900 Available
8 16,000 National 80-B Mechanical 1,000 1,650 Available
31 16,000 Gardner Denver 800-E SCR 1,000 2,200 Working
32 16,000 BDW 800 MI Mechanical 1,000 1,650 Working
33 16,000 Brewster N-46 Mechanical 1,000 2,000 Available
34 16,000 Ideco E-900 SCR 900 1,800 Available
39 16,000 Ideco E-900 SCR 900 2,350 Working
51 16,000 Oilwell 760 Mechanical 1,000 1,650 Working
47 16,000 Ideco H-900 Mechanical 900 1,650 Working
</TABLE>
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<TABLE>
<CAPTION>
HORSEPOWER
-----------------
RIG NO. DEPTH CAPACITY(FT.) DRAWWORKS RIG TYPE DRAWWORKS TOTAL STATUS
- ------- ------------------- --------- -------- --------- ----- ------
<C> <C> <S> <C> <C> <C> <C>
42 15,000 Gardner Denver 700 Mechanical 800 1,650 Working
44 15,000 Gardner Denver 700 Mechanical 800 1,650 Working
26 14,000 National 610 Mechanical 750 1,650 Working
29 13,000 Continental Emsco D-2 Mechanical 750 1,450 Available
38 13,000 Mid Continent U-36A Mechanical 600 1,650 Available
41 13,000 Mid Continent U-36A Mechanical 600 1,650 Available
9 12,000 Gardner Denver 500 Mechanical 650 2,250 Available
43 12,000 Superior 700 Mechanical 650 1,450 Working
45 12,000 Gardner Denver 500 Mechanical 650 1,450 Available
53 12,000 Unit U-40 Mechanical 850 1,650 Available
57 12,000 National 55 Mechanical 550 2,000 Available
58 12,000 Ideco 750 Mechanical 750 1,650 Available
28 11,000 BDW 650 Mechanical 650 1,350 Available
37 11,000 Gardner Denver 500 Mechanical 650 1,900 Available
30 10,000 Brewster N-42 Mechanical 550 1,725 Available
56 10,000 Cooper LTD 750 Mechanical 750 1,550 Working
55 7,500 Cooper LTD 550 Mechanical 550 1,400 Available
SOUTH TEXAS REGION
86 25,000 National 1320 Mechanical 2,000 2,700 Working
80 20,000 National 110-M Mechanical 1,500 2,700 Available
81 20,000 National 110-M Mechanical 1,500 2,700 Available
82 20,000 National 110-M Mechanical 1,500 2,700 Available
83 20,000 National 110-M Mechanical 1,500 2,700 Available
84 20,000 National 110-M Mechanical 1,500 2,700 Available
85 20,000 National 110-M Mechanical 1,500 2,700 Available
87 20,000 National 110-M Mechanical 1,500 2,280 Available
88 20,000 National 110-M Mechanical 1,500 2,280 Available
89 20,000 Oilwell 860 Mechanical 1,500 3,380 Available
90 20,000 Gardner Denver 1100 Mechanical 1,500 2,280 Available
93 20,000 Gardner Denver 1100 Mechanical 1,500 2,700 Available
79 18,000 Ideco 1200 Mechanical 1,200 3,300 Working
74 16,000 BDW 800 Mechanical 1,000 2,700 Available
76 16,000 National 80-B Mechanical 1,000 3,800 Available
77 16,000 National 80-B Mechanical 1,000 2,700 Available
78 16,000 National 80-B Mechanical 1,000 2,550 Available
92 16,000 National 80-B Mechanical 1,000 3,450 Available
94 16,000 National 80-B Mechanical 1,000 2,900 Available
73 14,000 National 610 Mechanical 750 1,650 Available
70 12,000 Cabot 900 Mechanical 900 2,570 Available
AVAILABLE FOR REFURBISHMENT
24 25,000 National 1320-UE SCR 2,000 3,960
68 25,000 Continental Emsco C-2 SCR 2,000 3,975
50 20,000 BDW 1350 SCR 1,500 2,700
65 20,000 Oilwell E-2000 SCR 2,000 3,975
66 20,000 Oilwell 840-E SCR 1,500 3,975
67 20,000 Oilwell 840-E SCR 1,500 3,975
27 16,000 National 80-B SCR 1,000 1,650
48 16,000 SCR 1,000 2,280
49 16,000 SCR 1,000 2,280
64 16,000 Ideco E-1200 SCR 1,200 2,280
72 16,000 Gardner Denver 800 Mechanical 1,000 3,100
75 16,000 National 80-B Mechanical 1,000 2,750
91 16,000 National 80-B Mechanical 1,000 2,600
71 12,000 Cabot 900 Mechanical 900 2,570
</TABLE>
Drilling rigs and related equipment deteriorate over time unless they are
operated and maintained properly. Bayard strives to keep its drilling rigs well
maintained and technologically competitive. An active maintenance program during
the life of a drilling rig permits the maintenance, replacement and upgrading of
its components on an individual basis. Over the life of a typical drilling rig,
major components, such as
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engines, pumps, drawworks and drill pipe, are replaced or rebuilt on a periodic
basis as required while other components, such as the mast and substructure, can
be utilized for extended periods of time with proper maintenance.
In connection with the TransTexas acquisition, Bayard acquired 45 trucks
which have been utilized to move Bayard's drilling rigs and related equipment.
The fleet includes various types of trucks, including pole, winch, tandem and
hauling vehicles. Additionally, Bayard acquired approximately 60 lowboy and
float trailers, three cranes and three forklifts.
During periods of high utilization in recent years, there has been a
general shortage of certain drilling equipment and supplies used in Bayard's
business. Except for limited periods of high utilization, the land drilling
industry has generally been characterized by an oversupply of land rigs.
Therefore, rig manufacturers have generally focused on the production of more
expensive offshore rigs and rig equipment. As a result, most rig manufacturers
are not currently building new land rigs and those manufacturers that are
building new land rigs and components charge premium prices, approximately $13.0
million for a new 2,000 horsepower rig, and require that orders be placed at
least 120 days in advance of requested delivery. The limited availability of new
rigs and equipment has caused land rig owners and operators, including Bayard,
to maintain and enhance their fleets primarily through acquisitions and
refurbishments using previously manufactured rig components and equipment. As
the land drilling industry continues to refurbish rigs using existing components
and equipment, the available supply of such components and equipment continues
to deplete. Additionally, a shortage of drill pipe in the contract drilling
industry has caused the price of drill pipe to increase significantly over the
past two years. Bayard has established arrangements to meet its current needs
for certain necessary drilling equipment and supplies, including drill pipe, on
satisfactory terms, but there can be no assurance that it will continue to be
able to do so. Accordingly, there can be no assurance that Bayard will not
experience shortages of, or material price increases in, drilling equipment and
supplies, including drill pipe, in the future. Any such shortages could delay
and adversely affect Bayard's ability to refurbish its construction project rigs
and obtain contracts for its marketed rigs.
CONTRACT DRILLING OPERATIONS
Bayard's drilling rigs are employed under individual contracts which extend
either over a stated period of time or the time required to drill a well or a
number of wells. Drilling contracts are obtained through either a competitive
bidding process or as a result of direct negotiations with customers. Terms of
Bayard's drilling contracts vary based on factors such as the complexity and
risk of operations, on-site drilling conditions, type of equipment used and the
anticipated duration of the work to be performed. Contracts are typically
entered into on a single well basis and obligate Bayard to pay certain operating
expenses, including wages of drilling personnel, maintenance expenses and costs
for incidental rig supplies, equipment and local office facilities. Contracts
generally are subject to termination by the customer on short notice, but are
sometimes written on a firm basis for a specified number of wells or years.
Bayard has ongoing relationships with a number of customers that often engage a
specific rig for the drilling of consecutive wells.
At December 31, 1998, all of Bayard's working rigs were operating under
daywork contracts. In addition, Bayard and its predecessors in the past have
performed drilling services under footage and turnkey contracts and Bayard may
do so again in the future. Revenues from daywork contracts accounted for
approximately 98% and 95% of total drilling revenues, excluding mobilization
revenues, during the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively, with the remainder from footage and turnkey
contracts.
Daywork Contracts. Under daywork contracts, Bayard provides a drilling rig
with required personnel to the operator, who supervises the drilling of the
well. Bayard is paid based on a negotiated fixed rate per day while the rig is
utilized. The rates for Bayard's services depend on market and competitive
conditions, the nature of the operations to be performed, the duration of the
work, the equipment and services to be provided, the geographic area involved
and other variables. Lower rates may be paid when the rig is in
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transit, or when drilling operations are interrupted or restricted by equipment
breakdowns, actions of the customer or adverse weather conditions or other
conditions beyond the control of Bayard. In addition, daywork contracts
typically provide for a lump sum fee for the mobilization and demobilization of
the drilling rig. Daywork drilling contracts generally specify the type of
equipment to be used, the size of the hole and the depth of the well. Under a
daywork drilling contract, the customer bears a large portion of out-of-pocket
costs of drilling and Bayard generally bears no part of the usual capital risks,
such as time delays for stuck drill pipe and blowouts, associated with oil and
gas exploration.
Footage and Turnkey Contracts. Under footage contracts, Bayard is paid a
fixed amount for each foot drilled, regardless of the time required or the
problems encountered in drilling the well. Bayard pays more of the out-of-pocket
costs associated with footage contracts compared to daywork contracts. Under
turnkey contracts, Bayard contracts to drill a well to an agreed depth under
specified conditions for a fixed price, regardless of the time required or the
problems encountered in drilling the well. Bayard provides technical expertise
and engineering services, as well as most of the equipment required for the
well, and is compensated when the contract terms have been satisfied. Turnkey
contracts afford an opportunity to earn a higher return than would normally be
available on daywork or footage contracts if the contract can be completed
successfully without complications.
The risks to Bayard under footage and turnkey contracts are substantially
greater than under daywork contracts because Bayard assumes most of the risks
associated with drilling operations generally assumed by the operator in a
daywork contract, including risk of blowout, loss of hole, lost or damaged drill
pipe, machinery breakdowns, abnormal drilling conditions and risks associated
with subcontractors' services, supplies, cost escalation and personnel.
CUSTOMERS AND MARKETING
Bayard's customers include major oil companies and independent oil and gas
producers. During the nine months ended September 30, 1998, the three largest
customers for Bayard's contract drilling services were Chesapeake Energy
Corporation, Union Pacific Resources Corp. and Sonat Exploration Company, which
accounted for approximately 14%, 10% and 10% of total revenues, respectively.
Chesapeake announced in 1997 that it was reducing its drilling program in the
Gulf Coast region, an area in which it utilizes a number of Bayard's rigs. In
late 1997, Chesapeake released two rigs under contract with Bayard and has
subsequently released three additional rigs it was using in the Gulf Coast
region. As of December 31, 1998, Chesapeake was utilizing four of Bayard's rigs;
however, there can be no assurance that Chesapeake or any of Bayard's other
principal customers will continue to employ Bayard's services or that the loss
of any of such customers or adverse developments affecting any of such customers
would not have a material adverse effect on Bayard's financial condition and
results of operations.
Bayard enters into informal, nonbinding commitments with many of its
customers to provide drilling rigs for future periods at agreed upon rates plus
fuel and mobilization charges, if applicable, and escalation provisions. This
practice is customary in the land drilling business during times of tightening
rig supply. Although neither Bayard nor the customer is legally required to
honor these commitments, Bayard strives to satisfy such commitments in order to
maintain good customer relations.
Bayard's sales force consists of industry professionals with significant
land drilling sales experience who utilize industry contacts and available
public data to determine how to most appropriately market available rigs.
Chesapeake Drilling Agreements. In December 1996, in connection with
Bayard's formation transactions, Chesapeake Energy Corporation and its operating
subsidiary entered into drilling agreements with Bayard by which Chesapeake
agreed to engage six of Bayard's rigs for two-year terms. For the year ended
December 31, 1997, Bayard recognized aggregate revenues of $10.9 million from
the Chesapeake drilling agreements.
Under the terms of the Chesapeake drilling agreements, the standard day
rates were subject to upward, but not downward, adjustment annually in November
to the average then-current market rates for
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the areas of operation, less $100 per day. Bayard and Chesapeake were required
to consider such adjustment each November during the term of the particular
Chesapeake drilling agreement and if no agreement could be timely reached as to
the appropriate rate adjustment, Bayard had the option to terminate the contract
for such rig at the conclusion of operations at the well then being drilled. In
December 1997, Bayard and Chesapeake were unable to agree on an appropriate rate
adjustment, so Bayard exercised its option to terminate the Chesapeake drilling
agreements.
COMPETITION
The contract drilling industry is a highly competitive and fragmented
business characterized by high capital and maintenance costs. As a result, even
though Bayard has the fifth largest active land drilling rig fleet in the United
States, Bayard believes that such fleet represents a market share of
approximately 6% of the domestic land drilling industry. Drilling contracts are
usually awarded through a competitive bid process and, while Bayard believes
that operators consider factors such as quality of service, type and location of
equipment, or the ability to provide ancillary services, price and rig
availability are the primary factors in determining which contractor is awarded
a job. Certain of Bayard's competitors have greater financial and human
resources than Bayard, which may enable them to better withstand periods of low
rig utilization, to compete more effectively on the basis of price and
technology, to build new rigs or acquire existing rigs and to provide rigs more
quickly than Bayard in periods of high rig utilization.
Competition in the market for drilling rigs caused substantial increases in
the acquisition prices paid for rigs in 1997. Continued competition and price
escalation could adversely affect Bayard's growth strategy if it is unable to
purchase additional drilling rigs or related equipment on favorable terms.
OPERATING HAZARDS AND INSURANCE
Bayard's operations are subject to many hazards inherent in the land
drilling business, including, for example, blowouts, cratering, fires,
explosions, loss of well control, loss of hole, damaged or lost drill strings
and damage or loss from inclement weather. These hazards could cause personal
injury or death, serious damage to or destruction of property and equipment,
suspension of drilling operations, or substantial damage to the environment,
including damage to producing formations and surrounding areas. Generally,
Bayard seeks to obtain indemnification from its customers by contract for
certain of these risks. To the extent not transferred to customers by contract,
Bayard seeks protection against certain of these risks through insurance,
including property casualty insurance on its rigs and drilling equipment,
commercial general liability and commercial contract indemnity, commercial
umbrella and workers' compensation insurance.
Bayard's insurance coverage for property damage to its rigs and drilling
equipment is based on Bayard's estimate of the cost of comparable used equipment
to replace the insured property. There is a deductible per occurrence on rigs
and equipment of $500,000.
Bayard's third party liability insurance coverage under the general policy
is $1 million per occurrence, with a self insured retention of $100,000 per
occurrence. The commercial umbrella policy has a self insured retention of
$10,000 per occurrence with coverage of $5 million per occurrence. Bayard
believes that it is adequately insured for public liability and property damage
to others with respect to its operations. However, such insurance may not be
sufficient to protect Bayard against liability for all consequences of well
disasters, extensive fire damage or damage to the environment.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
General
Bayard's operations are affected from time to time in varying degrees by
political developments and federal, state and local laws and regulations. In
particular, oil and gas production, operations and economics are or have been
affected by price controls, taxes and other laws relating to the oil and gas
industry, by changes in such laws and by changes in administrative regulations.
Although significant capital
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<PAGE> 83
expenditures may be required to comply with such laws and regulations, to date,
such compliance costs have not had a material adverse effect on the earnings or
competitive position of Bayard. In addition, Bayard's operations are vulnerable
to risks arising from the numerous laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection.
Environmental Regulation
Bayard's activities are subject to existing federal, state and local laws
and regulations governing environmental quality, pollution control and the
preservation of natural resources. Such laws and regulations concern, among
other things, air emissions, the containment, disposal and recycling of waste
materials, and reporting of the storage, use or release of certain chemicals or
hazardous substances. Numerous federal and state environmental laws regulate
drilling activities and impose liability for discharges of waste or spills,
including those in coastal areas. Bayard has conducted drilling activities in or
near ecologically sensitive areas, such as wetlands and coastal environments,
which are subject to additional regulatory requirements. State and federal
legislation also provide special protections to animal and marine life that
could be affected by Bayard's activities. In general, under various applicable
environmental programs, Bayard may potentially be subject to regulatory
enforcement action in the form of injunctions, cease and desist orders and
administrative, civil and criminal penalties for violations of environmental
laws. Bayard may also be subject to liability for natural resource damages and
other civil claims arising out of a pollution event.
Except for the handling of solid wastes directly generated from the
operation and maintenance of Bayard's drilling rigs, such as waste oils and wash
water, it is Bayard's practice to require its customers to contractually assume
responsibility for compliance with environmental regulations. Laws and
regulations protecting the environment have become more stringent in recent
years, and may, in certain circumstances, impose strict liability, rendering a
person liable for environmental damage without regard to negligence or fault on
the part of such person. Such laws and regulations may expose Bayard to
liability for the conduct of or conditions caused by others, or for acts of
Bayard which were in compliance with all applicable laws at the time such acts
were performed. The application of these requirements or adoption of new
requirements could have a material adverse effect on Bayard.
Environmental regulations that affect Bayard's customers also have an
indirect impact on Bayard. Increasingly stringent environmental regulation of
the oil and gas industry has led to higher drilling costs and a more difficult
and lengthy well permitting process.
The primary environmental statutory and regulatory programs that affect
Bayard's operations include the following:
Oil Pollution Act and Clean Water Act. The Oil Pollution Act of 1990 amends
certain provisions of the federal Water Pollution Control Act of 1972, commonly
referred to as the Clean Water Act, and other statutes as they pertain to the
prevention of and response to spills or discharges of hazardous substances or
oil into navigable waters. Under the Oil Pollution Act, a person owning or
operating a facility or equipment, including land drilling equipment, from which
there is a discharge or threat of a discharge of oil into or upon navigable
waters and adjoining shorelines is liable, regardless of fault, as a
"responsible party" for removal costs and damages. Federal law imposes strict,
joint and several liability on facility owners for containment and clean-up
costs and certain other damages, including natural resource damages, arising
from a spill.
The United States Environmental Protection Agency is also authorized to
seek preliminary and permanent injunctive relief and, in certain cases, criminal
penalties and fines. State laws governing the control of water pollution also
provide varying civil and criminal penalties and liabilities in the case of
releases of petroleum or its derivatives into surface waters or into the ground.
If a discharge occurs at a well site at which Bayard is conducting drilling or
pressure pumping operations, Bayard may be exposed to claims that it is liable
under the Clean Water Act or similar state laws.
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<PAGE> 84
Certain of Bayard's operations are also subject to EPA regulations,
including regulations that require the preparation and implementation of spill
prevention control and countermeasure plans to address the possible discharge of
oil into navigable waters. Where so required, Bayard has spill prevention
control and countermeasure plans in place.
Superfund. The Comprehensive Environmental, Response, Compensation, and
Liability Act, as amended, known as CERCLA or the "Superfund" Law, imposes
liability, without regard to fault or the legality of the original conduct, on
certain classes of persons with respect to the release of a "hazardous
substance" into the environment. These persons include:
- the current owner and operator of a facility from which hazardous
substances are released;
- owners and operators of a facility at the time any hazardous substances
were disposed;
- generators of hazardous substances who arranged for the disposal or
treatment at or transportation to such facility of hazardous substances;
and
- transporters of hazardous substances to disposal or treatment facilities
selected by them.
Bayard may be responsible under CERCLA for all or part of the costs to clean up
sites at which hazardous substances have been released. To date, however, Bayard
has not been named a potentially responsible party under CERCLA or any similar
state Superfund laws.
Hazardous Waste Disposal. Bayard's operations involve the generation or
handling of materials that may be classified as hazardous waste and subject to
the federal Resource Conservation and Recovery Act and comparable state
statutes. The EPA and various state agencies have limited the disposal options
for certain hazardous and nonhazardous wastes and is considering the adoption of
stricter handling and disposal standards for nonhazardous wastes.
As part of the Bonray Acquisition, Bayard acquired an equipment yard which
may require certain expenditures or remedial actions for the removal or cleanup
of contamination. In exchange for a $1 million cash payment to Bayard at
closing, Bayard did not require DLB Oil & Gas, Inc. to indemnify Bayard with
respect to such expenditures or remedial actions. While Bayard has not
determined whether and to what extent such expenditures or remedial actions may
be necessary or advisable, based on the presently available information, Bayard
does not believe that such expenditures will exceed $1 million. Management
believes that Bayard and its operations are in material compliance with
applicable environmental laws and regulations.
Health and Safety Matters
Bayard's facilities and operations are also governed by various other laws
and regulations, including the federal Occupational Safety and Health Act,
relating to worker health and workplace safety. As an example, the Occupational
Safety and Health Administration has issued the Hazard Communication Standard.
This standard applies to all private-sector employers, including the oil and gas
exploration and producing industry. The Hazard Communication Standard requires
that employers assess their chemical hazards, obtain and maintain certain
written descriptions of these hazards, develop a hazard communication program
and train employees to work safely with the chemicals on site. Failure to comply
with the requirements of the standard may result in administrative, civil and
criminal penalties. Bayard believes that appropriate precautions are taken to
protect employees and others from harmful exposure to materials handled and
managed at its facilities and that it operates in substantial compliance with
all Occupational Safety and Health Act regulations. While it is not anticipated
that Bayard will be required in the near future to make material expenditures by
reason of such health and safety laws and regulations, Bayard is unable to
predict the ultimate cost of compliance with these changing regulations.
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FACILITIES AND OTHER PROPERTY
Bayard leases approximately 7,500 square feet of office space for its
principal executive offices in Oklahoma City, Oklahoma at a cost of
approximately $7,000 per month and leases approximately 5,000 square feet of
office and warehouse space and ten acres of land in El Reno, Oklahoma for $2,000
per month. In addition, Bayard owns approximately ten acres of land in El Reno,
Oklahoma and five acres of land in Weatherford, Oklahoma that it uses for rig
storage and maintenance. Bayard leases a facility in Houston, Texas that
includes approximately 5,000 square feet of warehouse space and 1,300 square
feet of office space. Rental payments on the Houston facility are approximately
$1,800 per month. As part of the Bonray Acquisition, Bayard acquired
approximately 40 acres of land in Oklahoma City with facilities including 3,600
square feet of office space, an 8,000 square foot repair shop and three
warehouses. In the TransTexas Acquisition, Bayard acquired approximately 24
acres of land in Laredo, Texas with office and warehouse facilities totaling
approximately 125,000 square feet. Bayard considers all of its facilities to be
in good operating condition and adequate for their present uses.
EMPLOYEES
As of January 19, 1999, Bayard had approximately 550 employees, of which
approximately 100 were salaried and approximately 450 were employed on an hourly
basis. None of Bayard's employees is represented by any collective bargaining
unit. Bayard management believes that Bayard's relationship with its employees
is good.
LEGAL PROCEEDINGS
A purported class action lawsuit is pending against Bayard, certain
directors and officers of Bayard, the managing underwriters of Bayard's initial
public offering, and certain current and former stockholders of Bayard, alleging
violations of federal securities laws in connection with the initial public
offering. The lawsuit, Yuan v. Bayard Drilling Technologies, Inc., et al.
("Yuan"), was filed on February 3, 1998 in the United States District Court for
the Western District of Oklahoma. The principal plaintiff in Yuan is Tom Yuan.
The defendants in this case include Bayard, Chesapeake Energy Corporation,
Energy Spectrum LLC, James E. Brown, David E. Grose, Carl B. Anderson, III,
Merrill A. Miller, Jr., Sidney L. Tassin, Lew O. Ward, Mike Mullen, Roy T.
Oliver, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers,
Inc., Prudential Securities, Inc., Rauscher Pierce Refsnes, Inc. (a predecessor
to Dain Rauscher Incorporated) and Raymond James & Associates, Inc.
The plaintiffs in this lawsuit purport to sue on their own behalf and on
behalf of all persons who purchased shares of Bayard common stock on or
traceable to the initial public offering. In the lawsuit, plaintiffs allege
claims against all defendants under the Securities Act of 1933. The plaintiffs
allege that the registration statement and prospectus for Bayard's initial
public offering contained materially false and misleading information and
omitted material facts. In particular, the plaintiffs allege that such
registration statement and prospectus failed to disclose financial difficulties
of Chesapeake Energy Corporation, Bayard's largest customer, and the effects of
such difficulties on Chesapeake's ability to continue to provide Bayard with
substantial drilling contracts. The complaint further alleges that Bayard failed
to disclose pre-offering negotiations with R.T. Oliver Drilling, Inc., whom the
plaintiffs allege was a related party, for the purchase of drilling rigs. In
addition, the complaint alleges that Bayard failed to disclose that its growth
strategy required costly refurbishment of older drilling rigs that would
dramatically increase Bayard's costs, which could not be sustained by internally
generated cash flows. Plaintiffs are seeking rescission and damages.
Two other suits, Khan v. Bayard Drilling Technologies, Inc., et al.
("Khan") and Burkett v. Bayard Drilling Technologies, Inc., et al. ("Burkett"),
which were filed in District Court in and for Oklahoma County, State of Oklahoma
on January 14, 1998 and February 2, 1998, respectively, and alleged essentially
the same claims as Yuan, were dismissed without prejudice in May 1998 on a joint
application filed by all parties. The plaintiffs in Khan and Burkett, along with
others, have been appointed as lead plaintiffs in the Yuan federal court suit,
now styled to include the other lead plaintiffs, as Yuan, et al., and an amended
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consolidated complaint was filed on July 30, 1998. A motion to dismiss the
claims in this lawsuit has been filed by Bayard and the other defendants and is
currently pending before the court.
Bayard is also involved in other litigation arising from time to time in
the ordinary course of its business, including workers' compensation claims and
disputes arising out of its drilling activities. Such disputes include a claim
filed against Bayard and Marathon Oil Company on November 13, 1998 in the
District Court of Washita County in the State of Oklahoma. Eldred L. and
Patricia A. Schneberger, the plaintiffs in this lawsuit, seek an order of
abatement and actual, consequential and punitive damages for losses allegedly
incurred in connection with a drilling project that utilized one of Bayard's
rigs.
Bayard believes the allegations in the lawsuits referenced above are
without merit and is defending vigorously the claims brought against it. Bayard
is unable, however, to predict the outcome of these lawsuits or the costs to be
incurred in connection with their defense and there can be no assurance that
this litigation will be resolved in Bayard's favor. An adverse result or
prolonged litigation could have a material adverse effect on Bayard's financial
position or results of operations.
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PRINCIPAL STOCKHOLDERS OF BAYARD
The following table sets forth certain information regarding the beneficial
ownership of Bayard common stock as of January 15, 1999. This table discloses
the stock ownership of:
- each person known by Bayard to own more than 5% of the outstanding shares
of Bayard common stock;
- each of Bayard's directors;
- the Chief Executive Officer of Bayard and each of the two other persons
who served as executive officers of Bayard during 1998; and
- all executive officers and directors as a group.
All persons listed have an address in care of Bayard's principal executive
offices and have sole voting and investment power with respect to their shares
unless otherwise indicated.
The information contained in this table with respect to beneficial
ownership reflects "beneficial ownership" as defined in Rule 13d-3 under the
Securities Exchange Act of 1934. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of Bayard
common stock subject to options or warrants held by that person that are
exercisable on January 15, 1999 or become exercisable within 60 days following
January 15, 1999 are deemed outstanding. However, such shares are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person. All information with respect to the beneficial ownership of any
stockholder has been furnished by such stockholder and, unless otherwise
indicated, each stockholder has sole voting and investment power with respect to
the shares listed as beneficially owned by such stockholder, subject to
community property laws where applicable. Percentage of ownership is based on
18,200,765 shares of Bayard common stock outstanding as of January 15, 1999.
<TABLE>
<CAPTION>
BAYARD COMMON STOCK
BENEFICIALLY OWNED
---------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE
- ------------------------------------ --------- ----------
<S> <C> <C>
Nabors Industries, Inc...................................... 2,645,725(1) 14.5%
515 West Greens Road, Suite 1200
Houston, TX 77067
Carl B. Anderson, III....................................... 1,293,167(2)(3) 7.1
c/o AnSon Partners L.L.C.
4005 Northwest Expressway, Suite 400E
Oklahoma City, Oklahoma 73116
Energy Spectrum LLC......................................... 1,100,000(4) 6.0
5956 Sherry Lane, Suite 600
Dallas, Texas 75225
James E. Brown.............................................. 446,000(5) 2.4
Edward S. Jacob, III........................................ 50,000(6) *
David E. Grose, III......................................... 14,000(7) *
Mark Liddell................................................ 47,182(3) *
6307 Waterford Boulevard, Suite 100
Oklahoma City, Oklahoma 73118
Merrill A. Miller, Jr....................................... 5,167(3) *
c/o National-Oilwell, Inc.
5555 San Felipe
Houston, Texas 77056
</TABLE>
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<TABLE>
<CAPTION>
BAYARD COMMON STOCK
BENEFICIALLY OWNED
---------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE
- ------------------------------------ --------- ----------
<S> <C> <C>
Sidney L. Tassin............................................ 1,105,167(3)(8) 6.1
c/o Energy Spectrum Partners LP
5956 Sherry Lane, Suite 600
Dallas, Texas 75225
Lew O. Ward................................................. 428,292(3)(9) 2.3
c/o Ward Petroleum Corporation
502 South Fillmore Road
Enid, Oklahoma 73703
All directors and executive officers as a group (8
persons).................................................. 3,168,975(10) 17.2
</TABLE>
- ---------------
* Less than one percent.
(1) Represents shares of Bayard common stock held of record or beneficially by
the consenting stockholders. In the stockholder agreements, the consenting
stockholders have granted Nabors an irrevocable proxy to vote the covered
shares with respect to the merger.
(2) Includes:
(a)
1,018,000 shares of Bayard common stock held of record by AnSon, of
which Mr. Anderson is managing general partner;
(b)
170,000 shares of Bayard common stock held of record by James E. Brown
that are subject to voting rights retained by Mr. Anderson under an
irrevocable proxy; and
(c)
100,000 shares of Bayard common stock held of record and beneficially by
Mr. Anderson.
(3) Includes 5,167 shares of Bayard common stock subject to options granted
under Bayard's 1997 Non-Employee Director Stock Option Plan, referred to as
the "director stock plan," that are currently exercisable or become
exercisable within 60 days of January 15, 1999. Excludes 14,833 shares of
Bayard common stock that may be acquired upon exercise of options granted
under the director stock plan, none of which are exercisable within 60 days
after January 15, 1999.
(4) Represents shares of Bayard common stock held of record by Energy Spectrum
Partners LP, of which Energy Spectrum Capital LP is the sole general
partner, and includes 112,000 shares of Bayard common stock that may be
acquired within the next 60 days upon exercise of outstanding Series B
Warrants. Energy Spectrum LLC is the sole general partner of Energy
Spectrum Capital LP and possesses sole voting and investment power with
respect to such shares. Sidney L. Tassin, as President and a member of
Energy Spectrum LLC, may be deemed to have beneficial ownership of these
shares. Mr. Tassin disclaims beneficial ownership of such shares.
(5) Includes:
(a)
100,000 shares of Bayard common stock held by Mr. Brown which vest pro
rata over five years starting on December 10, 1997 and are subject to
certain restrictions on resale and provisions for the repurchase by
Bayard at a specified price and upon certain conditions, including
termination of employment with Bayard;
(b)
170,000 shares of Bayard common stock for which an irrevocable voting
proxy has been granted to Carl B. Anderson, III; and
(c)
160,000 shares of Bayard common stock subject to options granted under
Bayard's 1997 Stock Option and Stock Award Plan, referred to as the
"employee stock plan," that are currently exercisable or become
exercisable within 60 days of January 15, 1999.
Excludes options to purchase an aggregate of 440,000 shares of Bayard
common stock held by Mr. Brown which were granted under the employee stock
plan, subject to vesting and other conditions contained in stock option
agreements, none of which options are exercisable within 60 days after
January 15, 1999.
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(6) Includes 50,000 shares of Bayard common stock subject to options granted
under the employee stock plan that were exercisable on, or become
exercisable within 60 days after, January 15, 1999. Excludes options to
purchase an aggregate of 230,000 shares of Bayard common stock held by Mr.
Jacob which were granted under the employee stock plan, subject to vesting
and other conditions contained in stock option agreements, none of which
options are exercisable within 60 days after January 15, 1999.
(7) Includes 14,000 shares of Bayard common stock subject to options granted
under the employee stock plan that are currently exercisable. Excludes
options to purchase an aggregate of 56,000 shares of Bayard common stock
held by Mr. Grose which were granted under the employee stock plan, subject
to vesting and other conditions contained in stock option agreements, none
of which options are exercisable within 60 days after January 15, 1999.
(8) Represents shares of Bayard common stock held of record by Energy Spectrum
Partners LP and beneficially by Energy Spectrum LLC. Mr. Tassin, a director
of Bayard, is the President of Energy Spectrum LLC, which is the ultimate
general partner of Energy Spectrum Partners LP. Mr. Tassin disclaims
beneficial ownership of such shares. See note (4) above.
(9) Includes:
(a) 253,725 shares of Bayard common stock held of record by Wil-Cas
Investments, L.P., a family limited partnership controlled by Ward
Petroleum and family trusts for the benefit of Mr. Ward's children,
William C. Ward and Casidy Ward, of which they act as trustees; and
(b) 169,400 shares of Bayard common stock that may be acquired within the
next 60 days upon the exercise of outstanding warrants held by Wil-Cas
Investments, L.P.
(10) Includes:
(a) 112,000 shares of Bayard common stock that may be acquired by Energy
Spectrum Partners LP within the next 60 days upon the exercise of
outstanding Series B Warrants;
(b) 170,000 shares of Bayard common stock held by Mr. Brown that are
subject to voting rights retained by Mr. Anderson;
(c) 100,000 restricted shares of Bayard common stock held by Mr. Brown;
(d) 224,000 shares of Bayard common stock subject to options granted to
executive officers of Bayard under the employee stock plan that are
currently exercisable or become exercisable within 60 days after
January 15, 1999;
(e) 25,835 shares of Bayard common stock subject to options granted to
directors of Bayard under the director stock plan that are currently
exercisable or become exercisable within 60 days after January 15,
1999; and
(f) 169,400 shares of Bayard common stock that may be acquired by Wil-Cas
within the next 60 days upon the exercise of outstanding warrants.
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COMPARISON OF STOCKHOLDER RIGHTS
GENERAL
The following table summarizes the material differences between the rights
of holders of shares of Nabors common stock and the holders of shares of Bayard
common stock. Although both Nabors and Bayard are organized under the laws of
the State of Delaware, differences exist between various provisions of their
certificates of incorporation and by-laws. After the merger, Nabors' Restated
Certificate of Incorporation and Restated By-Laws will govern the rights of the
former stockholders of Bayard who receive shares of Nabors common stock.
<TABLE>
<CAPTION>
NABORS BAYARD
------ ------
<S> <C> <C>
(1) Stockholder Action by Stockholder action may be taken by Stockholders may not act by written
Unanimous Written unanimous written consent instead of an consent instead of a meeting. Such
Consent annual or special meeting. provision may be amended only upon the
affirmative vote of holders of at least
four-fifths of the voting stock.
(2) Special Meeting of Must be held upon written demand of May be proposed and held only upon
Stockholders holders of at least 50% of all votes written demand of the board of
entitled to vote on any issue to be directors.
considered at the proposed special
meeting.
(3) Amendment of Charter and Any amendment to Nabors' Restated The affirmative vote of a majority of
By-Laws Certificate of Incorporation would the shares of voting stock is required
require the affirmative vote of a to amend Bayard's Restated Certificate
majority of the shares of voting stock. of Incorporation, except that the
Directors and stockholders possess the affirmative vote of the holders of at
power to adopt, amend or repeal the least two-thirds of the voting stock is
By-Laws upon the affirmative vote of a required to change the provisions of
majority of the board or upon the Bayard's Restated Certificate of
affirmative vote of the holders of a Incorporation providing that: (1) a
majority of the voting stock. majority of the Bayard Board may adopt,
amend or repeal the Bylaws; (2) the
Bayard Board may designate committees;
(3) the stockholders shall have no power
to appoint or remove directors as
members of committees nor to abrogate
the power of the Bayard Board to
establish committees; (4) stockholders
shall have no power to elect or remove
officers nor to abrogate the power of
the board to elect and remove officers;
and (5) the directors are indemnified
for breach of fiduciary duties. Bayard's
Bylaws may be altered, amended, or
repealed by the Bayard Board or upon the
affirmative vote of the holders of at
least two-thirds of the voting stock.
(4) Number of Directors The number of directors shall be no more The number of directors shall be no more
than 11 nor fewer than five, and the than 21 nor fewer than three, and the
Nabors Board shall be divided as evenly affirmative vote of the holders of at
as possible into three staggered least two- thirds of the voting stock is
classes, with directors in each class to required to change this provision of
be elected every three years. Bayard's Restated Certificate of
Incorporation. Bayard does not have a
staggered board.
(5) Removal of Directors Under the Delaware General Corporation Bayard's Amended and Restated Bylaws
Law, directors sitting on a classified provide that no director shall be
board may be removed only with cause and removed from office except for cause and
on an affirmative vote by the holders of by an affirmative vote of the holders of
a majority of shares entitled to vote at at least two- thirds of the shares
an election of directors. entitled to vote at an election of
directors.
</TABLE>
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<TABLE>
<CAPTION>
NABORS BAYARD
------ ------
<S> <C> <C>
(6) Rights Agreement Nabors has not adopted a stockholder Bayard adopted a stockholder rights plan
rights plan. in August 1998. Under certain
circumstances, the Bayard rights
agreement will entitle the holder of
Rights to purchase either Bayard common
stock or the stock of a potential
acquiror at a substantially reduced
price. The Bayard rights agreement is
described in more detail below.
(7) Stockholder Approval of Nabors has elected not to be governed by Bayard's Restated Certificate of
Business Combinations the anti-takeover provisions of Section Incorporation provides that when certain
203 of the Delaware General Corporation large transactions with Bayard involve
Law, entitled "Business Combinations either a "Related Person," one who holds
with Interested Stockholders." 10% or more of the voting stock, or an
affiliate of a Related Person, the
affirmative vote of holders of at least
four-fifths of the voting stock, and the
affirmative vote of holders of
two-thirds of the voting stock not held
by any Related Person, are required to
approve the transaction. These
provisions do not apply to transactions
which were approved by the Bayard Board
before or after the Related Person
acquired such status. In order to change
these provisions, the affirmative vote
of holders of at least 80% of the voting
stock is required. The effect of these
provisions of Bayard's Restated
Certificate of Incorporation is to
provide greater protection from
takeovers than that provided by Section
203 of the Delaware General Corporation
Law alone, to which Bayard is also
subject.
</TABLE>
BAYARD RIGHTS AGREEMENT
On August 21, 1998, Bayard executed the Bayard rights agreement and
declared a dividend of one Right to purchase preferred stock for each
outstanding share of Bayard common stock, to stockholders of record at the close
of business on September 1, 1998. Each Right entitles the registered holder to
purchase from Bayard a unit consisting of one one-hundredth of a share of Series
A Junior Participating Preferred Stock, at a purchase price of $30 per such
fractional share, subject to adjustment.
The Rights will separate from Bayard common stock and a "distribution date"
will occur, with certain exceptions, upon the earlier of:
- ten days following a public announcement that a person or group of
affiliated or associated persons (an "acquiring person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of Bayard common stock; or
- ten business days following the commencement of a tender offer or
exchange offer that would result in a person's becoming an acquiring
person.
The Rights are not exercisable until the distribution date and will expire at
the close of business on August 21, 2008, unless earlier redeemed or exchanged
by Bayard.
If a person becomes an acquiring person (a "Flip-In Event"), each holder of
a Right, other than an acquiring person, will have the right to receive, upon
exercise of such Right, a number of shares of Bayard common stock having a
current market price equal to two times the exercise price of the Right. If
Bayard is acquired in a merger or other business combination transaction, or 50%
or more of Bayard's assets or earning power is sold or transferred (a "Flip-Over
Event"), each holder of a Right, other than an acquiring person, shall have the
right to receive, upon exercise, a number of shares of common stock of
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the acquiring company having a current market price equal to two times the
exercise price of the Right. Nevertheless, these rights will not accrue if the
Bayard Board approves the triggering transaction.
At any time until ten days following the first date of public announcement
of the occurrence of a Flip-In Event, Bayard may redeem the Rights in whole, but
not in part, at a price of $0.01 per Right, payable, at Bayard's option, in
cash, shares of Bayard common stock or other consideration. Under certain
circumstances set forth in the Bayard rights agreement, redemption may only be
made if a majority of the Bayard Board is composed of directors that are
independent of any acquiring person. Immediately upon the effectiveness of the
action of the Bayard Board ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
$0.01 redemption price.
At any time after the occurrence of a Flip-In Event, and before a person's
becoming the beneficial owner of 50% or more of the shares of Bayard common
stock then outstanding or the occurrence of a Flip-Over Event, Bayard, if a
majority of the Bayard Board is composed of directors independent of any
acquiring person, may exchange the Rights, other than Rights of an acquiring
person, in whole or in part, at an exchange ratio of one share of Bayard common
stock per Right, subject to adjustment.
On October 19, 1998, Bayard entered into an amendment to the Bayard rights
agreement. Under the terms of the amendment, Nabors, or any of its affiliates,
shall not become an acquiring person unless it becomes the beneficial owner of
at least 20% of the outstanding shares of Bayard common stock. In addition, no
person shall become the beneficial owner of shares of Bayard common stock held
by others as a result of the execution of the stockholder agreements. The Bayard
rights agreement was also amended to provide that it shall not apply to or be
affected by the execution or performance of the merger agreement, the stock
option agreement, the stockholder agreements, or any other transaction
contemplated by those agreements. See "The Merger Agreement and Related
Agreements -- Amendment of Bayard Rights Agreement."
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NABORS' YEAR 2000 COMPLIANCE PROGRAM
Background. The Y2K problem refers to the fact that a number of computers,
computer programs and other equipment with embedded chips or processors,
referred to collectively as "systems," in use today use two digits rather than
four digits to define the applicable year. Any systems that are date sensitive
may recognize a date of "00" as the year 1900 rather than the year 2000. This
could result in miscalculations or system failures causing disruptions of
operations, as well as potentially exposing Nabors to third party liability.
Y2K Compliance Program. Nabors has initiated a Y2K compliance program to
ensure that all of the critical systems and processes that are under its direct
control remain functional. Nabors has organized a task force of key employees
and engaged an outside consultant to assist in the management of its Y2K
compliance program. Nabors' Y2K compliance program will focus on Nabors' systems
as well as the systems of key third party service providers, product suppliers
and customers. The first phase of the program consists of inventorying or
identifying all systems. The identified systems will then be prioritized and all
critical systems will be assessed for Y2K compliance. Systems will be remediated
or replaced as necessary and contingency plans will be developed if deemed
appropriate. Nabors is currently in the inventory and assessment phases of the
program, which it expects to complete by March 31, 1999, with the entire program
being completed well in advance of the Year 2000.
Critical Systems. The systems that are critical to Nabors' operations
include both its accounting and administrative systems and its operational
systems. Upgrades to a number of Nabors' accounting and administrative systems
in the ordinary course of business have had the added benefit of resolving
certain Y2K compliance issues. Accordingly, Nabors believes its critical
accounting and administrative systems, which consists primarily of computer
hardware and software, to be substantially Y2K compliant. Nabors' critical
operational systems consist primarily of systems in use on Nabors' drilling
rigs. Nabors is currently performing an inventory of each drilling rig's
critical systems and is in the process of assessing these systems for Y2K
compliance. Currently, Nabors is not in a position to reasonably predict the
likely worst case Y2K scenario for its drilling rigs, but expects to be able to
do so following the completion of its drilling rig assessment.
Key Third Parties. Third parties that are key to Nabors' operations include
suppliers that provide capital equipment and other supplies and services
essential to the operation of Nabors' drilling rigs or business, and customers
that provide a source of revenue and cash flow to Nabors. Any significant Y2K
disruptions of Nabors' key suppliers and customers could adversely impact
Nabors' financial condition, results of operations or cash flows. Nabors is
directly contacting key suppliers and customers to determine the state of their
Y2K readiness, and is reviewing posted information of various suppliers in
assessing its own Y2K compliance. Because Nabors must rely on representations
made by key third parties with respect to their state of Y2K readiness, it
cannot guarantee that all of the Systems of key third parties that are relied
upon by Nabors will remain functional. Nabors expects to have completed
identifying and contacting all key third parties with respect to their Y2K
readiness by March 31, 1999.
Costs. To date, the incremental costs incurred by Nabors that relate solely
to the Y2K compliance program have been minimal. These costs are exclusive of
upgrades made to Nabors' systems in the ordinary course of business and consist
primarily of fees paid to an outside consultant and internal employee time.
Based upon Nabors' current assessments, the costs to complete Nabors' Y2K
compliance program will not have a material effect on Nabors' financial
condition, results of operations or cash flows. All current and future costs
related to Nabors' Y2K compliance program have been and are expected to be
funded with cash generated from Nabors' operations.
Risks. There are numerous uncertainties that make the ultimate impact of
Y2K disruptions in the United States or other countries where Nabors operates
difficult to predict. While Nabors will obtain representations from key third
parties with respect to their Y2K readiness, there will be certain Systems or
processes relied on by Nabors that are outside of Nabors' control. The failure
by key third parties to correct their Y2K issues could adversely effect Nabors.
Additionally, Nabors could be unsuccessful in identifying and remediating or
replacing all of its non-compliant systems, and as such, Nabors' financial
88
<PAGE> 94
condition, results of operations and cash flows could be materially impacted.
While Nabors does not currently anticipate any catastrophic system failures, no
assurances can be made that such failures will not ultimately occur.
Contingency Plans. If during the course of Nabors' assessment of its
critical systems, it is determined that the risk of Y2K disruptions is
significant, contingency plans will be developed as appropriate. Such plans
might include the use of alternative service providers or product suppliers.
Currently, Nabors does not have any contingency plans in place based on current
Y2K readiness assessments.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP serves as Bayard's independent auditors. A
representative of PricewaterhouseCoopers LLP will be at the special meeting to
answer questions by stockholders and will have the opportunity to make a
statement if so desired.
OTHER MATTERS
The Bayard Board knows of no matter to be acted upon at the special meeting
other than the adoption of the merger agreement. However, if any other matters
are properly brought before the special meeting, the persons named on the
accompanying form of proxy card as proxies by the holders of Bayard common stock
will vote thereon in accordance with their best judgment.
STOCKHOLDER PROPOSALS
The 1999 Annual Meeting of Stockholders of Bayard will be held only if the
merger is not consummated. In order to be considered for inclusion in the proxy
statement for the 1999 Annual Meeting of Stockholders of Bayard, stockholder
proposals intended to be presented at such meeting and included in such proxy
statement under Rule 14a-8 of the Securities Exchange Act of 1934 must have been
received by Bayard at its principal executive offices, Attention: Secretary, on
or before December 11, 1998. Notice of a stockholder proposal intended to be
presented at such meeting but not included in such proxy statement under Rule
14a-8 under the Securities Exchange Act of 1934 must be received by Bayard at
its principal executive offices, Attention: Secretary, no later than 60 days
before the 1999 Annual Meeting or, if later, ten days after the first public
notice of the 1999 Annual Meeting is sent to the stockholders of Bayard in order
to be considered "timely" under Rule 14a-4(c) of the Commission. Under the rules
of the Commission, if a stockholder fails to notify Bayard of its intention to
bring a non-Rule 14a-8 proposal before the 1999 Annual Meeting on or before such
date, then the proxy card solicited by the Bayard Board may grant discretionary
voting authority to the proxies named in the Bayard Board's proxy card with
respect to the non-Rule 14a-8 proposal.
LEGAL MATTERS
The validity of the shares of Nabors common stock offered to the
stockholders of Bayard by this document will be passed upon by Baker & McKenzie,
New York, New York. Anthony G. Petrello, the President, Chief Operating Officer
and a director of Nabors, was a partner of and is currently of counsel to Baker
& McKenzie. Certain United States tax consequences of the merger will be passed
upon for Bayard by Baker & Botts, L.L.P., Dallas, Texas.
89
<PAGE> 95
EXPERTS
The financial statements of Bayard as of December 31, 1996 and for each of
the two years in the period ended December 31, 1996 included in this document
have been audited by Grant Thornton LLP, independent public accountants, as
stated in their reports thereon appearing elsewhere in this document, and are so
included in reliance on such reports given upon the authority of that firm as
experts in auditing and accounting. The financial statements of Bayard as of
December 31, 1997 and for the fiscal year then ended, the financial statements
of Trend as of December 31, 1995 and 1996 and for the three fiscal years ended
December 31, 1996, 1995, and 1994, and the financial statements of Ward as of
December 31, 1996 and for the fiscal year then ended, included in this document
have been included in this document in reliance on the report of
PricewaterhouseCoopers LLP, independent public accountants, given upon the
authority of that firm as experts in auditing and accounting. The financial
statements of Bonray as of December 31, 1996 and June 30, 1996 and for the
six-month period ended December 31, 1996 and years ended June 30, 1996 and 1995
included in this document have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere in this
document, and are included in reliance on such report given upon the authority
of such firm as experts in accounting and auditing.
In preparation for Bayard's initial public offering, the Bayard Board
appointed PricewaterhouseCoopers LLP as auditors for Bayard's financial
statements for the six months ended June 30, 1997, and for the year ending
December 31, 1997. During the period Grant Thornton LLP was engaged by Bayard
and up to and including March 7, 1997, the date of the PricewaterhouseCoopers
LLP engagement, there were no disagreements with Grant Thornton LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure and there were no "reportable events" as the term is
defined under the Securities Act of 1933. The audit reports previously issued by
Grant Thornton LLP with respect to Bayard's financial statements did not contain
an adverse opinion or a disclaimer of opinion, nor were such reports qualified
or modified as to uncertainty, audit scope or accounting principles.
The consolidated financial statements of Nabors incorporated in this
document by reference to Nabors' Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 have been audited by PricewaterhouseCoopers LLP,
independent auditors, as stated in their report, which is incorporated by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ KIRK K. WAITE
Kirk K. Waite
Secretary
February 16, 1999
90
<PAGE> 96
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BAYARD DRILLING
TECHNOLOGIES, INC.
Report of Independent Certified Public Accountants........ F-2
Report of Independent Accountants......................... F-3
Balance Sheets as of December 31, 1996 and 1997, and
September 30, 1998..................................... F-4
Statements of Operations for the years ended December 31,
1995, 1996 and 1997, and nine months ended September
30, 1997 and 1998...................................... F-5
Statements of Equity (Deficit) for the years ended
December 31, 1995, 1996 and 1997 and nine months ended
September 30, 1998..................................... F-6
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and nine months ended September
30, 1997 and 1998...................................... F-7
Notes to Financial Statements............................. F-9
FINANCIAL STATEMENTS OF TREND DRILLING COMPANY
Report of Independent Accountants......................... F-25
Balance Sheets as of December 31, 1995 and 1996 and as of
April 30, 1997......................................... F-26
Statements of Operations for the years ended December 31,
1994, 1995 and 1996 and four months ended April 30,
1997 (unaudited)....................................... F-27
Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996....................... F-28
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and four months ended April 30,
1997 (unaudited)....................................... F-29
Notes to the Financial Statements......................... F-30
FINANCIAL STATEMENTS OF WARD DRILLING COMPANY, INC.
Report of Independent Accountants......................... F-35
Balance Sheet as of December 31, 1996 and May 31, 1997.... F-36
Statements of Operations and Retained Earnings for the
year ended December 31, 1996 and five months ended May
31, 1997 (unaudited)................................... F-37
Statements of Cash Flows for the year ended December 31,
1996 and five months ended May 31, 1997 (unaudited).... F-38
Notes to Financial Statements............................. F-39
FINANCIAL STATEMENTS OF BONRAY DRILLING CORPORATION
Report of Independent Auditors............................ F-42
Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996 and June 30, 1996.................... F-43
Statements of Operations and Accumulated Deficit for the
nine-month period ended September 30, 1997 (unaudited)
and for the six-month period ended December 31, 1996
and years ended June 30, 1996 and 1995................. F-44
Statements of Cash Flows for the nine-month period ended
September 30, 1997 (unaudited) and for the six-month
period ended December 31, 1996 and years ended June 30,
1996 and 1995.......................................... F-45
Notes to Financial Statements............................. F-46
</TABLE>
F-1
<PAGE> 97
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheet of Bayard Drilling
Technologies, Inc. (Note A), as of December 31, 1996, and the related statements
of operations, equity (deficit), and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bayard Drilling
Technologies, Inc., as of December 31, 1996, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
January 20, 1997
F-2
<PAGE> 98
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheet of Bayard Drilling
Technologies, Inc., as of December 31, 1997, and the related statements of
operations, equity, and cash flows for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bayard Drilling
Technologies, Inc., as of December 31, 1997 and the results of its operations
and its cash flows for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
February 19, 1998
F-3
<PAGE> 99
BAYARD DRILLING TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 4,963 $ 49,302 $ 19,148
Restricted investments.................................... -- 880 525
Accounts receivable....................................... 286 19,491 15,750
Accounts receivable -- affiliate.......................... 798 -- --
Other current assets...................................... 1 538 3,702
------- -------- --------
Total current assets.............................. 6,048 70,211 39,125
Property, plant and equipment, net.......................... 26,973 155,673 283,659
Goodwill, net of accumulated amortization of $375 at
December 31, 1997 and $1,029 at September 30, 1998........ -- 12,704 12,050
Other assets................................................ 1,652 1,900 5,008
------- -------- --------
Total assets...................................... $34,673 $240,488 $339,842
======= ======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 409 $ 8,246 $ 13,596
Accounts payable -- affiliate............................. 412 494 415
Accrued liabilities....................................... 253 5,067 11,696
Current portion of long-term debt......................... 947 7,450 6,000
------- -------- --------
Total current liabilities......................... 2,021 21,257 31,707
------- -------- --------
Deferred income tax liabilities............................. 348 13,554 14,085
------- -------- --------
Other long term liabilities................................. -- 2,055 1,572
------- -------- --------
Long-term debt, less current maturities..................... 6,053 23,069 13,222
------- -------- --------
Subordinated notes, net of debt discount of $429 at December
31, 1997.................................................. -- 2,091 --
------- -------- --------
Notes payable, 11% Senior notes due 2005.................... -- -- 100,000
Commitments and Contingencies -- Note G, H & K
STOCKHOLDERS EQUITY:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized; none issued or outstanding................. -- -- --
Common stock, $0.01 par value, 100,000,000 shares
authorized; 5,600,000 shares issued and outstanding at
December 31, 1996; 18,183,945 at December 31, 1997; and
18,193,945 at September 30, 1998....................... 56 182 182
Additional paid-in capital (net of deferred compensation of
$258 at December 31, 1997 and $219 at September 30,
1998)..................................................... 26,229 180,400 180,489
Accumulated deficit......................................... (34) (2,120) (1,415)
------- -------- --------
Total equity...................................... 26,251 178,462 179,256
------- -------- --------
Total liabilities and equity...................... $34,673 $240,488 $339,842
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 100
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1995 1996 1997 1997 1998
------ ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Drilling.......................................... $5,491 $8,995 $39,165 $33,214 $64,802
Drilling -- affiliate............................. 1,914 798 16,582 -- --
Other............................................. 303 60 -- -- --
------ ------ ------- ------- -------
Total revenues............................. 7,708 9,853 55,747 33,214 64,802
------ ------ ------- ------- -------
COSTS AND EXPENSES:
Drilling.......................................... 6,075 7,653 40,705 24,246 48,447
General and administrative........................ 880 658 1,868 1,181 2,374
Depreciation and amortization..................... 791 1,126 7,943 4,918 10,352
Other............................................. 47 46 -- -- --
------ ------ ------- ------- -------
Total costs and expenses................... 7,793 9,483 50,516 30,345 61,173
------ ------ ------- ------- -------
Operating income (loss).................... (85) 370 5,231 2,869 3,629
------ ------ ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense.................................. (3) (11) (3,065) (2,172) (3,392)
Interest income................................... -- -- 597 68 1,217
Gain (loss) on sale of assets..................... (131) 54 544 303 354
Other............................................. (3) 17 37 5 (7)
------ ------ ------- ------- -------
Total other income (expense)............... (137) 60 (1,887) (1,796) (1,828)
------ ------ ------- ------- -------
Earnings (loss) before income taxes and
extraordinary item................................ (222) 430 3,344 1,073 1,801
Income tax provision -- deferred.................... -- 17 1,428 410 758
------ ------ ------- ------- -------
Net income (loss) before extraordinary item......... (222) 413 1,916 663 1,043
Extraordinary loss.................................. -- -- (4,002) -- (338)
------ ------ ------- ------- -------
Net earnings (loss)................................. $ (222) $ 413 $(2,086) $ 663 $ 705
====== ====== ======= ======= =======
EARNINGS (LOSS) PER SHARE:
Basic:
Before extraordinary item....................... $ .21 $ .10 $ .06
======= ======= =======
Extraordinary item.............................. $ (.44) -- (.02)
======= ======= =======
Net earnings (loss)............................. $ (.23) $ .10 $ .04
======= ======= =======
Diluted:
Before extraordinary item....................... $ .17 $ .07 $ .06
======= ======= =======
Extraordinary item.............................. $ (.35) -- (.02)
======= ======= =======
Net earnings (loss)............................. $ (.18) $ .07 $ .04
======= ======= =======
Weighted average common shares outstanding, basic... 5,600 5,600 9,064 6,679 18,191
====== ====== ======= ======= =======
Weighted average common shares outstanding,
diluted........................................... 5,600 5,749 11,500 9,607 18,474
====== ====== ======= ======= =======
PRO FORMA INFORMATION:
Additional income tax expense..................... -- 146
------ ------
Pro forma net earnings (loss)..................... $ (222) $ 267
------ ------
Pro forma earnings (loss) per share, basic and
diluted......................................... $ (.04) $ .05
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 101
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
----------------------------------------------------
PARTNERS ADDITIONAL
CAPITAL COMMON PAID-IN DEFERRED RETAINED
(DEFICIT) STOCK CAPITAL COST EARNINGS TOTAL
--------- ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... $ (276) $ -- $ -- $ -- $ -- $ --
Net earnings through date of
corporate capitalization...... 447 -- -- -- -- --
Net increase in equity arising
from affiliate transactions... 5,285 -- -- -- -- --
Issuance of stock in corporate
capitalization................ (5,456) 20 5,436 -- -- 5,456
Sale of stock.................... -- 20 9,980 -- -- 10,000
Issuance of stock options and
warrants for drilling
agreements and debt........... -- -- 1,319 -- -- 1,319
Issuance of stock and options for
property and equipment........ -- 16 9,494 -- -- 9,510
Net loss from date of corporate
capitalization to December 31,
1996.......................... -- -- -- -- (34) (34)
------- ---- -------- ----- ------- --------
Balance at December 31, 1996....... -- 56 26,229 -- (34) 26,251
Net loss......................... -- -- -- -- (2,086) (2,086)
Issuance of stock options to
employees..................... -- -- 60 (53) -- 7
Sale of stock.................... -- 89 107,020 -- -- 107,109
Issuance of stock options and
warrants...................... -- -- 5,068 -- -- 5,068
Executive compensation
agreements.................... -- -- 250 (205) -- 45
Issuance of stock for
acquisitions.................. -- 37 42,031 -- -- 42,068
------- ---- -------- ----- ------- --------
Balance at December 31, 1997....... -- 182 180,658 (258) (2,120) 178,462
Net income (unaudited)........... -- -- -- -- 705 705
Exercise stock options
(unaudited)................... -- -- 50 -- -- 50
Executive compensation agreements
(unaudited)................... -- -- -- 39 -- 39
------- ---- -------- ----- ------- --------
Balance at September 30, 1998
(unaudited)...................... $ -- $182 $180,708 $(219) $(1,415) $179,256
======= ==== ======== ===== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 102
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................... $ (222) $ 413 $ (2,086) $ 663 $ 705
Adjustments to reconcile net earnings (loss)
to net cash (used in) provided by
operating activities --
Depreciation and amortization............. 791 1,126 7,943 4,918 10,352
(Gain) loss on sale of assets............. 131 (54) (544) (303) (354)
Extraordinary loss........................ -- -- 4,002 -- --
Compensation expense...................... -- -- 52 21 39
Deferred income taxes..................... -- 17 1,428 410 758
Change in assets and liabilities, net of
effects of affiliate transactions --
Decrease (increase) in accounts
receivable........................... 242 (2,059) (18,407) (12,526) 3,741
Increase in prepaid expenses........... -- -- (537) -- --
Decrease (increase) in other assets.... (6) (185) 513 (1,030) (3,590)
Increase (decrease) in accrued
liabilities.......................... (237) 251 4,814 3,564 6,629
Increase (decrease) in accounts
payable.............................. (389) (383) 1,432 12,895 5,350
Increase (decrease) in other
liabilities.......................... -- -- -- -- (483)
Increase (decrease) in payable to
affiliate............................ -- 412 82 -- (79)
------- -------- -------- -------- ---------
Net cash (used in) provided by
operating activities............... 310 (462) (1,308) 8,612 23,068
------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment....... (2,088) (10,578) (60,924) (50,454) (138,017)
Acquisition of businesses................... -- -- (26,056) (26,056) --
Proceeds from sale of assets................ 378 137 1,390 781 688
(Purchase) proceeds of investments.......... -- -- (880) (730) 355
------- -------- -------- -------- ---------
Net cash used in investing
activities......................... (1,710) (10,441) (86,470) (76,459) (136,974)
------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made to affiliates................. (8,828) (19,719) -- -- --
Advances received from affiliates........... 10,228 18,791 -- -- --
Proceeds from borrowings.................... -- 7,000 49,780 47,944 --
Proceeds from exercise of options........... -- -- -- -- 50
Net proceeds from issuance of stock......... -- 10,000 107,109 11,230 --
Proceeds from issuance of notes, net of
issuance costs............................ -- -- -- -- 97,450
Debt issuance costs......................... -- (206) (761) -- --
Payments on long-term debt.................. -- -- (24,011) (4,114) (13,748)
Payments under line of credit............... -- -- (8,701) -- --
Borrowings under line of credit............. -- -- 8,701 7,906 --
------- -------- -------- -------- ---------
Net cash provided by (used in) financing
activities............................. 1,400 15,866 132,117 62,966 83,752
------- -------- -------- -------- ---------
Net change in cash.......................... -- 4,963 44,339 (4,881) (30,154)
Cash at beginning of period................. -- -- 4,963 4,963 49,302
------- -------- -------- -------- ---------
Cash at end of period....................... $ -- $ 4,963 $ 49,302 $ 82 $ 19,148
======= ======== ======== ======== =========
Cash paid during the period for interest.... $ -- $ -- $ 2,854 $ 2,275 $ 2,110
Cash paid during the period for income
taxes..................................... $ -- $ -- $ -- $ -- $ --
======= ======== ======== ======== =========
</TABLE>
Continued
F-7
<PAGE> 103
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Continued
Supplemental noncash activity:
During 1995 an affiliate transferred drilling equipment to the Company at
the affiliate's basis totaling $173, net of accumulated depreciation of $1,306,
which has been reflected as an increase in payable to affiliate. Additionally,
the Company acquired property and equipment through trade payables totaling
$1,180.
During 1996 the Company acquired property and equipment totaling $9,841
through the issuance of stock and options and assumed a net deferred income tax
liability of $331. The Company acquired property and equipment through trade
payables and payables to affiliates totaling $1,390. The Company transferred
property and equipment totaling $29, net of accumulated depreciation of $1,254
to an affiliate which has been reflected as a decrease in payables to
affiliates. The Company issued stock options and warrants in exchange for
certain drilling agreements and debt. The stock options were valued at $1,100
and the warrants associated with the debt were valued at $219.
Additionally in 1996, the Company transferred the following assets and
liabilities to affiliates which resulted in a net increase in equity at the time
of corporate capitalization, effective December 1, 1996.
<TABLE>
<S> <C>
Accounts receivable......................................... $ 2,667
Other assets................................................ 17
Cash........................................................ 9,252
Accounts payable and accrued liabilities.................... (1,799)
Payable to affiliates....................................... (15,422)
--------
$ (5,285)
========
</TABLE>
During 1997 the Company acquired property and equipment through the
issuance of stock and options for $41,510 and through the issuance of trade
payables of $6,405. See -- Note "C" for further detail on such activity.
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 104
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
NOTE A -- NATURE OF OPERATIONS
Bayard Drilling Technologies, Inc. together with its predecessor, (the
"Company"), a Delaware corporation, is the successor to the drilling operations
of Anadarko Drilling Company ("Anadarko"), which began drilling operations in
1980. The Company provides land-based contract drilling services to major and
independent oil and gas companies in the Mid-Continent and Gulf Coast regions of
the United States.
Beginning in October 1996, AnSon Partners Limited Partnership ("APLP")
initiated a series of transactions among its wholly owned affiliates, Anadarko,
a partnership, and Bayard Drilling Company ("BDC"), a corporation, and the
Company. These series of transactions resulted in the corporate capitalization
of the Company in December 1996 with net assets, primarily drilling rigs,
previously owned by Anadarko. Such transactions were accounted for as a
reorganization of entities under common control.
NOTE B -- SUMMARY OF ACCOUNTING POLICIES
The summary of significant accounting policies applied in the preparation
of the accompanying financial statements follows.
1. BASIS OF PRESENTATION AND CONSOLIDATION
The financial statements and information for periods prior to December 1,
1996 represent those of the predecessor. The consolidated financial statements
for periods after December 31, 1996 include the accounts of the Company and its
wholly owned subsidiaries, Trend Drilling Company ("Trend") and WD Equipment,
L.L.C. and Bonray Drilling Corporation. All significant intercompany accounts
and transactions have been eliminated.
2. CASH
The Company considers all cash and investments with an original maturity of
90 days or less to be cash equivalents. The Company maintains its cash in a bank
deposit account which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. At December 31, 1997
and September 30, 1998, the Company had cash and cash equivalents in or at four
and three financial institutions respectively, where the balance exceeded
federally insured limits, in total by approximately $48.9 and $19.4 million,
respectively.
3. RESTRICTED INVESTMENTS
Restricted investments consist of certificates of deposits pledged to state
insurance departments and insurance companies to support payment of workers
compensation claims.
4. CONCENTRATION OF CREDIT RISK
The primary market for the Company's services are independent oil and gas
companies whose level of activities are related to, among other things, oil and
gas prices. The Company performs ongoing credit evaluations of its customers and
provides for potential credit losses when necessary. No allowance was required
at December 31, 1997, 1996 or 1995. At December 31, 1997 and September 30, 1998,
approximately 53% and 48%, respectively, of the Company's trade receivables and
over 63% and 48%, respectively, of total revenues were derived from the
Company's five largest customers in terms of total revenues.
F-9
<PAGE> 105
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, reduced by provisions to
recognize economic impairment in value when management determines that such
impairment has occurred. Drilling equipment is depreciated using the declining
balance method (which approximates straight line) over the estimated useful
lives from five to fifteen years. Other property and equipment are depreciated
on the same basis over estimated useful lives from three to ten years.
Refurbishments and upgrades of drilling equipment are capitalized if such
expenditures are significant and extend the lives of the equipment. Maintenance
and repairs are expensed as incurred. When assets are sold, retired or disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and the gain or loss is recognized.
It is the Company's policy to capitalize interest on construction costs for
rig refurbishments during the period in which those costs are incurred. The
Company incurred interest costs of approximately $3.6 million during 1997 and $5
million for the nine months ended September 30, 1998 of which approximately
$565,000 and $1.6 million, respectively, was capitalized in property and
equipment for rig construction. No interest costs were capitalized in 1996 or
1995.
6. REVENUE RECOGNITION
Revenues generated from the Company's dayrate drilling contracts are
recognized as services are performed and revenues generated from the Company's
footage drilling contracts are recognized as a percentage of completion. For all
drilling contracts under which the Company bears the risk of completion (such as
turnkey contracts) revenues and expenses are recognized using the completed
contracts method. When estimates of projected revenues and expenses indicate a
loss, the total estimated loss is accrued.
7. NET EARNINGS (LOSS) PER SHARE
Earnings per share are computed based on the weighted average number of
basic and diluted shares outstanding during the period pursuant to SFAS No. 128.
SFAS No. 128 simplifies the standards for computing earnings per share by
replacing the presentation of primary earnings per share with a presentation of
basic earnings per share and by simplifying the calculation of diluted earnings
per share. A reconciliation of the numerator and denominator used in the
calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------------------------ ------------------------------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item.......................... $1,916 $1,043
------ ------
Basic earnings per share........ 1,916 9,064 $.21 1,043 18,191 $.06
------ ---- ------
Effect of dilutive securities;
Warrants and options.......... 2,436 283
------ ------
Diluted earnings per share...... $1,916 11,500 $.17 $1,043 18,474 $.06
====== ====== ==== ====== ======
</TABLE>
Pro forma net earnings (loss) per share are presented to reflect the
provision for income taxes for periods Anadarko was a partnership.
Options to purchase 397,000 shares of common stock at $23 per share were
granted in November 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares. The options, which expire on November
4, 2003, were still outstanding at December 31, 1997.
F-10
<PAGE> 106
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Historical income taxes were not provided in the financial statements for
earnings attributable to Anadarko since the partners would pay income taxes or
receive as a deduction their distributive share of Anadarko's taxable income or
loss. The proforma income tax expense for 1996 was calculated using an effective
tax rate of 38%.
The Company uses the liability method of accounting for deferred income
taxes under SFAS No. 109, whereby deferred tax assets and liabilities are
recognized based upon differences between the financial statement and tax bases
of assets and liabilities using presently enacted tax rates. If it is more
likely than not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
9. GOODWILL AND OTHER ASSETS
Goodwill related to the acquisition of Trend and Bonray is being amortized
over fifteen years. Amortization expense of goodwill of $375,062 and $653,976,
respectively, has been recognized as of December 31, 1997 and September 30,
1998.
Other assets consist of (i) organizational costs incurred for the
organization of Bayard, (ii) debt issuance costs incurred on the term loan, and
(iii) issuance costs of the Senior Notes. Amortization expense for organization
costs is recognized over five years and debt issuance costs over the life of the
loan, which approximates five years, both on a straight-line basis. Amortization
expense of $1.4 million, $63,000 and $578,620 has been recognized for the years
ended December 31, 1997 and 1996 and for the nine months ended September 30,
1998, respectively.
On an ongoing basis, management reviews the valuation and amortization of
goodwill and other intangibles to determine possible impairment. The
recoverability of these assets is assessed by determining whether the carrying
value can be recovered from undiscounted future cash flows.
10. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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; accordingly actual results could differ from those estimates.
The Company has significant estimates for workers compensation liability due to
the retention of $500,000 per occurrence. At December 31, 1997 and 1996 and for
the nine months ended September 30, 1998, estimates for this retention were $1.7
million, $20,000 and $1.6 million, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and investments which
approximate fair value because of the short maturity of those instruments, a
payable to an affiliate which approximates fair value due to the demand nature
of this obligation, a floating rate term loan which approximates fair value
because the interest rate adjusts to the market rate, and notes payable which
approximate fair value because the interest rates on these notes reflects the
borrowing terms currently available to the Company.
12. INTERIM FINANCIAL STATEMENTS AND DISCLOSURES
In the opinion of management of Bayard Drilling Technologies, Inc.
("Bayard" or the "Company"), the unaudited interim financial statements for the
nine months ended September 30, 1998 and 1997
F-11
<PAGE> 107
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
include all adjustments, consisting of normal recurring accruals, necessary to
present fairly the Company's financial position as of September 30, 1998 and
results of operations and cash flows for the nine months ended September 30,
1998 and 1997. Results for the period ended September 30, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
13. STOCK BASED COMPENSATION
The Company applies APB Opinion 25 in accounting for its stock option
plans. Under this standard, compensation expense is only recognized for grants
of options which include an exercise price less than the market price of the
stock on the date of grant. Accordingly, based on the Company's grants for 1996,
for the year ended December 31, 1997 and for the nine months ended September 30,
1998, the Company recognized $0 and approximately $310,000 and $0, respectively,
of deferred compensation and $0 and approximately $52,000 and $39,000,
respectively, of compensation expense. For grants of options which include an
exercise price equal to or greater than the market price of the stock on the
date of grant, the Company has disclosed the pro forma effects of recording
compensation based on fair value in Note N to the financial statements as
allowed by Financial Accounting Standard No. 123 "Accounting for Stock-Based
Compensation."
NOTE C -- ACQUISITIONS
On May 1, 1997, the Company completed the acquisition of the common stock
of Trend ("Trend Acquisition") for $18 million in cash and 250,000 shares of
common stock which equates to $10.64 per share based on the appraisals of the
fair market value of the property and equipment acquired of $21,532,000. The
Company incurred costs of approximately $307,000 in connection with this
acquisition.
The Trend Acquisition was accounted for as a purchase. The following is an
analysis of the allocation of the purchase price:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 2,734
Property and equipment...................................... 21,532
Goodwill.................................................... 6,330
Current liabilities......................................... (2,265)
Long-term liabilities....................................... (1,340)
Deferred income tax liability............................... (6,330)
-------
Purchase price.............................................. $20,661
=======
</TABLE>
On May 30, 1997, the Company acquired WD Equipment, L.L.C. (which owned six
drilling rigs, but had no operations) from Ward Drilling Company, Inc. ("Ward
Acquisition") for approximately $8 million in cash and 400,000 shares of common
stock which equates to $8.95 per share based on the appraisal of the fair market
value of the assets acquired of $11,931,000. The Company also issued warrants to
purchase 200,000 shares of common stock at $10.00 per share. The warrant had an
estimated fair market value of $294,000 at the agreement closing date and was
recorded as an increase in property and equipment and additional paid in
capital.
On October 16, 1997, the Company completed the acquisition of Bonray
("Bonray Acquisition"), subject to certain working capital adjustments, for
3,015,000 shares of Common Stock, which equates to $11.86 per share based on the
appraisals of the fair market value of the property and equipment acquired of
$34,976,000.
F-12
<PAGE> 108
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bonray Acquisition was accounted for as a purchase. The following is a
preliminary analysis of the allocation of the purchase price:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 4,020
Property and equipment...................................... 34,976
Goodwill.................................................... 6,750
Current liabilities......................................... (3,162)
Long-term liabilities....................................... (74)
Deferred income tax liability............................... (6,750)
-------
Purchase price.............................................. $35,760
=======
</TABLE>
The following is the unaudited pro forma combined results of operations as
if Trend, Ward and Bonray had been acquired January 1, 1996 and 1997,
respectively (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
--------- ---------
<S> <C> <C>
Revenues.................................................... $47,952 $81,373
======= =======
Net income (loss)........................................... $(1,848) $ 3,174
======= =======
Net income (loss) per common share, basic................... $ (.33) $ .35
======= =======
Net income (loss) per common share, diluted................. $ (.32) $ .28
======= =======
</TABLE>
On June 26, 1998, the Company completed the acquisition of 25 drilling rigs
and certain related equipment and other assets from TransTexas Gas Corporation
("TransTexas") for $75 million in cash (the "TransTexas Acquisition"), which was
allocated to the cost basis of the rigs and equipment. The rigs will be
depreciated pursuant to the Company's depreciation policy. TransTexas utilized
the rigs solely for their own drilling activities and did not contract the rigs
to third parties. Therefore, there were no third party drilling revenues.
TransTexas accounted for the rigs and related costs and expenses as a cost
center. All of the acquired rigs are mechanical rigs capable of drilling to
depths of 12,000 feet or greater, with twelve of the rigs capable of drilling to
depths of 20,000 feet or greater. Four of the drilling rigs are awaiting
refurbishment when market conditions warrant. In addition, the Company and
TransTexas have entered into an Alliance Agreement that provides that for a
period of 30 months, if TransTexas engages in any land drilling activities in
Alabama, Louisiana, Mississippi, Oklahoma, New Mexico or Texas, TransTexas will
engage the Company to provide up to 15 of the Company's rigs for wells on which
TransTexas serves as operator.
F-13
<PAGE> 109
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS
DECEMBER 31, ENDED
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Drilling rigs and components........................ $42,303 $173,674 $305,354
Automobiles, trucks, and trailers................... 431 2,041 5,023
Buildings and property.............................. -- 461 2,061
Furniture, fixtures, and other...................... 7 532 777
------- -------- --------
42,741 176,708 313,215
Less accumulated depreciation....................... 15,768 21,035 29,556
------- -------- --------
$26,973 $155,673 $283,659
======= ======== ========
</TABLE>
NOTE E -- CHANGE IN ESTIMATED LIVES
Effective January 1, 1995, the Company changed the estimated remaining
lives of its drilling rigs and other related drilling equipment to 84 months
from remaining lives which ranged from 31 months to 113 months. The Company also
changed the estimated remaining life of drill collars from 20 months to 36
months. These changes were made to more closely approximate the remaining useful
lives of such assets. The effect of this change was to decrease the historical
net loss by approximately $539,000 and to reduce the pro forma net loss by
approximately $539,000 or $.05 per share (Note B(7)) for the year ended December
31, 1995.
Effective January 1, 1996, the Company changed the estimated remaining
lives of certain drilling component equipment from 84 months to 120 months and
changed the estimated remaining life of drill collars and pipe from 36 months to
60 months. After review and study by the Company, the useful lives of drilling
rigs acquired after January 1, 1996 were changed from 84 months to 144 months.
These changes were made to more closely approximate the remaining useful lives
of such assets. The effect of these changes was to increase the historical net
earnings by approximately $405,000 and to increase pro forma net earnings by
approximately $251,000, net of pro forma income taxes of $154,000, or $.02 per
share for the year ended December 31, 1996.
Effective July 1, 1997, the Company changed the estimated remaining lives
of its drilling rigs and other related drilling equipment to 180 months from
remaining lives of 144 months. These changes were made to more closely
approximate the remaining useful lives of such assets. The effect of these
changes was to increase earnings for the year ended December 31, 1997 by
approximately $505,000, net of income taxes of $310,000, or $.04 per share, on a
diluted basis.
NOTE F -- INCOME TAXES
On October 28, 1996, Anadarko conveyed its operating assets to its
wholly-owned subsidiary, BDC, which caused a change in tax status of the
drilling operations from a partnership to a taxable corporation. A deferred tax
asset was recognized for the temporary differences which existed at the date of
conveyance together with a related valuation allowance. At December 31, 1997,
the Company has net operating loss carry forwards of approximately $2 million,
of which $418,000 and $1,582,000 will expire in 2011 and 2012, respectively, if
unused.
F-14
<PAGE> 110
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense for the years ended December 31, 1995, 1996 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current................................................. $ -- $ -- $ --
Deferred................................................ -- 17 1,428
---- ---- ------
$ -- $ 17 $1,428
==== ==== ======
</TABLE>
Components of net deferred income tax liabilities are as follows:
<TABLE>
<CAPTION>
OCTOBER 28, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets (liabilities)
Operating loss carryforwards................... $ -- $ 167 $ 760
Property and equipment......................... 1,818 (515) (14,314)
Total valuation allowance...................... (1,818) -- --
------- ----- --------
Net deferred tax liabilities........... $ -- $(348) $(13,554)
======= ===== ========
</TABLE>
The Company's actual income tax expense, before extraordinary item,
differed from the federal statutory expense (based on a federal statutory rate
of 34%) for the years ended December 31, as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory
rate................................................. $(75) $ 146 $1,069
State income taxes..................................... -- -- 201
Amortization of goodwill............................... -- -- 142
Other items............................................ -- -- 16
Exclusion of partnership income taxes.................. 75 (129) --
---- ----- ------
$ -- $ 17 $1,428
==== ===== ======
</TABLE>
The Company's valuation allowance on tax assets was established October 28,
1996 due to a change in taxable status and decreased $1,818,000 during the
period from October 28, 1996 to December 31, 1996. The Company was not a taxable
entity in 1995. Effective December 1, 1996, the Company acquired assets with
deferred tax liabilities of approximately $2 million in which the purchase price
allocation resulted in the reduction of the Company's tax asset valuation
allowance of approximately $1,724,000. In 1997 the Company acquired assets with
deferred tax liabilities of approximately $13,080,000, which eliminated the
Company's tax asset valuation.
NOTE G -- LONG-TERM DEBT AND SUBORDINATED NOTES
Long-term debt at December 31, 1996 consisted of borrowings under loan
agreements (the "Loan Agreements") which provide for a term loan (the "Term
Loan") and a revolving loan (the "Revolving Loan"). The Term Loan of $7,000,000
bore interest at the Company's choice of LIBOR plus 4.25% (9.65% at December 31,
1996) or the prime rate of Chase Manhattan Bank, N.A. and requires monthly
payments of principal and interest in amounts sufficient to repay borrowings at
maturity on March 31, 2002. The Loan Agreements permit borrowings to a maximum
of $20 million under the Term Loan if defined collateral provisions are met. The
loan was collateralized by drilling equipment. The Loan Agreements also permit
borrowings up to $4 million under the Revolving Loan through December 31, 1998
subject to a $2 million limitation if the borrowings under the Term Loan exceed
$17 million.
F-15
<PAGE> 111
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Starting in 1997, the Loan Agreements require the maintenance of defined
collateral values, cash flow and liquidity ratios, financial reporting
requirements, and the maintenance of total liabilities to tangible net worth not
greater than 1.25 and imposes certain limitations on capital expenditures and
incurrence of additional debt.
In May 1997, the Company amended and increased the availability under the
Loan Agreements. The Term Loan provides the Company up to $30.5 million for the
purchase of additional land drilling rigs, the refurbishment of such rigs and
equipment and for working capital purposes. The Revolving Loan provides the
revolving credit loans of up to $10 million ($2 million of which is available
for the issuance of letters of credit) for general corporate purposes. Amounts
outstanding under the Revolving Loan (none at December 31, 1997) bear interest
based on Fleet National Bank's prime rate plus 1.5% (approximately 10% at
December 31) and mature in April 2000. Amounts outstanding under the Term Loan
of approximately $27.1 million at December 31, 1997, bear interest, at the
election of the Company, at floating rates equal to Chase Manhattan Bank's prime
rate plus 2.0% or LIBOR plus 4.25% (approximately 10% at December 31) and mature
in March 2002. The Loan Agreements are collateralized by substantially all of
the assets of the Company, including drilling rigs, equipment and drilling
contracts, and contain customary restrictive covenants (including covenants
restricting the ability of the Company to pay dividends or encumber assets) and
an affirmative covenant to maintain Total Available Liquidity (as defined in the
Loan Agreements) of at least $4.5 million through December 31, 1997 and $3
million through December 31, 1998. Pursuant to the Loan Agreements, the Company
must maintain certain financial ratios, including a Cash Flow Coverage ratio (as
defined in the Loan Agreements) of at least 1.25 to 1 until December 1997, 1.5
to 1 in 1998 and 1.75 to 1 thereafter, and a ratio of Total Liabilities (as
defined in the Loan Agreements) to Tangible Net Worth no greater than 1.25 to 1
in 1997 and 1 to 1 in 1998. Under the Loan Agreements the Company is obligated
to pay certain fees, including an annual commitment fee in an amount equal to
0.5% of the unused portion of the commitment.
Additionally, the Company issued Subordinated Notes due May 1, 2003 in the
original principal amounts of $18 million and $2.52 million (the "Subordinated
Notes") to Chesapeake Energy Corporation ("Chesapeake") and Energy Spectrum
Partners LP ("Energy Spectrum"), respectively. The Subordinated Notes bear
interest at either (i) 11% per annum, payable in cash or (ii) 12.875% per annum,
payable in the form of additional Subordinated Notes, which interest is payable
quarterly in arrears. On each quarterly interest payment date, the Company may
make an election as to the interest rate to be applied for the previous quarter.
The Subordinated Notes are redeemable, solely at the option of the Company, in
whole or in part, at any time after May 31, 1998 at varying redemption prices.
The Company must offer to redeem the Subordinated Notes upon the occurrence of
certain events constituting a "Change of Control" (as defined in the
Subordinated Notes) at a redemption price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
redemption. The Subordinated Notes are convertible into Common Stock at the
option of the Company, in whole or in part, in conjunction with a "Convertible
Event" (as defined in the Subordinated Notes), which includes certain
underwritten public offerings (including the Initial Public Offering), mergers,
consolidations and other business combination transactions. The Subordinated
Notes are general unsecured subordinated obligations of the Company that are
subordinated in rights of payment to all existing and future senior indebtedness
of the Company, pari passu with all existing and future subordinated
indebtedness of the Company and senior in right of payment to all future junior
subordinated indebtedness of the Company. At December 31, 1997, the amount of
Subordinated Notes outstanding was approximately $2.5 million as the $18 million
Subordinated Note to Chesapeake was extinguished in November 1997 with proceeds
from the Initial Public Offering. See Note "J" for further discussion on the
discount that was recorded related to this subordinate debt.
The Company also has three notes totaling approximately $3.4 million at
December 31, 1997 and $2.5 million at September 30, 1998, with a capital
financing corporation. The debt bears interest at 9.5%
F-16
<PAGE> 112
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and is collateralized by certain equipment (top drives) of the Company and
letters of credit totaling approximately $700,000. The debt matures in July,
October and November of 2000. The note agreement does not specify any
restrictive financial covenants that must be met but contains a cross default
provision that states any default on the Company's Term or Revolving Notes
constitutes a default on this note as well.
The Company recorded an extraordinary loss of $4.0 million (net of income
tax effect of $1.3 million) in the fourth quarter relating to the early
extinguishment of certain subordinate debt in the amount of approximately $2.1
million and other payments in the amount of approximately $3.2 million by
utilizing proceeds from the Company's Initial Public Offering completed in
November 1997.
At December 31, 1997, the aggregate yearly maturities on long-term
obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- -----------
<S> <C>
1998........................................................ $ 7,450,000
1999........................................................ 7,647,000
2000........................................................ 7,331,000
2001........................................................ 6,385,000
2002........................................................ 1,706,000
Thereafter.................................................. 2,520,000
-----------
$33,039,000
===========
</TABLE>
On June 26, 1998, the Company issued $100 million of Senior Notes and used
$75 million of such proceeds to fund the TransTexas Acquisition. The Company
used the remaining proceeds for general corporate purposes, including
acquisitions of drilling equipment and the refurbishment of rigs. The Senior
Notes mature on June 30, 2005. Interest on the Senior Notes is payable
semi-annually on June 30 and December 31 of each year, commencing on December
31, 1998. The Senior Notes are not redeemable prior to June 30, 2003, on or
after which the Senior Notes will be redeemable, in whole or in part, at the
option of the Company, at the redemption prices set forth in the Indenture
relating to the Senior Notes (the "Indenture"), plus accrued and unpaid interest
and certain other charges, if any, thereon to the date of redemption. In
addition, at any time on or before June 30, 2001, the Company may redeem up to
35% of the original aggregate principal amount of the Senior Notes with the net
proceeds of certain qualifying equity offerings at a redemption price equal to
111% of the principal amount thereof, plus accrued and unpaid interest and
certain other charges, if any, thereon to the date of redemption, provided that
at least $65 million in aggregate principal amount of Senior Notes remains
outstanding immediately after the occurrence of such redemption. Upon a
transaction resulting in a change of control, each holder of the Senior Notes
will have the right to require the Company to repurchase all or any part of such
holder's Senior Notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest and certain other charges, if any, thereon to
the date of repurchase. The Senior Notes are senior unsecured obligations of the
Company and rank pari passu in right of payment with all existing and future
senior indebtedness and other senior obligations of the Company, and senior in
right of payment to all future subordinated indebtedness of the Company.
Each of the Company's wholly owned domestic subsidiaries (each, a
"Guarantor") has issued a guarantee (a "Guarantee") of the Company's obligations
under the Notes. The Guarantees are senior unsecured obligations of each
respective Guarantor and rank pari passu in right of payment with all other
indebtedness and liabilities of such Guarantor that are not subordinated by
their terms to other indebtedness of such Guarantor, and senior in right of
payment to all subordinated indebtedness of such Guarantor.
F-17
<PAGE> 113
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had outstanding at September 30, 1998 $16.7 million of long
term debt under the Term Loan Agreement. The Term Loan was incurred to finance
the purchase of certain land drilling rigs, the refurbishment of such rigs and
equipment and for working capital purposes. On May 14, 1998, in connection with
the Company's corporate reorganization into a holding company structure, (i) the
Company prepaid $6.2 million of the Term Loan, obtained a release of all
collateral for the Term Loan, except 12 drilling rigs and related equipment, and
transferred to Bayard Drilling, L.P., the Company's wholly owned operating
subsidiary ("Bayard Drilling"), substantially all of its assets, subject to such
liens, and (ii) Bayard Drilling and Bayard Drilling, L.L.C., another wholly
owned subsidiary of the Company ("Bayard L.L.C."), agreed to guarantee the Term
Loan. Prior to such prepayment and collateral release, the Term Loan was secured
by substantially all of the assets of Bayard and Trend. In connection with the
Senior Notes Offering, the Term Loan was further amended to add Bonray as a
guarantor of the Company's obligations.
The Term Loan Agreement requires the Company and its subsidiaries to
maintain collateral security for the Term Loan based on appraised fair market
value and orderly liquidation value of the Company's drilling rigs and
associated rig equipment equivalent to the balance of the Term Loan, and adhere
to specified cash flow, leverage and liquidity ratios and minimum net worth and
liquidity requirements. The Term Loan Agreement contains restrictions on, among
other things, the ability of the Company and its subsidiaries to pay dividends,
make investments, incur indebtedness and liens, and make capital expenditures
and requires the maintenance of liquidity of $3 million through December 31,
1998. The Term Loan Agreement also contains affirmative covenants typical of
secured loan arrangements with finance companies, such as requiring financial
reports, insurance maintenance, legal, environmental and permit compliance. The
Company is prohibited from prepaying the Term Loan until after December 31,
1999.
The Term Loan bears interest at the Company's choice of LIBOR plus 4.25%
per annum (9.89% at September 30, 1998) or the prime rate of The Chase Manhattan
Bank plus 2.00% per annum and requires equal monthly payments of principal,
together with accrued interest, in amounts sufficient to repay borrowings at
maturity on March 31, 2002.
The Revolving Loan Agreement provides revolving credit loans, subject to a
borrowing base comprised of a portion of the Company's accounts receivable, of
up to $10 million ($2 million of which is available for letters of credit) for
general corporate purposes. The Company has not borrowed under the Revolving
Loan Agreement since November 1997 but has approximately $1.3 million of letters
of credit outstanding thereunder.
Any borrowings under the Revolving Loan Agreement would bear interest based
on Fleet National Bank's prime rate plus 1.5% (approximately 10.0% at September
30, 1998). A portion of the proceeds from the Initial Public Offering was used
to repay all outstanding amounts under the Revolving Loan Agreement. The Company
pays certain fees under the Revolving Loan Agreement, including a commitment fee
equal to 0.5% of the unused portion of the maximum commitment. Fleet's
commitment to lend under the Revolving Loan Agreement ends in April 2000. The
Company may terminate the Revolving Loan Agreement upon 60 days' prior written
notice to Fleet and the payment of a termination fee of 2% of the facility.
The Revolving Loan Agreement is collateralized by certain assets of Bayard
and Trend that were transferred to Bayard Drilling pursuant to the Company's
corporate reorganization into a holding company structure, including accounts
receivable, certain equipment and inventory, the Company's El Reno, Oklahoma
yard and the same 12 drilling rigs that collateralize the Term Loan Agreement,
together with equipment and drilling contracts related to such rigs. The
Revolving Loan Agreement is also secured by the receivables and certain other
assets of Bayard, Bayard Drilling, Bayard LLC, Trend and Bonray. Until May 14,
1998, the Revolving Loan Agreement was also collateralized by all drilling rigs
of Bayard and
F-18
<PAGE> 114
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trend, upon which date Fleet released all but such 12 rigs and related assets.
Bayard Drilling, Bayard LLC, Trend and Bonray have agreed to guarantee the
obligations under the Revolving Loan Agreement. The Revolving Loan Agreement
contains customary restrictive covenants that are substantially similar to the
covenants contained in the Term Loan Agreement.
NOTE H -- RELATED PARTY TRANSACTIONS
Before the corporate capitalization, AnSon Gas Corporation a wholly owned
affiliate of APLP served as the managing general partner responsible for all
management and operational functions of the Company and charged the Company for
such expenses. The Company expensed approximately $198,000 and $390,000 for such
services received in 1996 and 1995, respectively.
Prior to December 31, 1996, the Company and its affiliates made advances to
each other from time to time which generally had no specific repayment terms.
In December 1996, Anadarko granted the Company a transferable option,
exercisable at any time prior to June 30, 1998, to either purchase from Anadarko
a storage yard located in Weatherford, Oklahoma (the "Weatherford Storage Yard")
for a price of $1,000 in cash or lease from Anadarko, for any period specified
by the Company through a date not later than December 31, 1999, the Weatherford
Storage Yard for a lease price of $100 per year. In August 1997, the Company
acquired from Anadarko approximately 5 acres of land also in Weatherford,
Oklahoma, in consideration for the relinquishment by the Company of the option
to acquire or lease the Weatherford Storage Yard.
In May 1997, the Company paid Energy Spectrum a fee in the amount of
$220,000 for financial advisory and other services rendered to the Company in
connection with the completion of the Trend Acquisition, including the
evaluation and negotiation of the Trend Acquisition and for assistance in the
arrangement of alternative financial sources and structuring, negotiating and
closing the amended financing arrangements with CIT and Fleet. The Company also
reimbursed Energy Spectrum for expenses incurred in connection with the
rendering of such services.
The Company purchased drilling equipment and supplies from an affiliate
totaling $2,862,000 and $779,000 in 1996 and 1995, respectively. The Company
also transferred drilling equipment to an affiliate at the Company's basis
totaling $29,000, net of accumulated depreciation, which resulted in a decrease
in payable to affiliate. The Company has in the past purchased rigs and related
equipment from U.S. Rig & Equipment, Inc., an affiliate of Roy T. Oliver, who
served as a director of the Company until his resignation on August 13, 1997.
During 1997, the Company purchased approximately $5.0 million from U.S. Rig &
Equipment, Inc. Additionally, in August 1997, the Company sold one of its rigs
to an affiliate of Mr. Oliver for $500,000. Additionally, in November 1997, the
Company agreed to acquire six rigs and related drilling equipment for $14
million and such rigs will require additional refurbishment prior to placement
into service. In connection therewith, the Company made a cash down payment of
$3.5 million and closed the transaction in January 1998.
The Company has engaged affiliates of APLP and other related affiliates for
trucking services related to the movement of the Company's rigs on numerous
occasions. During 1997 and the nine months ended September 30, 1998, the Company
utilized these affiliates in consideration for such trucking services of
approximately $2.7 million.
From December 13, 1996 through December 31, 1997, APLP made available to
the Company certain of APLP's employees, office space and administrative
equipment, such as computer and telephone systems. In consideration for such
assistance, the Company has reimbursed APLP an aggregate of approximately
$236,000.
F-19
<PAGE> 115
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense incurred during the year ended December 31, 1997 and for
the nine months ended September 30, 1998 included approximately $680,000 and
$71,000, respectively, to current or former affiliates.
NOTE I -- SIGNIFICANT CUSTOMERS
During the year ended December 31, 1997, approximately 30% of revenues were
generated from current or former affiliated customers. Except for six rigs under
long term contracts with Chesapeake, dayrates billed to affiliated customers
approximated those billed to nonaffiliated customers. During 1996, sales to two
customers were, respectively, 75% (inclusive of $798,000 attributable to
Chesapeake, which became an affiliate in December 1996) and 18% of drilling
revenues. During 1995, sales to one customer totaled 36% of drilling revenue.
NOTE J -- STOCKHOLDER'S EQUITY AND OPTIONS
In December 1996, the Company issued 2,000,000 shares of Common Stock to
Anadarko for the operating assets of BDC, Anadarko's subsidiary. Further, the
Company issued 2,000,000 shares of Common Stock to Energy Spectrum for $10
million cash. The Company also acquired six drilling rigs and related equipment
by the issuance of 1,600,000 shares of Common Stock and put options on the
Company's common stock. The drilling rigs were recorded in accordance with
appraisals of the estimated fair value of the assets acquired ($9.5 million) and
the net deferred income tax liability assumed. The estimated fair value of the
put options are recorded as additional contributed capital to the Company.
The Company executed in December 1996 certain drilling agreements to supply
six drilling rigs to Chesapeake at rates equal to defined comparable market
rates but not less than $5,000 per day per rig. The Company granted the operator
an option to purchase 2,000,000 shares of Common Stock at $6 per share, subject
to performance of the operator under the drilling agreement. The estimated fair
value of the options of $1,100,000 was recorded as additional paid-in capital
and a deferred charge to be amortized over a twelve month period consistent with
the annual negotiations of contract terms. At December 31, 1997, the deferred
charge was fully amortized, and the Company and Chesapeake were unable to agree
on an appropriate rate adjustment related to these drilling agreements,
therefore the Company exercised its option to terminate the Chesapeake Drilling
Agreements.
In February 1997, the Company sold 100,000 shares of Common Stock at $2.50
per share to the President of the Company, which are subject to the terms of a
Restricted Stock Award Agreement. Deferred compensation in the amount of
$250,000 was recorded related to this stock grant as the purchase price was
below the fair market value of the Company's Common Stock at the date of grant.
See -- Note "N".
On December 10, 1996, the Company granted the issuer of the Term Loan (Note
G) warrants to immediately purchase up to 290,000 shares of the Company's Common
Stock at $8 per share or up to 300,000 shares at $8 per share when total
outstanding Common Stock exceeds 6,000,000 shares. The warrants expire at the
earlier of December 13, 2001 or eighteen months after completion of the initial
public stock offering by the Company. The warrant holder can also elect to
receive in stock the excess of the stock market value over the warrant exercise
price. These warrants have an estimated fair value of $219,000, which has been
recorded as debt issue costs and is being amortized over the term of the loan.
The Company purchased during May 1997, two drilling rigs from U.S. Rig &
Equipment, Inc. for cash and granted options to purchase 100,000 shares of
Common Stock at $8 per share.
In connection with the issuance of Subordinated Notes executed in May 1997,
the Company issued 1,140,000 shares of Common Stock at $7 per share.
Additionally, the Company issued two series of detachable Warrants, designated
as Series A Warrants and Series B Warrants. The Series A Warrants are
F-20
<PAGE> 116
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercisable at a price of $.01 per share and the Series B Warrants are
exercisable at $7.50 per share. Both Warrants expire 72 months from issuance.
The Company issued Series A Warrants and Series B Warrants representing the
right to purchase 798,000 shares and 912,000 shares of Common Stock,
respectively. The fair market value of these warrants at the agreement closing
date was $6 million, $4,024,000 of which was attributable to the Subordinated
Notes. The warrant value applicable to the Subordinated Notes was allocated
between the Subordinated Notes and warrants and recorded as a discount to the
Subordinated Notes and additional paid in capital. The remaining discount to be
amortized at December 31, 1997 is approximately $429,000. The amortization of
this discount has been included in interest expense.
In June 1997, the Company granted options to employees to purchase 59,600
shares of Common Stock at $8 per share. Deferred compensation in the amount of
$59,600 was recorded related to these stock options as the exercise price was
below the fair market value of the Company's Common Stock at the date of grant.
See -- Note "N". In November 1997, the Company granted options to employees and
executive officers to purchase 397,000 shares of Common Stock at $23 per share.
During 1996 and 1997, the Company issued stock options to three executive
officers pursuant to the 1997 Stock Option and Stock Award Plan to purchase
200,000, 50,000 and 50,000 shares of Common Stock, respectively, at an exercise
price of $5, $5 and $10 per share, respectively. Except for 10,000 options
exercised in April 1998, at an exercise price of $5 per share none of such
options has been exercised, and all of such options remain outstanding.
In October 1997, the Company consummated the Chesapeake Transactions,
resulting in the cancellation of the Chesapeake Option, the payment to the
Company of $9 million in cash by Chesapeake, the redemption of the $18 million
principal amount of Subordinated Notes held by Chesapeake for an aggregate cash
payment by the Company of $18.2 million and the issuance of 3,194,000 shares of
Common Stock to Chesapeake.
At the August 19, 1997 Board of Directors meeting, the number of authorized
shares of Common Stock was increased from 10,000,000 to 100,000,000 and the
number of authorized shares of preferred stock was increased from 2,000,000 to
20,000,000. Additionally, a two-for-one stock split effected as a stock dividend
on August 22, 1997 was approved. All stock option data, per share earnings and
references to common stock have been restated to give effect to the stock split.
On July 31, 1997, Energy Spectrum exercised in full its Series A Warrants,
at a price of $0.01 per share, for 98,000 shares of Common Stock.
In April 1998, the Company redeemed in full the $2.52 million principal
amount of Subordinated Notes issued to Energy Spectrum together with accrued
interest of $47,740. In connection therewith, Energy Spectrum waived its rights
to require the Company to redeem the Subordinated Notes at 110% of par value.
This redemption coupled with the redemption of $18 million principal amount of
Subordinated Notes from Chesapeake at the time of the Initial Public Offering,
leaves no Subordinated Notes outstanding.
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company has entered into two year employment agreements with three
executive officers, which provide for the payment of the remaining term of each
agreement upon a change of control. As of September 30, 1998, benefits under
such agreements, assuming a change of control, would aggregate approximately
$134,580.
As of September 30, 1998, the Company had construction commitments totaling
approximately $500,000 for rigs in various stages of refurbishment.
F-21
<PAGE> 117
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A shortage of drill pipe exists in the contract drilling industry in the
United States. This shortage has caused the price of drill pipe to increase
significantly over the past 30 months and has required orders for new drill pipe
to be placed at least one year in advance of expected use. The price increase
and the delay in delivery has caused the Company to substantially increase
capital expenditures for drill pipe in recent months. In the event the shortage
continues, the Company may be unable to obtain the drill pipe required to expand
its contract drilling operations. The Company has committed approximately $1.5
million for drill pipe orders at September 30, which is subject to cancellation
without penalty 90 days prior to the scheduled delivery date.
NOTE L -- SUBSEQUENT EVENTS
A purported class action lawsuit is pending against the Company, certain
directors and officers of the Company, the managing underwriters of the Initial
Public Offering, and certain current and former stockholders of the Company,
alleging violations of federal securities laws in connection with the Initial
Public Offering. The lawsuit, Yuan v. Bayard Drilling Technologies, Inc., et al.
("Yuan"), was filed on February 3, 1998 in the United States District Court for
the Western District of Oklahoma. The principal plaintiff in Yuan is Tom Yuan.
The defendants in this case include the Company, Chesapeake, Energy Spectrum
LLC, James E. Brown, David E. Grose, Carl B. Anderson, III, Merrill A. Miller,
Jr., Sidney L. Tassin, Lew O. Ward, Mike Mullen, Roy T. Oliver, Donaldson,
Lufkin & Jenrette Securities Corporation, Lehman Brothers, Inc., Prudential
Securities, Inc., Rauscher Pierce Refsnes, Inc. (a predecessor to Dain Rauscher
Incorporated) and Raymond James & Associates, Inc.
The plaintiffs in this lawsuit purport to sue on their own behalf and on
behalf of all persons who purchased shares of Common Stock on or traceable to
the Initial Public Offering. In the lawsuit, plaintiffs allege claims against
all defendants under the Securities Act. The plaintiffs allege that the
registration statement and prospectus for the Initial Public Offering contained
materially false and misleading information and omitted to disclose material
facts. In particular, the plaintiffs allege that such registration statement and
prospectus failed to disclose financial difficulties of Chesapeake, the
Company's largest customer, and the effects of such difficulties on Chesapeake's
ability to continue to provide the Company with substantial drilling contracts.
The petitions further allege that the Company failed to disclose pre-offering
negotiations with R.T. Oliver Drilling, Inc., whom the plaintiffs allege was a
related party, for the purchase of drilling rigs. In addition, the petitions
allege that the Company failed to disclose that its growth strategy required
costly refurbishment of older drilling rigs that would dramatically increase the
Company's costs, which could not be sustained by internally generated cash
flows. Plaintiffs are seeking rescission and damages.
Two other suits, Khan v. Bayard Drilling Technologies, Inc., et al.
("Khan") and Burkett v. Bayard Drilling Technologies, Inc., et al. ("Burkett"),
which were filed in District Court in and for Oklahoma County, State of Oklahoma
on January 14, 1998 and February 2, 1998, respectively, and alleged essentially
the same claims as Yuan, were dismissed without prejudice in May 1998 on a joint
application filed by all parties. The plaintiffs in Khan and Burkett, along with
others, have been appointed as lead plaintiffs in the Yuan federal court suit,
now styled to include the other lead plaintiffs, as Yuan, et al. A motion to
dismiss the claims in this lawsuit has been filed by the Company and the other
defendants and is currently pending before the court.
The Company is also involved in other litigation arising from time to time
in the ordinary course of its business, including workers' compensation claims
and disputes arising out of its drilling activities. Such disputes include a
claim filed against the Company and Marathon Oil Company on November 13, 1998 in
the District Court of Washita County in the State of Oklahoma. Eldred L. and
Patricia A. Schneberger, the plaintiffs in this lawsuit, seek an order of
abatement and actual, consequential and punitive damages for losses allegedly
incurred in connection with a drilling project that utilized one of the
Company's rigs.
F-22
<PAGE> 118
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes the allegations in the lawsuits referenced above are
without merit and is defending vigorously the claims brought against it. The
Company is unable, however, to predict the outcome of these lawsuits or the
costs to be incurred in connection with their defense and there can be no
assurance that this litigation will be resolved in the Company's favor. An
adverse result or prolonged litigation could have a material adverse effect on
the Company's financial position or results of operations.
Since the Consolidation Transactions and the Initial Public Offering of
11,040,000 shares of Common Stock, par value $0.01 per share of the Company,
which was completed in November 1997, and prior to December 31, 1997, the
Company agreed to purchase six additional rigs from R.T. Oliver for
approximately $14 million in cash. The Oliver Acquisition was completed on
January 9, 1998. The Company expects to refurbish and purchase complementary
equipment, including drill pipe, for these rigs at an aggregate cost of
approximately $28 million.
NOTE M -- EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan for certain eligible employees who
have attained the age of 21 and completed at least one year of service.
Participants may contribute up to 15% (20% prior to October 1997) of
compensation for any plan year. The Company's discretionary contribution is
based on the participants' total years of service. The Company has made
contributions of approximately $283,000 through September 30, 1998.
NOTE N -- BENEFIT AND COMPENSATION PLAN
In April 1997, the Board of Directors approved the adoption of an Employee
Stock Plan ("the Plan") whereby 1,600,000 shares of Common Stock are authorized
for issuance under the Plan to officers and employees. The Plan permits the
issuance of qualified or nonqualified stock options, as well as granting of
certain other awards, including shares of restricted stock. Options granted
become vested at the rate of 20% per year one year after being granted, with the
options expiring six years from the original grant date. The exercise price for
options granted through December 31, 1997 was based on the Company's estimate of
the fair market value on the date of the grant. Through December 31, 1997,
756,600 options and 100,000 shares of restricted stock (denoted below) were
issued under the Plan, 40,000 of which were exercisable at December 31, 1997 at
a weighted average exercise price of $5.
Activity pertaining to the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 10, 1996............................ -- --
Granted................................................... 200,000 $ 5.00
Exercised................................................. -- --
-------
Outstanding at January 1, 1997.............................. 200,000 $ 5.00
Granted................................................... 656,600 $16.16
Exercised................................................. -- --
------- ------
December 31, 1997......................................... 856,600 $13.55
=======
</TABLE>
F-23
<PAGE> 119
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE FAIR MARKET
WEIGHTED AVERAGE FAIR VALUE OF VALUE OF DEFERRED
EXERCISE NUMBER OF REMAINING WEIGHTED AVERAGE STOCK OPTIONS ON COMMON STOCK COMPENSATION
PRICE RANGE SHARES CONTRACTUAL LIFE EXERCISE PRICE DATE OF GRANT AT DATE OF GRANT COST
- ----------- --------- ---------------- ---------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 2.50 100,000(1) -- $ 2.50 $ 5.00 $ 5.00 $205,000
5.00 250,000 4.95 5.00 2.09 5.00 --
8.00 59,600 5.46 8.00 4.18 9.00 53,000
10.00 50,000 5.54 10.00 3.59 9.00 --
23.00 397,000 5.84 23.00 10.12 23.00 --
</TABLE>
- ---------------
(1) Unvested restricted stock.
The Company applies APB Opinion 25 in accounting for the Plan. Had
compensation been determined on the basis of fair value pursuant to FASB
Statement No. 123, net income and earnings per share would have been reduced as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
------ ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income (loss) (in thousands):
As reported............................................... $267 $(2,086)
Pro forma (net of effective tax of 38%)................... 261 (2,677)
Earnings per share, basic and fully diluted:
As reported, basic........................................ .05 (.23)
Pro forma, basic.......................................... .05 (.30)
As reported, diluted...................................... .05 (.18)
Pro forma, diluted........................................ .05 (.23)
</TABLE>
The fair value of each option granted is estimated using the Black-Scholes
model. This model includes, among others, a variable of stock volatility. As the
Company has not established a significant trading history, the volatility used
in the model was .40 for options granted through June 30, 1997 and .43 for
options granted since July 1, 1997 based on volatility of the stock price of a
similar entity that has been publicly traded for several years. Dividend yield
was estimated to remain at zero with risk free interest rates ranging between
5.72 and 6.31 percent. As there is no prior experience available to use in
estimating an expected life for the options, an average of the time between the
vesting and expiration dates of the options was used in determining the expected
lives of the options ranging from 3.5 to 5.5 years. Fair value of options
granted during 1997 and 1996 under the Plan were $4.6 million and $416,000,
respectively.
F-24
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheets of Trend Drilling Company
as of December 31, 1996 and 1995, and the related statements of operations,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respect, the financial position of Trend Drilling Company as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Oklahoma City, Oklahoma
April 28, 1997
F-25
<PAGE> 121
TREND DRILLING COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------- APRIL 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 448,857 $ 570,873 $ 149,352
Accounts receivable.................................... 2,398,231 3,474,043 2,544,526
Other current assets................................... 34,899 40,661 40,661
Deferred tax asset..................................... 175,593 -- --
---------- ---------- ----------
Total current assets........................... 3,057,580 4,085,577 2,734,539
Property, plant and equipment, net..................... 4,781,019 4,176,964 4,133,639
Goodwill, net of accumulated amortization of $60,000,
$84,000 and $92,000, respectively................... 60,000 36,000 28,000
Deferred tax asset..................................... 186,688 379,850 379,850
---------- ---------- ----------
Total assets................................... $8,085,287 $8,678,391 $7,276,028
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $2,358,575 $1,424,415 $ 583,405
Accrued liabilities.................................... 626,883 1,049,338 280,049
Income taxes payable................................... -- 986,834 1,157,103
Current portion of long-term debt...................... 1,457,976 415,445 232,394
Deferred tax liability................................. -- 11,939 11,939
---------- ---------- ----------
Total current liabilities...................... 4,443,434 3,887,971 2,264,890
---------- ---------- ----------
Long-term debt........................................... 1,755,437 1,339,992 1,339,992
---------- ---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 25,000 shares authorized;
500 shares issued and outstanding................... 500 500 500
Additional paid-in capital............................. 2,483,880 2,483,880 2,483,880
Retained earnings (accumulated deficit)................ (597,964) 966,048 1,186,766
---------- ---------- ----------
Stockholders' equity........................... 1,886,416 3,450,428 3,671,146
---------- ---------- ----------
Total liabilities and stockholders' equity..... $8,085,287 $8,678,391 $7,276,028
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 122
TREND DRILLING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FOUR MONTHS
--------------------------------------- ENDED
1994 1995 1996 APRIL 30, 1997
----------- ----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Drilling contracts..................... $12,563,991 $12,283,649 $15,692,056 $6,389,703
----------- ----------- ----------- ----------
OPERATING EXPENSES:
Drilling............................... 10,070,842 9,218,081 11,752,135 4,844,669
General and administrative............. 1,415,842 1,878,347 1,647,330 514,937
Depreciation and amortization.......... 1,077,292 1,344,835 1,602,832 627,350
----------- ----------- ----------- ----------
Total operating expenses....... 12,563,976 12,441,263 15,002,297 5,986,956
----------- ----------- ----------- ----------
Operating income (loss).................. 15 (157,614) 689,759 402,747
----------- ----------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest expense....................... (183,768) (280,741) (261,331) (46,750)
Interest income........................ 5,880 17,380 8,035 --
Other.................................. 140,021 43,673 53,523 --
Gain on disposition of equipment....... 71,366 42,573 2,055,230 --
----------- ----------- ----------- ----------
Total other income (expense)... 33,499 (177,115) 1,855,457 (46,750)
----------- ----------- ----------- ----------
Income (loss) before income taxes........ 33,514 (334,729) 2,545,216 355,997
Income tax benefit (expense)............. (17,177) 112,906 (981,204) (135,279)
----------- ----------- ----------- ----------
Net Income (loss)........................ $ 16,337 $ (221,823) $ 1,564,012 $ 220,718
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 123
TREND DRILLING COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
CAPITAL IN EARNINGS
COMMON EXCESS OF (ACCUMULATED
STOCK PAR VALUE DEFICIT) TOTAL
------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993..................... $500 $2,483,880 $ (392,478) $2,091,902
Net income................................... -- -- 16,337 16,337
---- ---------- ---------- ----------
Balance, December 31, 1994..................... 500 2,483,880 (376,141) 2,108,239
Net loss..................................... -- -- (221,823) (221,823)
---- ---------- ---------- ----------
Balance, December 31, 1995..................... 500 2,483,880 (597,964) 1,886,416
Net income................................... -- -- 1,564,012 1,564,012
---- ---------- ---------- ----------
Balance, December 31, 1996..................... $500 $2,483,880 $ 966,048 $3,450,428
==== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 124
TREND DRILLING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FOUR MONTHS
-------------------------------------- ENDED
1994 1995 1996 APRIL 30, 1997
----------- ----------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 16,337 $ (221,823) $1,564,012 $ 220,718
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............ 1,077,292 1,344,836 1,602,832 627,350
Gain on disposition of property, plant
and equipment.......................... (71,366) (42,573) (2,055,230) --
Deferred tax expense (benefit)........... 17,177 (112,906) (5,630) --
Change in assets and liabilities:
Accounts receivable.................... (1,436,642) (120,759) (1,075,812) 929,517
Prepaid expenses....................... 2,867 (19,349) (5,762) --
Accounts payable and accrued
liabilities......................... 903,866 929,719 (511,705) (1,610,299)
Income taxes payable................... -- -- 986,834 170,269
Deferred revenue....................... (172,250) -- -- --
----------- ----------- ---------- -----------
Net cash provided by operating
activities........................ 337,281 1,757,145 499,539 337,555
----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of equipment......... 264,219 42,573 2,872,647 --
Capital expenditures........................ (3,645,969) (1,552,257) (1,792,194) (576,027)
----------- ----------- ---------- -----------
Net cash provided by (used in)
investing activities.............. (3,381,750) (1,509,684) 1,080,453 (576,027)
----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt.............. 3,000,000 850,000 775,000 --
Principal payments under debt obligations... (299,809) (658,104) (2,232,976) (183,049)
----------- ----------- ---------- -----------
Net cash provided by (used in)
financing activities.............. 2,700,191 191,896 (1,457,976) (183,049)
----------- ----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents................................. (344,278) 439,357 122,016 (421,521)
Cash and cash equivalents, beginning of
period...................................... 353,778 9,500 448,857 570,873
----------- ----------- ---------- -----------
Cash and cash equivalents, end of period...... $ 9,500 $ 448,857 $ 570,873 $ 149,352
=========== =========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest................................. $ 136,857 $ 232,553 $ 254,110 $ 46,750
=========== =========== ========== ===========
Income taxes............................. $ -- $ -- $ -- $ 275,000
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE> 125
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS
INFORMATION RELATING TO THE FOUR MONTHS ENDED APRIL 30, 1997 IS UNAUDITED
(A) NATURE OF OPERATIONS
Trend Drilling Company (the "Company"), an Oklahoma corporation, began
operations in 1981. The Company provides contract drilling services in the
Mid-Continent region of the United States. The Company's customers are primarily
independent oil and gas companies.
On February 13, 1997, the owner of the Company and sole stockholder,
entered into a stock purchase agreement (the "Agreement"), with Bayard Drilling
Technologies, Inc. ("Bayard") for the sale of the Company (the "Bayard
Acquisition"). The executed agreement states a purchase price of $18 million
plus shares of Bayard stock, adjusted for changes in working capital as of the
closing date compared to December 31, 1996.
(B) SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
REVENUE RECOGNITION
The Company recognizes revenue and expenses on dayrate contracts as the
drilling progresses (percentage-of-completion method). For footage and turnkey
contracts, the Company recognizes the revenue and expenses upon completion of
the well (completed-contract method).
Revenue earned of $279,390, but not billed, is included in accounts
receivable at December 31, 1996.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheet, the Company considers cash equivalents
to be all instruments that had a remaining maturity of three months or less at
the date of purchase.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation of
property, plant and equipment is determined primarily on the straight-line
method over the estimated useful lives of the assets at the following rates:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings................................................... 15-39
Drilling rigs and related equipment......................... 5-14
Vehicles.................................................... 5
Furniture and office equipment.............................. 5-10
</TABLE>
Upon retirement or disposal, the related cost and accumulated depreciation
are removed from the accounts and any gain or loss is included in operations.
Repairs and maintenance, which extend the useful life of property, plant and
equipment, are capitalized.
GOODWILL
The excess of the purchase price over the fair value of assets acquired is
amortized on the straight-line method over five years. Amortization expense was
$24,000 for the years-ended December 31, 1996, 1995 and 1994.
F-30
<PAGE> 126
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Accordingly, deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
the enacted tax rate in effect in the years in which the differences are
expected to reverse. Deferred tax expense represents the change in the deferred
tax liability balance.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with oil
and natural gas companies. For the years ended December 31, 1996 and 1995 over
ninety-five percent of the Company's trade receivables were from ten or less
customers. These customers also represented 63%, 51% and 54% of total revenues
for 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company had deposits in domestic banks
in excess of federally insured limits of approximately $467,000 and $348,000,
respectively.
ACCOUNTING 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 for certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS AND DISCLOSURES
In the opinion of management, the unaudited interim financial statements
for the period ended April 30, 1997 and unaudited interim financial statement
disclosures subsequent to December 31, 1996 include all adjustments, consisting
of normal recurring accruals, necessary to present fairly the Company's results
of operations for the four months ended April 30, 1997.
(C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Building................................................... $ 295,946 $ 295,946
Drilling rigs and related equipment........................ 12,323,939 12,887,107
Vehicles................................................... 233,018 227,018
Furniture and office equipment............................. 153,984 141,131
Leasehold costs............................................ -- 9,290
----------- -----------
13,006,887 13,560,492
Less accumulated depreciation.............................. 8,225,868 9,383,528
----------- -----------
$ 4,781,019 $ 4,176,964
=========== ===========
</TABLE>
F-31
<PAGE> 127
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(D) LONG-TERM DEBT
Long-term debt consisted of the following at December 31,
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Notes payable to banks...................................... $3,213,413 $1,755,437
Less current portion........................................ 1,457,976 415,445
---------- ----------
Total long-term debt.............................. $1,755,437 $1,339,922
========== ==========
</TABLE>
On March 26, 1996, the Company entered into a term loan (the "Note") of
$3,098,058, which consolidated all of the Company's bank borrowings into one
term loan. At December 31, 1996, long-term debt consisted of borrowings under
this note of $1,755,437 which bears an interest rate at the prime rate, adjusted
quarterly (8.25% at December 31, 1996). The Note contains a subjective
acceleration clause which allows the lender to demand payment of the Note when
the lender, at its sole discretion, determines that the Note is impaired.
However, the Note has been classified based on the scheduled maturities in the
accompanying balance sheet as management does not believe such impairment has
occurred. The Note requires the maintenance of financial reporting requirements
and annual personal financial statements from the owner of the Company.
The Note requires monthly payments of principal and interest in amounts
sufficient to repay borrowings at maturity on March 26, 2001. The Note is
collateralized by Accounts Receivable and Property, Plant and Equipment and is
personally guaranteed by the owner of the Company.
At December 31, 1995, long-term debt consisted of borrowings under four
bank notes with an aggregate amount of $3,213,413 which bore interest at a rate
of 1% over prime (which was 8.75% on December 31, 1995).
At December 31, 1996, the aggregate scheduled yearly maturities on
long-term obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997........................................................ $ 415,445
1998........................................................ 373,762
1999........................................................ 406,799
2000........................................................ 442,757
2001........................................................ 116,674
----------
$1,755,437
==========
</TABLE>
(E) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1994, 1995
and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- --------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ -- $882,957
State.............................................. -- -- 103,877
Deferred:
Federal............................................ 15,369 (101,021) (5,037)
State.............................................. 1,808 (11,885) (593)
------- --------- --------
$17,177 $(112,906) $981,204
======= ========= ========
</TABLE>
F-32
<PAGE> 128
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax expense (benefit) differs from the amount computed by
multiplying income (loss) before income taxes by the U.S. federal income tax
statutory rate. The reasons for this difference are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- --------- --------
<S> <C> <C> <C>
Computed expected tax expense (benefit).............. $11,394 $(113,807) $865,373
State income taxes................................... 1,340 (13,389) 101,808
Non-deductible business meals and entertainment
expense............................................ 4,443 14,290 14,023
------- --------- --------
$17,177 $(112,906) $981,204
======= ========= ========
</TABLE>
The components of the deferred tax assets and (liabilities) consisted of
the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss and tax credit carry-forwards.......... $ 38,549 $ --
Excess of book basis over tax basis of current
liabilities............................................ 112,054 --
Excess of tax basis over book basis of current assets..... 24,990 --
Depreciation of property, plant and equipment............. 190,488 383,650
Deferred tax liabilities:
Excess of tax basis over book basis of current
liabilities............................................ -- (11,939)
Amortization of goodwill.................................. (3,800) (3,800)
-------- --------
Net deferred tax asset...................................... $362,281 $367,911
======== ========
</TABLE>
(F) RELATED PARTIES
The Company has several affiliates in the oil and gas industry with which
the Company does business throughout the year. The type of transactions with
these related parties varies from the Company drilling wells for affiliates to
affiliates moving rigs from one well site to another, as well as receiving
certain administrative support for which the Company was not billed (i.e.,
computer support).
As of December 31, 1996 and 1995, the Company had trade receivables with
related parties in the amount of $375,016 and $32,633, respectively, and trade
payables with related parties of $168,169 and $505,426, respectively.
For the period ended December 31, 1996, 1995 and 1994 the Company had
revenues of $462,535, $917,743 and $1,422,658, respectively and expenses of
$2,121,975, $2,003,356 and $1,660,169, respectively, with related parties.
The Company leases office space from an affiliate. For the years ended
December 31, 1996, 1995 and 1994, the Company paid rent of approximately
$10,000.
The Company has an agreement for 1997 to continue renting this office space
for approximately $1,000 per month.
F-33
<PAGE> 129
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(G) EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan ("the Plan") for certain eligible
employees who have attained the age of 21 and completed at least six months of
service. Participants may contribute up to 15% of compensation for any Plan
year. The Company's discretionary contribution is allocated to each
participant's account in the proportion which that participant's compensation
bears to the total compensation of all eligible participants. The Company made
contributions of approximately $130,000, $35,000 and $20,000 to the Plan in
1996, 1995 and 1994, respectively.
F-34
<PAGE> 130
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheet of Ward Drilling Company,
Inc. as of December 31, 1996, and the related statement of operations and
retained earnings, and cash flows for the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ward Drilling Company as of
December 31, 1996, and the results of its operations and its cash flows for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND, L.L.P.
Oklahoma City, Oklahoma
August 22, 1997
Bon
F-35
<PAGE> 131
WARD DRILLING COMPANY, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1997
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 7,038 $ --
Accounts receivable....................................... 1,733,647 1,287,069
Prepaids and other assets................................. 781,470 520,204
----------- -----------
Total current assets.............................. 2,522,155 1,807,273
----------- -----------
EQUIPMENT:
Drilling equipment........................................ 14,701,019 14,843,582
Other equipment........................................... 444,606 448,918
Other..................................................... 373,263 376,882
----------- -----------
15,518,888 15,669,382
Less accumulated depreciation............................. 8,569,372 8,509,445
----------- -----------
Net equipment.......................................... 6,949,516 7,159,937
----------- -----------
Total assets...................................... $ 9,471,671 $ 8,967,210
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Book overdraft............................................ $ 118,765 $ 5,295
Accounts payable.......................................... 1,246,022 383,329
Accrued expenses.......................................... 590,161 474,582
Advances from affiliate and stockholder................... 3,265,480 3,899,629
----------- -----------
Total current liabilities......................... 5,220,428 4,762,835
----------- -----------
Note payable to bank........................................ 500,000 --
----------- -----------
Commitments and contingencies
STOCKHOLDER'S EQUITY:
Common stock of $1 par value. Authorized 25,000 shares;
issued and outstanding 1,000 shares.................... 1,000 1,000
Additional paid-in capital................................ 99,014 99,014
Retained earnings......................................... 3,651,229 4,104,361
----------- -----------
Total stockholder's equity........................ 3,751,243 4,204,375
----------- -----------
Total liabilities and stockholder's equity...... $ 9,471,671 $ 8,967,210
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 132
WARD DRILLING COMPANY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
DECEMBER 31, FIVE MONTHS ENDED
1996 MAY 31, 1997
------------ -----------------
(UNAUDITED)
<S> <C> <C>
DRILLING REVENUES........................................... $11,384,944 $4,956,971
----------- ----------
OPERATING EXPENSES:
Drilling.................................................. 9,890,597 3,914,240
Depreciation.............................................. 966,328 413,249
General and administrative................................ 484,748 196,747
----------- ----------
Total operating expenses.......................... 11,341,673 4,524,236
----------- ----------
Operating income.................................. 43,271 432,735
----------- ----------
OTHER INCOME (EXPENSE):
Interest income........................................... 34,536 16,810
Interest expense.......................................... (72,056) (27,224)
Gain on sale of assets.................................... 7,895 --
Miscellaneous income...................................... 66,678 30,810
----------- ----------
Total other income................................ 37,053 20,396
----------- ----------
Net income (loss)................................. $ 80,324 $ 453,131
=========== ==========
Retained earnings at beginning of year...................... $ 3,570,905
===========
Retained earnings at end of year............................ $ 3,651,229
===========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 133
WARD DRILLING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, FIVE MONTHS ENDED
1996 MAY 31, 1997
------------ -----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 80,324 $ 453,131
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 966,328 413,249
Gain on sale of assets................................. (7,895) --
Change in assets and liabilities:
(Increase) decrease in accounts receivable........... (485,735) 446,578
(Increase) decrease in prepaids and other assets..... (330,577) 261,266
Decrease in cost incurred or contracts in progress... 463,588 --
Decrease in accounts payable......................... (75,797) (862,693)
Increase (decrease) in accrued expenses.............. 250,400 (115,579)
----------- ---------
Net cash provided by operating activities.............. 860,636 595,952
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, including major
repairs and betterments................................ (1,564,162) (623,669)
Proceeds from sale of assets.............................. 21,034 --
----------- ---------
Net cash used in investing activities.................. (1,543,128) (623,669)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on revolving line of credit...................... 50,000
Payments on revolving line of credit...................... -- (500,000)
Advances from affiliate and stockholder................... 1,301,282 634,149
Payments to affiliates.................................... (616,136) --
Decrease in book overdraft................................ (52,671) (113,470)
----------- ---------
Net cash provided by financing activities.............. 682,475 20,679
----------- ---------
Net decrease in cash........................................ (17) (7,038)
Cash at beginning of year................................... 7,055 7,038
----------- ---------
Cash at end of year......................................... $ 7,038 $ --
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 57,244 $ 20,000
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 134
WARD DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION RELATING TO THE FIVE MONTHS ENDED MAY 31, 1997 IS UNAUDITED
(A) NATURE OF OPERATIONS
Ward Drilling Company (the "Company"), an Oklahoma corporation, began
operations in 1981. The Company provides contract drilling services in the
Mid-Continent region of the United States for independent oil and gas companies.
In May 1997, the Company's parent, L.O. Ward Revocable Trust transferred
all the fixed assets of the Company into WD Equipment L.L.C. in anticipation of
the sale of these assets to Bayard Drilling Technologies, Inc. ("Bayard"), which
was consummated on May 31, 1997 (the "Bayard Acquisition"). The Company and
Bayard agreed to a purchase price of approximately $8 million plus 400,000
shares of Bayard stock plus warrants to purchase up to 200,000 shares of Bayard
stock in exchange for the purchase of WD Equipment L.L.C.
(B) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue and expenses on dayrate contracts as the
drilling progresses (percentage-of-completion method). For turnkey and footage
contracts, the Company recognizes the revenue and expenses upon completion of
the well (completed-contract method).
CASH AND CASH EQUIVALENTS
The Company considers cash equivalents to be all instruments that had a
remaining maturity of three months or less at the date of purchase.
EQUIPMENT
Equipment is recorded at cost. Depreciation on drilling equipment is
determined using the units-of-production method based upon management's
estimates of remaining drilling days by rig. Depreciation on all other equipment
is determined using the straight-line method over the estimated useful lives of
the assets ranging from three to seven years. Upon retirement or disposal, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is included in operations.
The costs of major repairs and overhauls which extend the useful life of
drilling equipment are capitalized by charges to the allowance for accumulated
depreciation. Other additions and improvements are charged to the applicable
equipment account.
INCOME TAXES
The Company is an electing S corporation for federal and state income tax
purposes. The Company's taxable income or loss will be included in its
stockholder's income tax return. Accordingly, no provision for income taxes has
been included in these financial statements.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with oil
and natural gas companies. At December 31, 1996 over ninety-eight percent of the
Company's trade receivables were from four customers. For the year ended
December 31, 1996 the ten largest customers account for over 96% of total
revenues.
At December 31, 1996 the Company had deposits in domestic banks in excess
of federally insured limits of approximately $156,000.
F-39
<PAGE> 135
WARD DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING 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 for certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) NOTE PAYABLE TO BANK
The Company has available a line of credit with a bank for $500,000 which
expires in March 1998. The line of credit is collateralized by inventory,
accounts receivable, and other miscellaneous assets. Interest is at the bank's
base rate plus one percent (9.25% and 9.5% at December 31, 1996 and 1995,
respectively.) Upon consummation of the sale of the Company on May 31, 1997,
this line of credit was extinguished.
(D) RELATED PARTIES
The Company conducts drilling activities for companies owned or controlled
by L.O. Ward, one of the trustees of the L.O. Ward Revocable Trust (the Related
Parties); however no drilling activities were conducted for the Related Parties
in 1996.
General and administrative expense in the accompanying statement of
operations is net of management fee income received from one of the Related
Parties aggregating $10,320 in 1996.
The Company allocates office space and administrative expenses directly to
Related Parties. Amounts allocated under this arrangement aggregated
approximately $25,000 for 1996.
The Company paid approximately $75,000 in 1996 to one of the Related
Parties for services which includes finding drilling contracts for the Company
and certain other administrative services. Certain expenses incurred by the
Related Parties and attributable to the Company's operations are not billed to
the Company.
Accounts receivable at December 31, 1996 included $8,446 of receivables
from affiliated entities. Accounts payable at December 31, 1996 included
$241,233 owed to affiliated entities.
(E) EMPLOYMENT AGREEMENTS
The Company has issued stock appreciation rights to certain employees which
may entitle them to receive bonuses. These bonuses are based on net income and
the ratio of stock appreciation rights owned by the employees to total
outstanding shares of common stock at year end. Ninety-nine stock appreciation
rights were outstanding at December 31, 1996. A bonus payment of approximately
$37,500 was payable to employees at December 31, 1996.
(F) SAVINGS PLAN
The Company participates in a salary deferral retirement plan which is
available to substantially all employees. Participants in the plan may make
contributions to the plan, with the Company matching up to 25% of the employee's
basic contribution. The basic contribution cannot exceed 5% of the employee's
base salary. Total contributions by the Company were approximately $10,000 in
1996.
F-40
<PAGE> 136
WARD DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(G) CONTINGENCIES
The Company maintains a self insurance plan for workers' compensation and
is liable for claims up to $400,000 per-occurrence. The Company is involved in
legal actions arising out of workers' compensation claims. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position. Total expense for workers'
compensation was approximately $335,000 in 1996, and accrued liabilities
included a reserve for unpaid and incurred but not reported claims of $310,000
at December 31, 1996.
F-41
<PAGE> 137
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bonray Drilling Corporation
We have audited the accompanying balance sheets of Bonray Drilling
Corporation as of December 31, 1996 and June 30, 1996, and the related
statements of operations and accumulated deficit and cash flows for the
six-month period ended December 31, 1996 and the years ended June 30, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bonray Drilling Corporation
at December 31, 1996 and June 30, 1996, and the results of its operations and
its cash flows for the six-month period ended December 31, 1996 and the years
ended June 30, 1996 and 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 17, 1997
F-42
<PAGE> 138
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
-------- ------------ -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 187 $ 58 $ 667
Temporary Investments..................................... -- -- 150
Accounts receivable (Note 5).............................. 2,172 2,100 4,131
Accounts receivable -- parent............................. -- -- (55)
Drilling contracts in progress............................ 20 -- 115
Prepaid expenses.......................................... 89 166 184
------- ------- -------
Total current assets............................... 2,468 2,324 5,302
Properties and equipment:
Drilling equipment (Notes 1 and 3)........................ 20,411 20,927 19,400
Land...................................................... 110 110 110
Buildings................................................. 356 356 73
Other equipment........................................... 1,145 1,006 546
------- ------- -------
22,022 22,399 20,129
Less accumulated depreciation (Note 1).................... 14,179 14,210 1,519
------- ------- -------
Net properties and equipment................................ 7,843 8,189 18,610
------- ------- -------
Note receivable -- parent (Note 3).......................... -- -- 21,820
------- ------- -------
Loan origination fees....................................... -- -- 545
------- ------- -------
Total assets....................................... $10,311 $10,513 $46,277
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 689 $ 871 $ 1,529
Notes payable (Note 3):
Short-term line of credit............................... 555 -- --
Other................................................... 189 343 --
Accrued liabilities:
Salaries and wages...................................... 246 268 271
Payroll and other taxes................................. 57 17 62
Workers' compensation insurance (Note 4)................ 446 768 879
Income taxes payable.................................... -- 4 19
Other................................................... 120 120 34
------- ------- -------
Total current liabilities.......................... 2,302 2,391 2,794
Obligations due after one year:
Note payable (Note 3)..................................... -- -- 23,000
Workers' compensation insurance (Note 4).................. 75 75 70
Other..................................................... 28 14 --
Deferred income taxes..................................... -- -- 2,030
Stockholders' equity:
Common stock, $1.00 par value; 800,000 shares authorized;
432,740 shares issued at December 31, 1996 and June 30,
1996; 423,540 shares issued at September 30, 1997....... 433 433 424
Capital in excess of par value............................ 12,497 12,497 17,146
Retained earnings (accumulated deficit) (Note 1).......... (4,932) (4,805) 813
------- ------- -------
7,998 8,125 18,383
Less 9,200 shares of treasury stock, at cost.............. 92 92 --
------- ------- -------
Total stockholders' equity......................... 7,906 8,033 18,383
------- ------- -------
Total liabilities and stockholders' equity......... $10,311 $10,513 $46,277
======= ======= =======
</TABLE>
See accompanying notes.
F-43
<PAGE> 139
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH NINE-MONTH
------------------- PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30, DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
-------- -------- ------------ -------------
(DOLLARS IN THOUSANDS, (UNAUDITED)
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Contract drilling operations (Note 5)........... $ 8,486 $ 10,257 $ 6,004 $ 14,279
Gain (loss) on sales of assets.................. 1,029 (66) 27 (57)
Interest and other income....................... 172 89 27 456
-------- -------- -------- --------
Total revenues.......................... 9,687 10,280 6,058 14,678
Costs and expenses (Note 4):
Contract drilling operations.................... 6,865 8,189 4,836 10,240
General and administrative...................... 752 864 473 860
Interest and other expense...................... 39 85 43 548
Depreciation.................................... 1,130 1,284 569 1,707
-------- -------- -------- --------
8,786 10,422 5,921 13,355
-------- -------- -------- --------
Income (loss) before provision for income taxes... 901 (142) 137 1,323
Provision for income taxes (Note 2)............... 35 -- 10 563
-------- -------- -------- --------
Net income (loss)................................. 866 (142) 127 760
Accumulated deficit at beginning of period........ (5,656) (4,790) (4,932) (4,805)
Elimination of accumulated deficit from purchase
adjustment (Note 1)............................. -- -- -- 4,858
-------- -------- -------- --------
Retained earnings (accumulated deficit) at end of
period.......................................... $ (4,790) $ (4,932) $ (4,805) $ 813
======== ======== ======== ========
Net income (loss) per share....................... $ 2.05 $ (0.34) $ 0.30 $ 1.79
======== ======== ======== ========
Weighted average shares outstanding............... 423,540 423,540 423,540 423,540
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-44
<PAGE> 140
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH NINE-MONTH
------------------- PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30, DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
-------- -------- ------------ -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers....................... $ 10,910 $10,628 $ 6,457 $ 13,123
Cash paid to suppliers and employees............... (10,178) (9,662) (5,325) (12,233)
Interest received.................................. 36 5 -- 408
Interest paid...................................... (27) (66) (27) (436)
Income taxes paid.................................. (30) (5) (6) --
Other cash receipts................................ 152 85 61 35
-------- ------- ------- --------
Net cash provided by operating activities.......... 863 985 1,160 897
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of assets...................... 1,659 27 43 --
Capital expenditures............................... (2,120) (987) (931) (6,051)
-------- ------- ------- --------
Net cash used by investing activities.............. (461) (960) (888) (6,051)
CASH FLOWS FROM FINANCING ACTIVITIES
Contributed capital................................ -- -- -- 4,582
Borrowings on notes payable........................ -- -- 395 23,000
Note receivable -- parent.......................... -- -- -- (21,820)
Short term investment.............................. -- -- -- (150)
Payments on notes payable.......................... (86) (553) (241) (171)
Net increase (decrease) in borrowings on short-term
line of credit................................... (165) 555 (555) 322
-------- ------- ------- --------
Net cash provided (used) by financing activities... (251) 2 (401) 5,763
-------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 151 27 (129) 609
Cash and cash equivalents at beginning of period... 9 160 187 58
-------- ------- ------- --------
Cash and cash equivalents at end of period......... $ 160 $ 187 $ 58 $ 667
======== ======= ======= ========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss).................................. $ 866 $ (142) $ 127 $ 760
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation..................................... 1,130 1,284 569 1,707
(Gain) loss on sales of assets................... (1,029) 66 (27) (57)
Deferred income taxes............................ -- -- -- 563
Change in assets and liabilities:
Decrease (increase) in current assets:
Accounts receivable......................... (434) (33) 72 (2,086)
Drilling contracts in progress.............. 13 1 20 (115)
Prepaid expenses............................ 9 5 (77) (18)
Loan origination fees....................... -- -- -- (545)
Increase (decrease) in current liabilities:
Accounts payable............................ 68 (276) 182 658
Accrued liabilities......................... (48) 479 308 49
Accrued workers' compensation insurance and
other due after one year................. 288 (399) (14) (19)
-------- ------- ------- --------
Total adjustments........................ (3) 1,127 1,033 137
-------- ------- ------- --------
Net cash provided by operating
activities............................. $ 863 $ 985 $ 1,160 $ 897
======== ======= ======= ========
</TABLE>
DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITY
During the year ended June 30, 1995, the Company acquired property, plant
and equipment by issuing a note payable of $828,050.
See accompanying notes.
F-45
<PAGE> 141
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND SIX-MONTH PERIOD ENDED DECEMBER
31, 1996 AND YEARS ENDED JUNE 30, 1996 AND 1995
INFORMATION RELATING TO THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 IS
UNAUDITED
1. BASIS OF FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Bonray Drilling Corporation (the "Company") is engaged in domestic onshore
contract drilling of oil and gas wells. The Company currently owns and has
available for operation fifteen drilling rigs located in Oklahoma, having depth
capabilities ranging from 7,000 to 25,000 feet.
On February 10, 1997, substantially all of the Company's shares of
outstanding common stock were purchased by DLB Oil & Gas, Inc. ("DLB") for $30
per share or approximately $12,700,000. As a result of the completed
transaction, the Company became a subsidiary of DLB. Effective on the date of
the acquisition, the Company changed its fiscal year end from June 30 to
December 31 to correspond with the year end of DLB.
The transaction was accounted for as a purchase using push down accounting
treatment. This resulted in a step up in the basis of the acquired assets of
approximately $6.3 million, the establishment of approximately $1.5 million of
deferred income taxes and the elimination of the previously recorded balance of
accumulated depreciation and amortization. Additionally, the accumulated deficit
of $4,858,000 was eliminated as a result of a new basis established for the
acquired assets and liabilities.
Cash and Cash Equivalents
Cash and cash equivalents include cash deposits in banks and short-term
investments with original maturities of three months or less from the date of
purchase by the Company.
Contract Drilling Operations
Revenue earned from footage and turnkey contracts is recognized by the
completed contract method, while revenue earned from daywork contracts is
recognized by the percentage-of-completion method. Provision is made for the
entire amount of expected losses on contracts, if any, in the period in which
such losses are first determined.
Valuation of Properties and Equipment
Drilling equipment is stated at amounts representing historical cost prior
to the February 10, 1997 acquisition by DLB (pushed-down cost thereafter)
adjusted by prior year write-downs based on the expected future economic value
of such equipment. This value was determined by projecting the estimated future
undiscounted cash flows generated by drilling equipment based on the Company's
historical utilization rates and profit margins as well as consideration of the
economic conditions of the industry. The Company continues to review these
assets for possible impairment based on expected future cash flows and other
available information and has determined that no impairment in the value of the
assets exists at September 30, 1997, December 31, 1996 or June 30, 1996 or 1995.
However, due to the uncertainty of such factors it is reasonably possible that
the estimated future cash flows may change. Additions to drilling equipment,
land, buildings and other equipment are reported at cost.
F-46
<PAGE> 142
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation
Depreciation of drilling equipment is computed on an operating day basis
(net of estimated salvage value), except for drilling rigs and related equipment
which are "mothballed" or otherwise not expected to be used for an extended
period of time. During the year ended June 30, 1996, there was a decrease in the
estimated salvage value of these inactive drilling rigs and equipment. As a
result, depreciation on this equipment was increased during the year ended June
30, 1996 to reduce the net book value of these assets to their estimated salvage
value. Depreciation recorded on these inactive rigs and equipment was $269,000
and $36,000 for the years ended June 30, 1996 and 1995, respectively (none for
the six-month period ended December 31, 1996). The net book value of such
drilling equipment is $457,000, which approximates the estimated salvage value
of the equipment at December 31, 1996.
Depreciation of buildings and other equipment is computed by the
straight-line method over the estimated useful lives of the assets.
Income (Loss) Per Share
Income (loss) per share is computed on the basis of weighted average number
of shares of common stock and dilutive common stock equivalents outstanding.
Credit Risk
The Company operates its rigs in the state of Oklahoma and grants credit,
which is generally unsecured, to its customers (Note 5). At December 31, 1996,
approximately 90% of the Company's accounts receivable were from five customers.
The Company has not experienced any significant credit losses in the six-month
period ended December 31, 1996 or the nine-month period ended September 30,
1997, or the years ended June 30, 1996 or 1995 and is not aware of any
significant uncollectible accounts at December 31, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating their fair values of financial instruments: Cash and cash equivalents
are estimated to have a fair value approximating the carrying amount due to the
short maturity of those instruments. Notes payable have variable interest rates
with carrying values approximating fair values.
Interim Financial Statements and Disclosures
In the opinion of management, the unaudited interim financial statements as
of and for the nine-month period ended September 30, 1997 and unaudited interim
financial statement disclosures subsequent to December 31, 1996 include all
adjustments, consisting of normal recurring accruals and push-down adjustments,
necessary to present fairly the Company's financial position as of September 30,
1997 and
F-47
<PAGE> 143
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
results of operations and cash flows for the nine-month period ended September
30, 1997. Results for the period ended September 30, 1997 are not necessarily
indicative of the results to be expected for the entire year.
2. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1996 and
June 30, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
-------- ------------
<S> <C> <C>
Deferred tax liability --
Tax depreciation over book depreciation and write-downs... $ 658 $ 629
====== ======
Deferred tax assets:
Net revenues and expenses recognized for tax purposes
which are deferred for financial purposes.............. $ 25 $ 25
Net operating loss carryforwards.......................... 2,073 1,999
------ ------
Total deferred tax assets before valuation allowance........ 2,098 2,024
Less valuation allowance recognized....................... 1,440 1,395
------ ------
Net deferred tax assets..................................... $ 658 $ 629
====== ======
</TABLE>
The deferred tax assets and liability are offset and, therefore, no
deferred tax asset or liability is reflected in the Company's balance sheets at
December 31, 1996 and June 30, 1996.
The difference between the amount of the provision for income taxes and the
amount which would result from the application of the statutory rate to income
(loss) before provision for income taxes is analyzed as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH
JUNE 30, PERIOD ENDED
------------ DECEMBER 31,
1995 1996 1996
----- ---- ------------
<S> <C> <C> <C>
Provision (credit) for income taxes at a statutory
rate................................................... $ 306 $(48) $ 47
Difference resulting from:
Increase (decrease) in valuation allowance for net
deferred tax assets................................. (330) 24 (45)
Alternative minimum tax................................ 35 -- --
Other.................................................. 24 24 8
----- ---- ----
Provision for income taxes............................... $ 35 $ -- $ 10
===== ==== ====
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards for
federal tax purposes of approximately $4,600,000 which will expire beginning in
the year 2001 if not used. At December 31, 1996, the net operating loss
carryforwards for state tax purposes amounted to approximately $12,100,000.
F-48
<PAGE> 144
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE
In July 1997, the Company entered into a $23 million credit agreement in
connection with which substantially all of the Company's assets were pledged as
collateral. Additionally, the company's parent, DLB, pledged as collateral all
of the outstanding common stock of the Company. Upon consummation of the
acquisition of the Company by Bayard, the shares of common stock of the Company
were released by the lender and the shares of common stock of Bayard acquired by
DLB in the acquisition were pledged in lieu thereof. In connection with the
acquisition, the note payable to Lehman Commercial Paper, Inc. was transferred
to DLB, thereby eliminating the note receivable from DLB.
During the six-month period ended December 31, 1996, the Company acquired
drilling equipment with the proceeds from two notes with a bank in the amounts
of $245,000 and $150,000, respectively. The notes are payable in monthly
installments of principal and interest in the amounts of $21,415 and $13,102,
respectively, until paid in full with interest at a rate of 1/2% above the
national prime lending rate (aggregate rate of 8.75% at December 31, 1996) and
are secured by the equipment purchased as well as other specific drilling
equipment owned by the Company. The balances of the two notes at December 31,
1996 are $205,000 and $138,000, respectively, all of which is due within one
year. During 1997, all of these outstanding note balances were retired by DLB.
The Company has a revolving line of credit agreement (the "credit
agreement") with a bank. Credit availability is subject to a monthly borrowing
base determination calculated as 75% of the Company's accounts receivable less
than 90 days old, not to exceed $750,000. At December 31, 1996, no borrowings
were outstanding under the revolving line of credit ($555,000 outstanding at
June 30, 1996). The credit agreement, which expired November 3, 1997, provided
for monthly interest payments, which accrued at a rate of 1/2 of 1% over the
lender's national prime rate (aggregate rate of 8.75% at December 31, 1996).
Outstanding advances and accrued interest are due in full upon expiration of the
credit agreement. The credit agreement is secured by the Company's accounts
receivable.
During the year ended June 30, 1995, the Company acquired drilling and
other equipment by issuing a note payable to the seller of the equipment. The
$189,000 balance on the note at June 30, 1996 was paid by the Company during the
six-month period ended December 31, 1996.
4. WORKERS' COMPENSATION
The Company is covered by a workers' compensation insurance plan for its
employees under which the Company is responsible for claims up to $100,000 per
incident.
At December 31, 1996 and June 30, 1996, the Company has an estimated net
liability for accrued workers' compensation costs totaling $843,000 and $521,000
respectively. Under the plan, the Company is to reimburse the administrator for
costs as the administrator pays those costs, normally over a five-year period.
Accordingly, at both December 31, 1996 and June 30, 1996, $75,000 is classified
as due after one year, in the accompanying balance sheets.
Total workers' compensation costs incurred by the Company were $538,000 for
the six-month period ended December 31, 1996 and $597,000 and $979,000 for the
years ended June 30, 1996 and 1995, respectively, and were based on actual and
estimated claims incurred. For the six-month period ended December 31, 1996 and
the year ended June 30, 1996, workers' compensation expense was reduced by
$38,000 and $48,000 ($0.09 and $0.11 per share, respectively) for changes in
estimates of claims relating
F-49
<PAGE> 145
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to prior fiscal years. Workers' compensation expense for the year ended June 30,
1995 was increased by $40,000 ($0.09 per share), for changes in the estimated
costs of claims that occurred in prior fiscal years.
The Company accrues losses for workers' compensation based on management's
estimate of the expected cost of claims incurred. The estimates are based upon
known information, historical experiences and consideration of risk reduction
techniques, when applicable, such as stop loss insurance on individual claims.
Due to uncertainties inherent in the estimation process, it is reasonably
possible that these estimates will be revised in the near-term; however,
management does not expect that such changes will be material to the financial
position or results of operations of the Company.
5. MAJOR CUSTOMERS
Contract drilling operations revenues include revenues from certain
customers, which individually account for 10% or more of contract drilling
operations revenues as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH
----------------------------- PERIOD ENDED
CUSTOMER JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996
- -------- ------------- ------------- -----------------
<S> <C> <C> <C>
A......................................... $ 879 $3,333 $1,301
B......................................... 2,561 1,881 1,166
C......................................... -- -- 728
D......................................... 2,082 1,042 721
E......................................... -- -- 695
------ ------ ------
$5,522 $6,256 $4,611
====== ====== ======
</TABLE>
6. SUBSEQUENT EVENTS
On October 16, 1997, the Company was acquired by Bayard for 3,015,000
shares of common stock, par value $0.01 per share, of Bayard, subject to certain
working capital adjustments.
7. CONTINGENCIES
During the normal course of business, the Company enters into agreements
and executes transactions that may result in a contingent liability to the
Company. At September 30, 1997, management does not believe such contingencies
would be material to the financial statements.
F-50
<PAGE> 146
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NABORS INDUSTRIES, INC.,
NABORS ACQUISITION CORP. VII
and
BAYARD DRILLING TECHNOLOGIES, INC.
Dated as of October 19, 1998,
as amended on January 15, 1999
and February 12, 1999
(COMPOSITE VERSION)
<PAGE> 147
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I THE MERGER.................................................. A-1
1.1. The Merger.................................................. A-1
1.2. Closing/Effective Time...................................... A-1
1.3. Effect of the Merger........................................ A-2
1.4. Certificate of Incorporation; Bylaws........................ A-2
1.5. Directors and Officers of Merger Sub........................ A-2
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES.......... A-2
2.1. Conversion of Securities.................................... A-2
2.2. Exchange of Certificates.................................... A-3
2.3. Stock Transfer Books........................................ A-5
2.4. Dissenting Shares........................................... A-5
2.5. Company Stock Options; Company Warrants..................... A-5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..... A-6
3.1. Organization, Qualification, Etc............................ A-6
3.2. Capital Stock............................................... A-7
3.3. Corporate Authority Relative to this Agreement; No
Violation................................................... A-7
3.4. Reports and Financial Statements............................ A-8
3.5. No Undisclosed Liabilities.................................. A-8
3.6. No Violation of Law......................................... A-9
3.7. Environmental Laws and Regulations.......................... A-9
3.8. No Undisclosed Employee Benefit Plan Liabilities or
Severance Arrangements...................................... A-9
3.9. Absence of Certain Changes or Events........................ A-9
3.10. Litigation.................................................. A-9
3.11. Lack of Ownership of Company Common Stock................... A-10
3.12. Tax Matters................................................. A-10
3.13. Required Vote............................................... A-11
3.14. Insurance................................................... A-11
3.15. Intellectual Property....................................... A-11
3.16. Material Contracts.......................................... A-11
3.17. Ownership of Merger Sub; No Prior Activities................ A-12
3.18. Brokers..................................................... A-12
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-12
4.1. Organization, Qualification, Etc............................ A-12
4.2. Capital Stock............................................... A-13
4.3. Corporate Authority Relative to this Agreement; No
Violation................................................... A-13
4.4. Reports and Financial Statements............................ A-14
4.5. No Undisclosed Liabilities.................................. A-15
4.6. No Violation of Law......................................... A-15
4.7. Environmental Laws and Regulations.......................... A-15
4.8. No Undisclosed Employee Benefit Plan Liabilities or
Severance Arrangements...................................... A-15
4.9. Absence of Certain Changes or Events........................ A-15
4.10. Litigation.................................................. A-16
4.11. Company Rights Plan......................................... A-16
4.12. Lack of Ownership of Parent Common Stock.................... A-16
4.13. Tax Matters................................................. A-16
4.14. Required Vote............................................... A-17
4.15. Insurance................................................... A-17
</TABLE>
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<PAGE> 148
<TABLE>
<S> <C> <C>
4.16. Intellectual Property....................................... A-17
4.17. Material Contracts.......................................... A-18
4.18. Brokers..................................................... A-19
4.19. Opinion of Financial Advisor................................ A-19
ARTICLE V COVENANTS................................................... A-19
5.1. Affirmative Covenants of the Company........................ A-19
5.2. Negative Covenants of the Company........................... A-19
5.3. Negative Covenants of Parent................................ A-21
5.4. Access and Information...................................... A-21
5.5. Registration Rights......................................... A-21
5.6. No Solicitation............................................. A-22
5.7. Confidentiality............................................. A-23
ARTICLE VI ADDITIONAL AGREEMENTS....................................... A-23
6.1. Special Meeting of Company Stockholders..................... A-23
6.2. Registration Statement; Proxy Statement..................... A-23
6.3. Appropriate Action; Consents; Filings....................... A-25
6.4. Tax Treatment; Affiliates................................... A-25
6.5. Public Announcements........................................ A-26
6.6. AMEX Listing................................................ A-26
6.7. Indemnification of Directors and Officers................... A-26
6.8. Agreement to Defend......................................... A-27
6.9. Obligations of Merger Sub................................... A-27
6.10. Accounting for Merger....................................... A-28
6.11. Executive Employment Agreement.............................. A-28
6.12. Takeover Statutes........................................... A-28
6.13. Employee Matters............................................ A-28
6.14. Stockholder Agreements...................................... A-28
ARTICLE VII CLOSING CONDITIONS.......................................... A-28
7.1. Conditions to Obligations of Each Party Under this
Agreement................................................... A-28
7.2. Additional Conditions to Obligations of Parent.............. A-29
7.3. Additional Conditions to Obligations of the Company......... A-30
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER........................... A-30
8.1. Termination................................................. A-30
8.2. Effect of Termination....................................... A-31
8.3. Amendment................................................... A-31
8.4. Waiver...................................................... A-32
8.5. Fees; Expenses and Other Payments........................... A-32
ARTICLE IX GENERAL PROVISIONS.......................................... A-32
9.1. Effectiveness of Representations, Warranties and
Agreements.................................................. A-32
9.2. Notices..................................................... A-33
9.3. Certain Definitions......................................... A-33
9.4. Headings.................................................... A-34
9.5. Severability................................................ A-34
9.6. Entire Agreement............................................ A-34
9.7. Assignment.................................................. A-34
9.8. Parties in Interest......................................... A-34
9.9. Failure or Indulgence Not Waiver; Remedies Cumulative....... A-34
9.10. Governing Law............................................... A-34
9.11. Jurisdiction................................................ A-35
9.12. Counterparts................................................ A-35
</TABLE>
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of October 19, 1998 as amended
on January 15, 1999 and February 12, 1999 (this "Agreement"), is entered into
among NABORS INDUSTRIES, INC., a Delaware corporation ("Parent"), NABORS
ACQUISITION CORP. VII, a Delaware corporation ("Merger Sub") and a wholly owned
subsidiary of Parent, and BAYARD DRILLING TECHNOLOGIES, INC., a Delaware
corporation (the "Company").
WHEREAS, upon the terms and subject to the conditions of this Agreement and
in accordance with the General Corporation Law of the State of Delaware
("Delaware Law"), Merger Sub will merge with and into the Company (the
"Merger");
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company have determined the Merger to be advisable and in the best interests of
their respective corporations and stockholders and to be consistent with, and in
furtherance of, their respective business strategies and goals, and, by
resolutions duly adopted, have approved and adopted this Agreement;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code"), and that
this Agreement shall constitute a "plan of reorganization" for the purposes of
Section 368 of the Code;
WHEREAS, as a condition of the willingness of Parent to enter into this
Agreement, the Company and Parent will, simultaneously with the execution of
this Agreement, enter into a stock option agreement (the "Company Stock Option
Agreement", pursuant to which the Company will grant Parent the option (the
"Company Option") to purchase shares of Company Common Stock (as defined in
Section 2.1(a)), upon the terms and subject to the conditions set forth therein;
and
WHEREAS, as a condition of the willingness of Parent to enter into this
Agreement, certain stockholders of the Company will, simultaneously with the
execution of this Agreement, enter into Stockholder Agreements with Parent,
dated as of the date hereof (the "Stockholder Agreements"), which provide, among
other things, that, subject to the terms and conditions thereof, such
stockholders will vote their shares of Company Common Stock in favor of the
Merger and approval and adoption of this Agreement and the transactions
contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with Delaware Law, at the Effective Time (as
defined in Section 1.2), Merger Sub shall be merged with and into the Company.
As a result of the Merger, the separate corporate existence of Merger Sub shall
cease and the Company shall continue as the surviving corporation in the Merger
(the "Surviving Corporation").
1.2. Closing/Effective Time. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place (a) at the
offices of Baker & McKenzie, Two Allen Center, Houston, Texas, at 9:00 a.m.,
local time, on the first business day immediately following the day on which the
last to be fulfilled or waived of the conditions set forth in Article VII shall
be fulfilled or waived in accordance with this Agreement or (b) at such other
time, date or place as Parent and the Company may agree. The date on which the
Closing occurs is referred to in this Agreement as the "Closing Date." As
promptly as practicable after the satisfaction or, if permissible, waiver of the
conditions set forth in Article VII, the parties hereto shall cause the Merger
to be consummated by filing of the certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware, in such form
<PAGE> 150
as required by, and executed in accordance with the relevant provisions of,
Delaware Law. The Merger shall become effective at the time of filing of the
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with Delaware Law, or at such later time that the parties hereto
shall have agreed upon and designated in such filing as the effective time of
the Merger (the "Effective Time").
1.3. Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of Delaware Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, except as otherwise provided herein, all the property, rights, privileges,
powers and franchises of Merger Sub and the Company shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Merger Sub and the Company
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4. Certificate of Incorporation; Bylaws. At the Effective Time, each of
the Restated Certificate of Incorporation, as amended, and the Amended and
Restated Bylaws of the Company shall be amended and restated in its entirety to
read as set forth in Exhibit 1.4A and Exhibit 1.4B, respectively, and as so
amended shall be the Restated Certificate of Incorporation and Bylaws of the
Surviving Corporation.
1.5. Directors and Officers of Merger Sub. The directors of Merger Sub
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation, each to hold office in accordance with the Restated Certificate of
Incorporation and Bylaws of the Surviving Corporation, and the officers of the
Company immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
2.1. Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of Merger Sub, the Company or the
holders of any of the following securities:
(a) Each share of common stock, par value $.01 per share, of the
Company ("Company Common Stock") issued and outstanding immediately prior
to the Effective Time (excluding any treasury shares held by the Company or
any of its Subsidiaries, shares held by Parent or any of its Subsidiaries
and Dissenting Shares (as defined in Section 2.4)), shall be converted into
the right to receive (i) 0.3375 fully paid, non-assessable shares of common
stock (the "Exchange Ratio"), par value $.10 per share, of Parent ("Parent
Common Stock") and (ii) $0.30 in cash (the "Cash Consideration").
(b) If between the date of this Agreement and the Effective Time the
outstanding shares of Parent Common Stock or Company Common Stock shall
have been changed into a different number of shares or a different class,
by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares or if a "Flip-In
Event" or "Flip-Over Event" (each as defined under the Company Rights Plan
(as defined in Section 4.2)) shall have occurred under the Company Rights
Plan, the Exchange Ratio shall be correspondingly adjusted to reflect such
stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares or event.
(c) All such shares of Company Common Stock shall no longer be
outstanding, shall automatically be canceled and retired and shall cease to
exist, and each certificate previously evidencing any such shares shall
thereafter represent the right to receive the Merger Consideration (as
defined in Section 2.2(b)). The holders of such certificates previously
evidencing such shares of Company Common Stock outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to
such shares of Company Common Stock, except as otherwise provided herein or
by law. Such certificates previously evidencing shares of Company Common
Stock shall be exchanged for certificates evidencing whole shares of Parent
Common Stock and payment of the Cash
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Consideration in accordance with the allocation procedures of this Section
2.1 upon the surrender of such certificates in accordance with the
provisions of Section 2.2, without interest. No fractional shares of Parent
Common Stock shall be issued, and, in lieu thereof, a cash payment shall be
made pursuant to Section 2.2(e).
(d) Each share of Company Common Stock held in the treasury of the
Company and each share of Company Common Stock owned by Parent or any
direct or indirect wholly owned subsidiary of Parent or of the Company
immediately prior to the Effective Time shall be canceled and extinguished
without any conversion thereof and no payment shall be made with respect
thereto.
(e) Each share of common stock, par value $.10 per share, of Merger
Sub issued and outstanding at the Effective Time shall be converted into
one share of common stock of the Surviving Corporation.
2.2. Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Parent shall deposit, or
shall cause to be deposited, with First Chicago Trust Company of New York
or such other bank or trust company designated by Parent and reasonably
acceptable to the Company (the "Exchange Agent"), for the benefit of the
holders of shares of Company Common Stock, for exchange in accordance with
this Article II through the Exchange Agent (i) certificates evidencing such
number of whole shares of Parent Common Stock equal to the Exchange Ratio
multiplied by the number of shares of Company Common Stock outstanding
(other than (x) shares described in Section 2.1(d) and (y) Dissenting
Shares), (ii) an amount in cash equal to the Cash Consideration multiplied
by the number of shares of Company Common Stock outstanding (other than (x)
shares described in Section 2.1(d) and (y) Dissenting Shares) and (iii)
additional cash in consideration of fractional shares as provided in
Section 2.2(e) (such Parent Common Stock and cash being hereinafter
referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to
irrevocable instructions, deliver the Parent Common Stock and cash out of
the Exchange Fund. Except as contemplated by Section 2.2(e) and (f) hereof,
the Exchange Fund shall not be used for any other purpose.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, Parent will instruct the Exchange Agent to mail to each
holder of record of a certificate or certificates which immediately prior
to the Effective Time evidenced outstanding shares of Company Common Stock
(the "Certificates"), (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Parent
may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates evidencing
shares of Parent Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such Certificate
shall be entitled to receive in exchange (A) an amount in cash and
certificates evidencing that number of whole shares of Parent Common Stock,
which such holder has the right to receive in respect of the shares of
Company Common Stock formerly evidenced by such Certificate in accordance
with Section 2.1, and (B) cash in lieu of fractional shares of Parent
Common Stock to which such holder is entitled pursuant to Section 2.2(e)
(such shares of Parent Common Stock and cash being collectively, the
"Merger Consideration"), and the Certificate so surrendered shall be
canceled. In the event of a transfer of ownership of shares of Company
Common Stock which is not registered in the transfer records of the
Company, a certificate evidencing the proper number of shares of Parent
Common Stock may be issued in accordance with this Article II to a
transferee if the Certificate evidencing such shares of Company Common
Stock is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.2, each Certificate (other than Certificates
representing Dissenting Shares) shall be deemed at any time after the
Effective Time to evidence only the right to receive, upon such surrender,
the Merger
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<PAGE> 152
Consideration. The Exchange Agent shall not be entitled to vote or exercise
any rights of ownership with respect to the Parent Common Stock held by it
from time to time hereunder, except that it shall receive and hold all
dividends or other distributions paid or distributed with respect thereto
for the account of the persons entitled thereto.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect
to Parent Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the
shares of Parent Common Stock evidenced thereby, and no other part of the
Merger Consideration shall be paid to any such holder, until the holder of
such Certificate shall surrender such Certificate, at which time, subject
to the effect of applicable laws, there shall be issued to the holder (i)
certificates evidencing whole shares of Parent Common Stock issued in
exchange therefor, the amount of cash payable with respect to the Cash
Consideration and the amount of any cash payable with respect to a
fractional share of Parent Common Stock to which such holder is entitled
pursuant to Section 2.2(e) and the amount of dividends or other
distributions with a record date after the Effective Time then paid with
respect to such whole shares of Parent Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions
(without interest thereon), with a record date after the Effective Time but
prior to surrender and a payment date occurring after surrender, payable
with respect to such whole shares of Parent Common Stock. No interest shall
be paid on any such amounts.
(d) No Further Rights in Company Common Stock. All shares of Parent
Common Stock issued and cash paid upon conversion of the shares of Company
Common Stock in accordance with the terms of this Agreement shall be deemed
to have been issued or paid in full satisfaction of all rights pertaining
to such shares of Company Common Stock.
(e) No Fractional Shares.
(i) No certificates or scrip evidencing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests will not entitle the
owner thereof to vote or to any rights of a stockholder of Parent.
(ii) Each holder of a Certificate having a fractional interest
arising upon the conversion of such Certificate shall, at the time of
surrender of the Certificate, be paid by the Exchange Agent an amount in
cash equal to the value of such fractional interest based on the average
closing price per share of Parent Common Stock as reported by The Wall
Street Journal (Northeast edition) for the ten consecutive trading days
ending on and including the fifth trading day prior to the Closing Date,
appropriately adjusted for any stock splits, reverse stock splits, stock
dividends, recapitalizations or other similar transactions. No interest
shall be paid on any such amounts. All fractional shares to which a
single record holder would be entitled shall be aggregated.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the holders of Company Common Stock for one
year after the Effective Time shall be delivered to Parent, upon demand,
and any holders of Company Common Stock who have not then complied with
this Article II shall thereafter look only to Parent for the Merger
Consideration to which they are entitled.
(g) No Liability. Neither Parent nor the Surviving Corporation shall
be liable to any holder of shares of Company Common Stock for any shares of
Parent Common Stock or cash (or dividends or distributions with respect
thereto) delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(h) Lost Certificates. In the event any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Certificate to be lost, stolen or destroyed and,
if required by the Surviving Corporation, the posting by such person of a
bond in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that may
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<PAGE> 153
be made against it with respect to such Certificate, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate the
shares of Parent Common Stock, the Cash Consideration and cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of
Parent Common Stock as provided above, deliverable in respect thereof
pursuant to this Agreement.
2.3. Stock Transfer Books. At the Effective Time, the stock transfer books
of the Company shall be closed and there shall be no further registration of
transfers of shares of Company Common Stock thereafter on the records of the
Company. On or after the Effective Time, any Certificates presented to the
Exchange Agent or Parent for any reason shall be canceled and exchanged for the
Merger Consideration.
2.4. Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Company Common Stock that are issued and outstanding
immediately prior to the Effective Time and that are held by stockholders who
have properly exercised appraisal rights with respect thereto under Section 262
of Delaware Law (the "Dissenting Shares") shall not be converted into the right
to receive the consideration therefor specified in Section 2.1, but the holders
of Dissenting Shares shall be entitled to receive such payment as shall be
determined pursuant to Section 262 of Delaware Law; provided, however, that if
any such holder shall have failed to perfect or shall withdraw or lose the right
to appraisal and payment under Delaware Law, each such holder's shares of
Company Common Stock shall thereupon be deemed to have been converted as of the
Effective Time into the right to receive the consideration therefor specified in
Section 2.1, without any interest thereon, as provided in Section 2.2, and such
shares shall no longer be Dissenting Shares.
2.5. Company Stock Options; Company Warrants.
(a) At the Effective Time each outstanding Company Stock Option (as
defined in Section 4.2) to purchase shares of Company Common Stock, by
virtue of the Merger and without further action on the part of the Company
or the holder of any Company Stock Option, shall be converted into an
option to purchase Parent Common Stock ("Parent Stock Option") exercisable
for that number of whole shares of Parent Common Stock equal to the product
of the number of shares of Company Common Stock covered by Company Stock
Option immediately prior to the Effective Time multiplied by the Exchange
Ratio rounded up to the nearest whole number of shares of Parent Common
Stock, and the per share exercise price for the shares of Parent Common
Stock issuable upon the exercise of such Parent Stock Options shall be
equal to the quotient determined by dividing (i) the amount obtained by
subtracting (A) the Cash Consideration from (B) the exercise price per
share of Company Common Stock specified for such Company Stock Option under
the applicable Company Stock Option plan or agreement immediately prior to
the Effective Time, by (ii) the Exchange Ratio (rounding the resulting
exercise price up to the nearest whole cent). The date of grant of the
Parent Stock Option shall be the date on which Company Stock Option was
originally granted. Parent shall reserve for issuance the number of shares
of Parent Common Stock that will become issuable upon the exercise of
Parent Stock Options pursuant to this Section 2.5. The Parent Stock Options
granted pursuant hereto shall have the same schedule of vesting and same
period for exercise as applies to Company Stock Options granted prior to
the date of this Agreement; provided, however, that, with respect to the
employee holders of Company Stock Options identified in Section 4.2,
paragraph 1 of the Company Disclosure Schedule (as defined in the first
clause of Article IV) who are still employed by the Company immediately
prior to the Effective Time, should such an employee holder be terminated
by the Surviving Corporation without cause during the one-year period
immediately following the Effective Time, then the number of Parent Stock
Options received by such employee holder in exchange for such employee
holder's Company Stock Options in accordance with this Section 2.5(a) shall
immediately and fully vest upon such termination. As soon as practicable
after the Effective Time, Parent shall file a registration statement on
Form S-8 (or any successor form), or another appropriate form with respect
to the shares of Parent Common Stock subject to such options and shall use
its best efforts to maintain the effectiveness of such registration
statement or registration statements for so long as such options remain
outstanding. Except as otherwise expressly provided herein, the Parent
Stock Options shall be subject to the terms and
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<PAGE> 154
conditions of Parent's 1998 Employee Stock Option Plan or a similar plan,
and except as otherwise contemplated by Parent and consistent with this
Section 2.5(a), the form of stock option agreement shall be Parent's
standard form as in effect on the date hereof. If Parent requests, Parent
and the Company will negotiate in good faith to modify this Section 2.5(a)
so that, in lieu of converting Company Stock Options into Parent Stock
Options, Parent will adopt the Company Stock Option plans, subject to the
changes in the terms of the Company Stock Options described above.
(b) The Company shall (i) take all necessary action pursuant to the
Company's stock option plans or otherwise and (ii) to the extent necessary
under the terms of the applicable stock option plans and agreements, shall
use its best reasonable efforts to cause the holders of Company Stock
Options to execute any documents necessary, in each case, to effectuate the
provisions of this Section 2.5.
(c) At the Effective Time each outstanding Company Warrant (as defined
in Section 4.2) to purchase shares of Company Common Stock, by virtue of
the Merger and without further action on the part of the Company or the
holder of any Company Warrant, shall remain outstanding on the same terms
as in effect immediately prior to the Effective Time, but shall thereafter
only be exercisable for (i) that number of whole shares of Parent Common
Stock equal to the product of the number of shares of Company Common Stock
covered by the Company Warrant immediately prior to the Effective Time
multiplied by the Exchange Ratio rounded up to the nearest whole number of
shares of Parent Common Stock, and (ii) that amount of cash equal to the
product of the number of shares of Company Common Stock covered by the
Company Warrant immediately prior to the Effective Time multiplied by the
Cash Consideration. Parent shall reserve for issuance the number of shares
of Parent Common Stock that will become issuable upon the exercise of the
Company Warrants pursuant to this Section 2.5.
(d) The Company shall (i) take all necessary action pursuant to the
Company's warrant agreements or otherwise and (ii) to the extent necessary
under the terms of the applicable Company Warrants, shall use its best
reasonable efforts to cause the holders of Company Warrants to execute any
documents necessary, in each case, to effectuate the provisions of this
Section 2.5.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth on the Disclosure Schedule delivered by Parent to the
Company prior to the execution of this Agreement (the "Parent Disclosure
Schedule"), each of Parent and Merger Sub jointly and severally represents and
warrants to the Company that:
3.1. Organization, Qualification, Etc. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority to
own its properties and assets and to carry on its business as it is now being
conducted and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification, except for jurisdictions in which the
failure to be so qualified or in good standing would not, individually or in the
aggregate, have a Material Adverse Effect (as defined below) on Parent. As used
in this Agreement, any reference to a state of facts, event, change or effect
having a "Material Adverse Effect" on or with respect to Parent or the Company,
as the case may be, means (except as provided in the immediately following
sentence) a state of facts, event, change or effect that has had, or would
reasonably be expected to have, a material adverse effect on the business,
results of operations or financial condition of the applicable entity and its
Subsidiaries (as defined in Section 9.3(g)), taken as a whole, except for any
such state of facts, events, changes or effects that are attributable to changes
or developments in general economic conditions or the oil and gas or contract
drilling industries in general. In addition, it is expressly understood and
agreed that a Material Adverse Effect shall not be deemed to include (A) any
state of facts, events, changes or effects, or any anticipated state of facts,
events, changes or effects (including, but not limited to, any estimated or
anticipated operating losses or other adverse operating results), which prior to
or on
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<PAGE> 155
February 12, 1999 have been disclosed to or are known by the Company (in the
case of any state of facts, events, changes or effects affecting the Parent) or
the Parent (in the case of any state of facts, events, changes or effects
affecting the Company) or (B) any state of facts, events, changes or effects
which do not cause or are not reasonably expected to cause or result in actual
monetary loss which exceeds $75.0 million (in the case of Parent), or $7.5
million (in the case of the Company). The copies of Parent's Restated
Certificate of Incorporation and By-laws which have been delivered to the
Company are complete and correct and in full force and effect on the date
hereof. Each of Parent's Significant Subsidiaries (as defined in Section 9.3(f))
is a corporation duly organized, validly existing and (if applicable) in good
standing under the laws of its jurisdiction of incorporation or organization,
has the requisite power and authority to own its properties and to carry on its
business as it is now being conducted, and is duly qualified to do business and
is (if applicable) in good standing in each jurisdiction in which the ownership
of its property or the conduct of its business requires such qualification,
except for jurisdictions in which the failure to be so qualified or in good
standing (if applicable) would not, individually or in the aggregate, have a
Material Adverse Effect on Parent. All the outstanding shares of capital stock
of, or other ownership interests in, Parent's Significant Subsidiaries are
validly issued, fully paid and non-assessable and are owned by Parent, directly
or indirectly, free and clear of all liens, claims, charges or encumbrances,
except for restrictions contained in credit agreements and similar instruments
to which Parent is a party under which no event of default has occurred or
arisen. There are no existing options, rights of first refusal, preemptive
rights, calls or commitments of any character relating to the issued or unissued
capital stock or other securities of, or other ownership interests in, any
Significant Subsidiary of Parent.
3.2. Capital Stock. The authorized stock of Parent consists of 200,000,000
shares of common stock, par value $.10 per share ("Parent Common Stock"),
10,000,000 shares of preferred stock, par value $.10 per share ("Parent
Preferred Stock"), and 8,000,000 shares of Class B Stock, par value $.10 per
share ("Parent Class B Stock"). As of August 4, 1998, 100,860,903 shares of
Parent Common Stock were issued and outstanding and no shares of Parent
Preferred Stock or Parent Class B Stock were issued or outstanding. All the
outstanding shares of Parent Common Stock have been validly issued and are fully
paid and non-assessable. As of August 4, 1998, there were no outstanding
subscriptions, convertible or exchangeable securities, options, warrants, calls,
rights or other arrangements or commitments obligating Parent to issue, deliver
or sell any shares of its capital stock or debt securities, or any securities of
any kind convertible into its capital stock, or obligating Parent to grant,
extend or enter into any such subscription, option, warrant, call, right or
other arrangement or commitment other than: (a) options and other rights to
receive or acquire 21,155,747 shares of Parent Common Stock granted on or prior
to August 4, 1998, pursuant to employee incentive or benefit plans, programs and
arrangements and non-employee director plans; (b) warrants to purchase 200,000
shares of Parent Common Stock issued to the former stockholders of an acquired
entity; and (c) rights to acquire shares of Parent Common Stock upon conversion
of Parent's 5% Convertible Subordinated Notes due May 15, 2006. Except for the
issuance of shares of Parent Common Stock pursuant to the options and other
rights referred to in clauses 3.2(a), (b) and (c), since August 4, 1998, no
shares of Parent Common Stock, Parent Preferred Stock or Parent Class B Stock
have been issued and no options, warrants or other securities convertible into
shares of capital stock of Parent have been issued or granted. The shares of
Parent Common Stock to be issued as consideration in the Merger are duly
authorized and, when issued in accordance with the terms of this Agreement, will
be validly issued, fully paid and nonassessable. Parent has not granted any
registration rights with respect to its securities that are currently
exercisable.
3.3. Corporate Authority Relative to this Agreement; No Violation. Parent
has the corporate power and authority to enter into this Agreement and to carry
out its obligations hereunder. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of Parent and no other corporate
proceedings on the part of Parent are necessary to authorize the consummation of
the transactions contemplated hereby. The Boards of Directors of Parent and
Merger Sub have determined that the transactions contemplated by this Agreement
are in the best interests of such entities and their respective stockholders.
This Agreement has been duly and validly executed and delivered by Parent and
Merger Sub and, assuming this Agreement
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constitutes a valid and binding agreement of the Company, this Agreement
constitutes a valid and binding agreement of Parent and Merger Sub, enforceable
against them in accordance with its terms (except insofar as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally, or by principles governing
the availability of equitable remedies). Neither Parent nor Merger Sub is
subject to or obligated under any charter, by-law or contract provision or any
license, franchise or permit, or subject to any order or decree, which would be
breached or violated by its executing or carrying out the transactions
contemplated by this Agreement, except for any breaches or violations which
would not, individually or in the aggregate, have a Material Adverse Effect on
Parent. Other than in connection with or in compliance with the provisions of
Delaware Law, the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act"),
Section 4043 of ERISA (as defined in Section 3.8) and the securities or blue sky
laws of the various states (collectively, the "Parent Required Approvals"), no
authorization, consent or approval of, or filing with, any governmental body or
authority is necessary for the consummation by Parent of the transactions
contemplated by this Agreement, except for such authorizations, consents,
approvals or filings, the failure to obtain or make which would not,
individually or in the aggregate, have a Material Adverse Effect on Parent or
substantially impair or delay the consummation of the transactions contemplated
hereby.
3.4. Reports and Financial Statements. Parent has previously furnished to
the Company true and complete copies of: (a) Parent's Annual Reports on Form
10-K filed with the Securities and Exchange Commission (the "SEC") for each of
the years ended September 30, 1995 through 1997; (b) Parent's Quarterly Reports
on Form 10-Q filed with the SEC for the quarters ended December 31, 1997, March
31, 1998 and June 30, 1998; (c) each definitive proxy statement filed by Parent
with the SEC since September 30, 1995; (d) each final prospectus filed by Parent
with the SEC since September 30, 1995, except any final prospectus on Form S-8;
and (e) all Current Reports on Form 8-K filed by Parent with the SEC since
October 1, 1997. As of their respective dates, such reports, proxy statements
and prospectuses (collectively, the "Parent SEC Reports") (i) complied as to
form in all material respects with the applicable requirements of the Securities
Act, the Exchange Act and the rules and regulations promulgated thereunder and
(ii) did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except to the extent that information contained in any Parent SEC
Report has been revised or superseded by a later filed Parent SEC Report, none
of the Parent SEC Reports contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The audited consolidated financial statements
and unaudited consolidated interim financial statements included in the Parent
SEC Reports (including any related notes and schedules) have been prepared in
accordance with and fairly present the financial position of Parent and its
consolidated subsidiaries as of the dates thereof and the results of operations
and cash flows for the periods or as of the dates then ended (subject, where
appropriate, to normal year-end adjustments), in each case in accordance with
past practice and generally accepted accounting principles in the United States
("GAAP") consistently applied during the periods involved (except (i) as
otherwise disclosed in the notes thereto, (ii) in the case of unaudited interim
financial statements, such differences in presentation or omissions as are
permitted by Rule 10-01 of Regulation S-X promulgated by the SEC and (iii) the
unaudited interim financial statements do not contain all notes required by
GAAP). Since October 1, 1996, Parent has timely filed all material reports,
registration statements and other filings required to be filed by it with the
SEC under the rules and regulations of the SEC.
3.5. No Undisclosed Liabilities. Neither Parent nor any of its Subsidiaries
has any liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise, of a type required to be reflected on a balance sheet
prepared in accordance with GAAP, except (a) liabilities or obligations
reflected in the Parent SEC Reports filed after September 30, 1997 but prior to
the date hereof ("Parent Filed SEC Reports"), (b) liabilities and obligations
incurred under this Agreement and fees and expenses
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related thereto, (c) liabilities and obligations incurred in the ordinary course
of business after June 30, 1998 and (d) liabilities or obligations which are not
reasonably expected, individually or in the aggregate, to have a Material
Adverse Effect on Parent.
3.6. No Violation of Law. The businesses of Parent and its Subsidiaries are
not being conducted in violation of any law, ordinance or regulation of any
governmental body or authority (provided that no representation or warranty is
made in this Section 3.6 with respect to Environmental Laws (as defined in
Section 3.7)) except (a) as described in the Parent Filed SEC Reports and (b)
for violations or possible violations which would not, individually or in the
aggregate, have a Material Adverse Effect on Parent.
3.7. Environmental Laws and Regulations. Except as described in the Parent
Filed SEC Reports, (a) Parent and each of its Subsidiaries is in compliance with
all applicable international, federal, state, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata) (collectively, "Environmental Laws"),
which compliance includes, but is not limited to, the possession by Parent and
its Subsidiaries of all material permits and other governmental authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof, except for noncompliance which would not, individually or in
the aggregate, have a Material Adverse Effect on Parent; (b) neither Parent nor
any of its Subsidiaries has received written notice of, or, to the knowledge of
Parent, is the subject of, any actions, causes of action, claims,
investigations, demands or notices by any Person asserting an obligation to
conduct investigations or clean-up activities under Environmental Law or
alleging liability under or noncompliance with any Environmental Law
(collectively, "Environmental Claims") which would, individually or in the
aggregate, have a Material Adverse Effect on Parent; and (c) to the knowledge of
Parent, there are no facts, circumstances or conditions in connection with the
operation of its business or any currently or formerly owned, leased or operated
facilities that are reasonably likely to lead to any such Environmental Claims
in the future, except for any such Environmental Claims which would not,
individually or in the aggregate, have a Material Adverse Effect on Parent.
3.8. No Undisclosed Employee Benefit Plan Liabilities or Severance
Arrangements. Except as described in the Parent Filed SEC Reports, all "employee
benefit plans," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), maintained or contributed to by
Parent or its Subsidiaries are in compliance with all applicable provisions of
ERISA and the Code, and Parent and its Subsidiaries do not have any liabilities
or obligations with respect to any such employee benefit plans, whether accrued,
contingent or otherwise, except (a) as described in the Parent Filed SEC
Reports, and (b) for instances of noncompliance or liabilities or obligations
that would not, individually or in the aggregate, have a Material Adverse Effect
on Parent. No employee of Parent will be entitled to any additional benefits or
any acceleration of the time of payment or vesting of any benefits under any
employee incentive or benefit plan, program or other arrangement as a result of
the transactions contemplated by this Agreement.
3.9. Absence of Certain Changes or Events. Other than as disclosed in the
Parent Filed SEC Reports, since October 1, 1997 the businesses of Parent and its
Subsidiaries have been conducted in all material respects in the ordinary course
consistent with past practice, and there has not been any event, occurrence,
development or state of circumstances or facts that has had, or would have, a
Material Adverse Effect on Parent.
3.10. Litigation. Except as described in the Parent Filed SEC Reports,
there are no actions, suits or proceedings pending (or, to Parent's knowledge,
threatened) against or affecting Parent or its Subsidiaries, or any of their
respective properties at law or in equity, or before any federal, state, local
or foreign governmental body or authority, which, individually or in the
aggregate, are reasonably likely to have a Material Adverse Effect on Parent. On
or before October 31, 1998, Parent will provide to the Company a complete list
of all pending or threatened actions, suits or proceedings involving amounts in
excess of $250,000.
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3.11. Lack of Ownership of Company Common Stock. Except for the Company
Option, neither Parent nor any of its Subsidiaries owns any shares of Company
Common Stock or other securities convertible into shares of Company Common
Stock.
3.12. Tax Matters.
(a) All federal, state, local and foreign Tax Returns (as defined in
Section 3.12(d)) required to be filed by or on behalf of Parent, each of
its Subsidiaries, and each affiliated, combined, consolidated or unitary
group of which Parent or any of its Subsidiaries (i) is a member (a
"Current Parent Group") or (ii) has been a member within six years prior to
the date hereof but is not currently a member, but only insofar as any such
Tax (as defined in Section 3.12(d)) relates to a taxable period ending on a
date within the last six years (a "Past Parent Group", and together with
Current Parent Groups, a "Parent Affiliated Group") have been timely filed,
and all returns filed are complete and accurate except to the extent any
failure to file or any inaccuracies in filed returns would not,
individually or in the aggregate, have a Material Adverse Effect on Parent
(it being understood that the representations made in this Section 3.12, to
the extent that they relate to Past Parent Groups, or to any Subsidiary of
Parent for periods prior to the time such Subsidiary was acquired by
Parent, are made to the knowledge of Parent). All Tax Returns include any
required disclosure of all positions taken therein that could give rise to
a substantial underpayment penalty within Section 6662 of the Code or
similar provision of state, local, foreign or other law. All Taxes due and
owing by Parent, any Subsidiary of Parent or any Parent Affiliated Group
have been paid, or adequately reserved for, except to the extent any
failure to pay or reserve would not, individually or in the aggregate, have
a Material Adverse Effect on Parent. There is no audit examination,
deficiency, refund litigation, proposed adjustment or matter in controversy
with respect to any Taxes due and owing by Parent, any Subsidiary of Parent
or any Parent Affiliated Group which would, individually or in the
aggregate, have a Material Adverse Effect on Parent. All assessments for
Taxes due and owing by Parent, any Subsidiary of Parent or any Parent
Affiliated Group with respect to completed and settled examinations or
concluded litigation have been paid. As soon as practicable after the
public announcement of the execution of this Agreement, Parent will provide
the Company with written schedules of (i) the taxable years of Parent for
which the statutes of limitations with respect to federal income Taxes have
not expired, and (ii) with respect to federal income Taxes, those years for
which examinations have been completed, those years for which examinations
are presently being conducted, and those years for which examinations have
not yet been initiated. Parent and each of its Subsidiaries have complied
in all material respects with all rules and regulations relating to the
withholding of Taxes, except to the extent any such failure to comply would
not, individually or in the aggregate, have a Material Adverse Effect on
Parent.
(b) None of Parent nor any of its Subsidiaries knows of any fact or
has taken any action that could reasonably be expected to prevent the
Merger from constituting transactions described in Section 368(a) of the
Code.
(c) Any amount or other entitlement that could be received (whether in
cash or property or the vesting of property) as a result of any of the
transactions contemplated by this Agreement by any employee, officer or
director of Parent or any of its affiliates who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation
Section 1.280G-1) under any employee benefit plan or other compensation
arrangement currently in effect would not be characterized as an "excess
parachute payment" or a "parachute payment" (as such terms are defined in
Section 280G(b)(1) of the Code).
(d) For purposes of this Agreement: (i) "Taxes" means any and all
federal, state, local, foreign or other taxes of any kind (together with
any and all interest, penalties, additions to tax and additional amounts
imposed with respect thereto) imposed by any taxing authority, including,
without limitation, taxes or other charges on or with respect to income,
franchises, windfall or other profits, gross receipts, property, sales,
use, capital stock, payroll, employment, social security, workers'
compensation, unemployment compensation, or net worth, and taxes or other
charges in the nature of
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excise, withholding, ad valorem or value added, and (ii) "Tax Return" means
any return, report or similar statement (including the attached schedules)
required to be filed with respect to any Tax, including, without
limitation, any information return, claim for refund, amended return or
declaration of estimated Tax.
3.13. Required Vote. No vote of the stockholders of Parent is required by
law, the charter or by-laws of Parent or otherwise in order to consummate the
Merger and the transactions contemplated hereby.
3.14. Insurance. The Parent Disclosure Schedule sets forth all material
policies of insurance or programs of self-insurance by which Parent or any of
its Subsidiaries or any of their respective properties or assets are covered
against present losses, all of which are now in full force and effect. Parent
agrees to maintain such policies (or policies of substantially the same nature)
in full force and effect at all times until the Effective Time. On or before
October 31, 1998, Parent will provide the Company a schedule which shall set
forth for the current policy year and each of the preceding five policy years
(i) a summary of the loss experience under each policy; (ii) a statement
describing each claim under an insurance policy which sets forth the name of the
claimant, a description of the policy, and the amount and a brief description of
the claim; and (iii) a statement describing the loss experience for all claims
that were self-insured, including the number and aggregate cost of such claims.
Neither Parent nor any of its Subsidiaries have received any refusal of coverage
or any notice that a defense will be afforded with reservation of rights.
3.15. Intellectual Property. Parent and its Subsidiaries own or possess
adequate licenses or other valid rights to use all patents, patent rights,
trademarks, trademark rights and proprietary information used or held for use in
connection with their respective business as currently being conducted, except
where the failure to own or possess such licenses and other rights would not
have, individually or in the aggregate, a Material Adverse Effect on Parent, and
there are no assertions or claims challenging the validity of any of the
foregoing which are likely to have, individually or in the aggregate, a Material
Adverse Effect on Parent. The conduct of Parent's and its Subsidiaries'
businesses as currently conducted does not conflict with any patents, patent
rights, licenses, trademarks, trademark rights, trade names, trade name rights
or copyrights of others in any way likely to have, individually or in the
aggregate, a Material Adverse Effect on Parent. The systems, processes, and
computer software and hardware used, operated, sold or licensed by Parent or its
Subsidiaries that is material to its business or its internal operations is
capable of providing or is being or will be adapted, or is capable of being
replaced, to provide uninterrupted millennium functionality to record, store,
process and present calendar dates falling on or after January 1, 2000 in
substantially the same manner and with substantially the same functionality as
such systems, processes, software and hardware records, stores, processes and
presents such calendar dates falling on or before December 31, 1999, except as
would not have a Material Adverse Effect on Parent. The costs of the adaptations
and replacements referred to in the prior sentence will not have a Material
Adverse Effect on Parent.
3.16. Material Contracts. The Parent Disclosure Schedule lists the
following contracts and other agreements to which Parent or any of its
Subsidiaries is a party (other than intercompany arrangements) as of the date
hereof (collectively, the "Parent Contracts"):
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any person providing for lease payments in
excess of $5,000,000 per annum and a term of more than one year;
(b) any agreement (or group of related agreements) for the purchase or
sale of raw materials, commodities, supplies, products, or other personal
property, or for the furnishing or receipt of services, the performance of
which has a term more than six months, and involves consideration in excess
of $5,000,000.
(c) any partnership or joint venture agreement;
(d) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed
money, or any capitalized lease obligation, in
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excess of $5,000,000, or under which it has imposed a lien, security
interest or other encumbrance on any of its assets, tangible or intangible,
to secure such indebtedness or obligations;
(e) any agreement which purports to limit in any material respect the
manner in which, or the localities in which, all or any material portion of
the business of Parent and its Subsidiaries, taken as a whole, or the
Company and its Subsidiaries, taken as a whole, is conducted;
(f) any agreement with any of the stockholders of Parent and their
affiliates relating to the voting, transfer or disposition of Parent's
securities;
(g) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance or other material plan or
arrangement (including any employee benefit plan) for the benefit of its
current or former directors, officers and employees;
(h) any collective bargaining agreement;
(i) all turnkey and footage drilling contracts and all daywork
drilling contracts for amounts in excess of $2,000,000 or that are not
terminable or subject to completion within 90 days;
(j) any agreement under which the consequences of a default or
termination could have a Material Adverse Effect on Parent; or
(k) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $5,000,000 other
than agreements entered into in the ordinary course.
Except as disclosed in the Parent Disclosure Schedule, there is no contract or
agreement that is material to the business, financial condition or results of
operations of Parent and its Subsidiaries, taken as a whole. Neither Parent nor
any of its Subsidiaries is in violation or default under (nor does there exist
any condition which upon the passage of time or the giving of notice would cause
a violation or default under) any Parent Contract, other than such violations or
defaults as would not have a Material Adverse Effect on Parent. To the knowledge
of Parent, none of the other parties to the Parent Contracts are in violation of
or in default under (nor does there exist any condition which upon the passage
of time or the giving of notice would cause a violation or default under) any
Parent Contract, other than such violations or defaults as would not have a
Material Adverse Effect on Parent.
3.17. Ownership of Merger Sub; No Prior Activities. Merger Sub is a direct,
wholly owned subsidiary of Parent. Except for obligations or liabilities
incurred in connection with its incorporation or organization and the
transactions contemplated by this Agreement and except for this Agreement and
any other agreements or arrangements contemplated by this Agreement, Merger Sub
has not and will not have incurred, directly or indirectly, through any
Subsidiary or affiliate, any obligations or liabilities or engaged in any
business activities of any type or kind whatsoever or entered into any
agreements or arrangements with any person.
3.18. Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Parent or Merger Sub.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Disclosure Schedule delivered by the Company to
Parent prior to the execution of this Agreement (the "Company Disclosure
Schedule" and together with the Parent Disclosure Schedule, the "Disclosure
Schedule"), the Company represents and warrants to Parent and Merger Sub that:
4.1. Organization, Qualification, Etc. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power and
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authority to own its properties and assets and to carry on its business as it is
now being conducted and is duly qualified to do business and is in good standing
in each jurisdiction in which the ownership of its properties or the conduct of
its business requires such qualification, except for jurisdictions in which the
failure to be so qualified or in good standing would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. The copies of the
Company's Restated Certificate of Incorporation, as amended, and Amended and
Restated Bylaws which have been delivered to Parent are complete and correct and
in full force and effect on the date hereof. Each of the Company's Significant
Subsidiaries is duly organized, validly existing and (if applicable) in good
standing under the laws of its jurisdiction of incorporation or organization,
has the power and authority to own its properties and to carry on its business
as it is now being conducted, and is duly qualified to do business and is (if
applicable) in good standing in each jurisdiction in which the ownership of its
property or the conduct of its business requires such qualification, except for
jurisdictions in which the failure to be so qualified or (if applicable) in good
standing would not, individually or in the aggregate, have a Material Adverse
Effect on the Company. All the outstanding shares of capital stock of, or other
ownership interests in, the Company's Significant Subsidiaries are validly
issued, fully paid and non-assessable and are owned by the Company, directly or
indirectly, free and clear of all liens, claims, charges or encumbrances, except
for restrictions contained in credit agreements and similar instruments to which
the Company is a party under which no event of default has occurred or arisen.
There are no existing options, rights of first refusal, preemptive rights, calls
or commitments of any character relating to the issued or unissued capital stock
or other securities of, or other ownership interests in, any Significant
Subsidiary of the Company.
4.2. Capital Stock. The authorized capital stock of the Company consists of
100,000,000 shares of Company Common Stock, and 20,000,000 shares of preferred
stock, par value $.01 per share ("Company Preferred Stock"), of which 1,000,000
shares have been designated as Series A Junior Participating Preferred Stock
("Company Series A Preferred Stock"). As of August 21, 1998, 18,193,945 shares
of Company Common Stock and no shares of Company Preferred Stock were issued and
outstanding, and no shares of Company Common Stock were held in the Company's
treasury. All the outstanding shares of Company Common Stock have been validly
issued and are fully paid and nonassessable. As of August 21, 1998, there were
no outstanding subscriptions, convertible or exchangeable securities, options,
warrants, or other rights, arrangements or commitments obligating the Company to
issue, deliver or sell any shares of its capital stock or debt securities, or
any securities of any kind convertible into its capital stock, or obligating the
Company to grant, extend or enter into any such subscription, option, warrant,
or other right, arrangement or commitment, other than: (a) rights ("Company
Rights") to acquire shares of the Company Series A Preferred Stock pursuant to
the Rights Agreement, dated as of August 21, 1998, between the Company and
Norwest Bank Minnesota, N.A. (the "Company Rights Plan"); (b) options and other
similar rights (the "Company Stock Options") to receive or acquire 1,296,600
shares of the Company Common Stock granted on or prior to August 21, 1998,
pursuant to employee incentive or benefit plans, programs and arrangements and
nonemployee director plans; and (c) warrants to purchase an aggregate of 397,000
shares of Company Common Stock (the "Company Warrants"). Except for the issuance
of shares of the Company Common Stock pursuant to the options, warrants and
other rights referred to in clauses 4.2(a), (b) and (c), since August 21, 1998,
no shares of Company Common Stock or Company Preferred Stock have been issued
and no options, warrants or other securities convertible into shares of capital
stock of the Company have been issued or granted. Section 4.2 of the Company
Disclosure Schedule sets forth a true and complete list of all Company Stock
Options and Company Warrants, showing for each holder the number and type of
Company Stock Options and Company Warrants held, the exercise prices thereof,
and the dates of grant, expiration and vesting thereof. The Company has made
available to Parent complete and correct copies of all agreements evidencing the
Company Stock Options and Company Warrants. The Company has not granted any
registration rights with respect to its securities that are currently
exercisable.
4.3. Corporate Authority Relative to this Agreement; No Violation. The
Company has the requisite corporate power and authority to execute and deliver
this Agreement and the Company Stock Option Agreement, and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Company Stock Option Agreement and the consummation of the
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transactions contemplated hereby and thereby have been duly and validly
authorized by the Board of Directors of the Company and, except for the adoption
of this Agreement by its stockholders, no other corporate proceedings on the
part of the Company are necessary to authorize the consummation of the
transactions contemplated hereby and thereby. The Board of Directors of the
Company has taken all appropriate action so that none of the Company, Parent or
Merger Sub will be subject to the limitations on "business combinations" set
forth in Section 203 of Delaware Law by virtue of (a) the Company, Parent and
Merger Sub entering into this Agreement, (b) the Company and Parent entering
into the Company Stock Option Agreement, (c) Parent and the parties thereto
entering into the Stockholder Agreements and (d) the consummation by the parties
to the agreements referred to in clauses (a), (b) and (c) of the transactions
contemplated hereby and thereby. The Board of Directors of the Company has
determined that the transactions contemplated by this Agreement are advisable
and in the best interests of the Company and its stockholders and to recommend
to such stockholders that they adopt this Agreement. Neither the Company nor any
affiliate or associate of the Company has, at any time during the last three
years, owned in excess of 15% of the Parent Common Stock. This Agreement and the
Company Stock Option Agreement have been duly and validly executed and delivered
by the Company and, assuming this Agreement and the Company Stock Option
Agreement, as applicable, constitutes a valid and binding agreement of the other
parties hereto and thereto, this Agreement and the Company Stock Option
Agreement constitute valid and binding agreements of the Company, enforceable
against the Company in accordance with their terms (except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by principles governing the availability of equitable remedies).
The Company is not subject to or obligated under any charter, by-law or contract
provision or any license, franchise or permit, or subject to any order or
decree, which would be breached or violated by its executing or, subject to the
adoption of this Agreement by its stockholders, carrying out the transactions
contemplated by this Agreement and the Company Stock Option Agreement, except
for any breaches or violations which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. Other than in
connection with or in compliance with the provisions of Delaware Law, the
Securities Act, the Exchange Act, the HSR Act, Section 4043 of ERISA and the
securities or blue sky laws of the various states (collectively, the "Company
Required Approvals"), no authorization, consent or approval of, or filing with,
any governmental body or authority is necessary for the consummation by the
Company of the transactions contemplated by this Agreement, except for such
authorizations, consents, approvals or filings, the failure to obtain or make
which would not, individually or in the aggregate, have a Material Adverse
Effect on the Company or substantially impair or delay the consummation of the
transactions contemplated hereby.
4.4. Reports and Financial Statements. The Company has previously furnished
to Parent true and complete copies of: (a) the Company's Annual Report on Form
10-K filed with the SEC for the year ended December 31, 1997; (b) the Company's
Quarterly Reports on Form 10-Q filed with the SEC for the quarters ended March
31, 1998 and June 30, 1998; (c) the definitive proxy statement filed by the
Company on April 13, 1998; (d) each final prospectus filed by the Company with
the SEC since November 1, 1997, except any final prospectus on Form S-8; and (e)
all Current Reports on Form 8-K filed by the Company with the SEC since January
1, 1998. As of their respective dates, such reports, proxy statements and
prospectuses (collectively, "Company SEC Reports") (i) complied as to form in
all material respects with the applicable requirements of the Securities Act,
the Exchange Act, and the rules and regulations promulgated thereunder and (ii)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except to the extent that information contained in any Company SEC
Report has been revised or superseded by a later filed Company SEC Report, none
of Company SEC Reports contains any untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary in order
to make the statement therein, in light of the circumstances under which they
were made, not misleading. The audited consolidated financial statements and
unaudited consolidated interim financial statements included in the Company SEC
Reports (including any related notes and schedules) have been prepared in
accordance with and fairly present the financial position of the Company and its
consolidated Subsidiaries as of the
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dates thereof and the results of their operations and their cash flows for the
periods or as of the dates then ended (subject, where appropriate, to normal
year-end adjustments), in each case in accordance with past practice and GAAP
consistently applied during the periods involved (except (i) as otherwise
disclosed in the notes thereto, (ii) in the case of unaudited interim financial
statements, such differences in presentation or omissions as are permitted by
Rule 10-01 of Regulation S-X promulgated by the SEC and (iii) the unaudited
interim financial statements do not contain all notes required by GAAP). Since
November 4, 1997, the Company has timely filed all material reports,
registration statements and other filings required to be filed by it with the
SEC under the rules and regulations of the SEC.
4.5. No Undisclosed Liabilities. Neither the Company nor any of its
Subsidiaries has any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, of a type required to be reflected on a
balance sheet prepared in accordance with GAAP, except (a) liabilities or
obligations reflected in Company SEC Reports filed after December 31, 1997 but
prior to the date hereof ("Company Filed SEC Reports"), (b) liabilities and
obligations incurred under this Agreement and fees and expenses related thereto,
(c) liabilities and obligations incurred in the ordinary course of business
after June 30, 1998 and (d) liabilities or obligations which are not reasonably
expected, individually or in the aggregate, to have a Material Adverse Effect on
the Company.
4.6. No Violation of Law. The businesses of the Company and its
Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any governmental body or authority (provided that no
representation or warranty is made in this Section 4.6 with respect to
Environmental Laws) except (a) as described in the Company Filed SEC Reports and
(b) for violations or possible violations which would not, individually or in
the aggregate, have a Material Adverse Effect on the Company.
4.7. Environmental Laws and Regulations. Except as described in the Company
Filed SEC Reports, (a) the Company and each of its Subsidiaries is in compliance
with all applicable Environmental Laws, which compliance includes, but is not
limited to, the possession by the Company and its Subsidiaries of all material
permits and other governmental authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof, except
for non-compliance which would not, individually or in the aggregate, have a
Material Adverse Effect on the Company; (b) neither the Company nor any of its
Subsidiaries has received written notice of, or, to the knowledge of the
Company, is the subject of, any Environmental Claims which would, individually
or in the aggregate, have a Material Adverse Effect on the Company; and (c) to
the knowledge of the Company, there are no facts, circumstances or conditions in
connection with the operation of its business or any currently or formerly
owned, leased or operated facilities that are reasonably likely to lead to any
such Environmental Claims in the future, except for any such Environmental
Claims which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
4.8. No Undisclosed Employee Benefit Plan Liabilities or Severance
Arrangements. Except as described in the Company Filed SEC Reports, all
"employee benefit plans," as defined in Section 3(3) of ERISA, maintained or
contributed to by the Company or its Subsidiaries are in compliance with all
applicable provisions of ERISA and the Code, and the Company and its
Subsidiaries do not have any liabilities or obligations with respect to any such
employee benefit plans, whether accrued, contingent or otherwise, except (a) as
described in the Company Filed SEC Reports and (b) for instances of non-
compliance or liabilities or obligations that would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. No employee of the
Company will be entitled to any additional benefits or any acceleration of the
time of payment or vesting of any benefits under any employee incentive or
benefit plan, program or arrangement as a result of the transactions
contemplated by this Agreement.
4.9. Absence of Certain Changes or Events. Other than as disclosed in the
Company Filed SEC Reports, since January 1, 1998 the businesses of the Company
and its Subsidiaries have been conducted in all material respects in the
ordinary course consistent with past practice, and there has not been any event,
occurrence, development or state of circumstances or facts that has had, or
would have, a Material Adverse Effect on the Company.
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4.10. Litigation. Except as described in the Company Filed SEC Reports or
previously disclosed in writing to Parent, there are no actions, suits or
proceedings pending (or, to the Company's knowledge, threatened) against or
affecting the Company or its Subsidiaries, or any of their respective properties
at law or in equity, or before any federal, state, local or foreign governmental
body or authority which, individually or in the aggregate, are reasonably likely
to have a Material Adverse Effect on the Company. On or before October 31, 1998,
the Company will provide to Parent a complete list of all pending or threatened
actions, suits or proceedings involving amounts in excess of $250,000.
4.11. Company Rights Plan. Under the terms of the Company Rights Plan, as
amended prior to the execution of this Agreement, the execution and delivery of
this Agreement, the Company Stock Option Agreement and the Stockholder
Agreements, the performance of the transactions contemplated by this Agreement
or such other agreements in accordance with the terms hereof and thereof will
not (except to the extent caused by Parent's becoming the beneficial owner of
any Company Common Stock other than in accordance with this Agreement, the
Company Stock Option Agreement or the Stockholder Agreements) cause (i) Company
Rights to become exercisable under the Company Rights Plan or (ii) a
"Distribution Date", "Stock Acquisition Date", "Flip-In Trigger Date", "Flip-In
Event" or "Flip-Over Event" (as such terms are defined in the Company Rights
Plan) to occur upon the consummation of any such transactions. In addition, the
Company Rights Plan has been amended so that the Company Rights will expire
immediately prior to the Effective Time.
4.12. Lack of Ownership of Parent Common Stock. Neither the Company nor any
of its Subsidiaries owns any shares of Parent Common Stock or other securities
convertible into shares of Parent Common Stock.
4.13. Tax Matters.
(a) All federal, state, local and foreign Tax Returns required to be
filed by or on behalf of the Company, each of its Subsidiaries, and each
affiliated, combined, consolidated or unitary group of which the Company or
any of its Subsidiaries (i) is a member (a "Current Company Group") or (ii)
has been a member within six years prior to the date hereof but is not
currently a member, but only insofar as any such Tax relates to a taxable
period ending on a date within the last six years (a "Past Company Group"
and together with Current Company Groups, a "Company Affiliated Group") and
Anadarko Drilling Company have been timely filed, and all returns filed are
complete and accurate except to the extent any failure to file or any
inaccuracies in filed returns would not, individually or in the aggregate,
have a Material Adverse Effect on the Company (it being understood that the
representations made in this Section 4.13, to the extent that they relate
to Past Company Groups and Anadarko Drilling Company, or to any Subsidiary
of the Company for periods prior to the time such Subsidiary was acquired
by the Company, are made to the knowledge of the Company). All Tax Returns
include any required disclosure of all positions taken therein that could
give rise to a substantial underpayment penalty within Section 6662 of the
Code or similar provision of state, local, foreign or other law. All Taxes
due and owing by the Company, any Subsidiary of the Company or any Company
Affiliated Group and Anadarko Drilling Company have been paid, or
adequately reserved for, except to the extent any failure to pay or reserve
would not, individually or in the aggregate, have a Material Adverse Effect
on the Company. There is no audit examination, deficiency, refund
litigation, proposed adjustment or matter in controversy with respect to
any Taxes due and owing by the Company, any Subsidiary of the Company or
any Company Affiliated Group which would, individually or in the aggregate,
have a Material Adverse Effect on the Company. All assessments for Taxes
due and owing by the Company, any Subsidiary of the Company or any Company
consolidated group with respect to completed and settled examinations or
concluded litigation have been paid. As soon as practicable after the
public announcement of the execution of this Agreement, the Company will
provide Parent with written schedules of (i) the taxable years of the
Company for which the statutes of limitations with respect to federal
income Taxes have not expired, and (ii) with respect to federal income
Taxes, those years for which examinations have been completed, those years
for which examinations are presently being conducted, and those years for
which examinations have not yet been initiated. The Company and each of its
Subsidiaries have
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complied in all material respects with all rules and regulations relating
to the withholding of Taxes, except to the extent any such failure to
comply would not, individually or in the aggregate, have a Material Adverse
Effect on the Company. Neither the Company nor any Subsidiary is (nor has
it ever been) a party to any tax sharing agreement and has not assumed the
tax liability of any other person under a contract; has ever filed a
consent under Section 341(f) of the Code; is required to make any
adjustment under Section 481(a) of the Code for any tax year ending after
the Effective Time by reason of a change in method of accounting or
otherwise; or is required to make a payment with respect to the
remuneration of an employee which would result in non-deductible expense
pursuant to Section 162(m) of the Code. Neither the Company nor any
Subsidiary is (nor has it ever been) a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii).
(b) None of the Company nor any of its Subsidiaries knows of any fact
or has taken any action that could reasonably be expected to prevent the
Merger from constituting transactions described in Sections 368(a) of the
Code.
(c) Any amount or other entitlement that could be received (whether in
cash or property or the vesting of property) as a result of any of the
transactions contemplated by this Agreement by any employee, officer or
director of the Company or any of its affiliates who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation
Section 1.280G-1) under any employee benefit plan or other compensation
arrangement currently in effect would not be characterized as an "excess
parachute payment" or a "parachute payment" (as such terms are defined in
Section 280G(b)(1) of the Code).
4.14. Required Vote. The affirmative vote of the holders of a majority of
the outstanding shares of the Company Common Stock (the "Company Stockholder
Approval") is required to adopt the Merger Agreement. No other vote of the
stockholders of the Company is required by law, the charter or by-laws of the
Company or otherwise in order for the Company to consummate the Merger and the
transactions contemplated hereby and by the Company Stock Option Agreement.
4.15. Insurance. The Company Disclosure Schedule sets forth all material
policies of insurance or programs of self-insurance by which the Company or any
of its Subsidiaries or any of their respective properties or assets are covered
against present losses, all of which are now in full force and effect. The
Company agrees to maintain such policies (or policies of substantially the same
nature) in full force and effect at all times until the Effective Time. On or
before October 31, 1998, the Company will provide Parent a schedule which shall
set forth for the current policy year and each other policy year since November
1996 (i) a summary of the loss experience under each policy; (ii) a statement
describing each claim under an insurance policy; and (iii) a statement
describing the loss experience for all claims that were self-insured, including
the number and aggregate cost of such claims. Neither the Company nor any of its
Subsidiaries have received any refusal of coverage or any notice that a defense
will be afforded with reservation of rights.
4.16. Intellectual Property. The Company and its Subsidiaries own or
possess adequate licenses or other valid rights to use all patents, patent
rights, trademarks, trademark rights and proprietary information used or held
for use in connection with their respective business as currently being
conducted, except where the failure to own or possess such licenses and other
rights would not have, individually or in the aggregate, a Material Adverse
Effect on the Company, and there are no assertions or claims challenging the
validity of any of the foregoing which are likely to have, individually or in
the aggregate, a Material Adverse Effect on the Company. The conduct of the
Company's and its Subsidiaries' businesses as currently conducted does not
conflict with any patents, patent rights, licenses, trademarks, trademark
rights, trade names, trade name rights or copyrights of others in any way likely
to have, individually or in the aggregate, a Material Adverse Effect on the
Company. The systems, processes, and computer software and hardware used,
operated, sold or licensed by the Company or its Subsidiaries that is material
to its business or its internal operations is capable of providing or is being
or will be adapted, or is capable of being replaced, to provide uninterrupted
millennium functionality to record, store, process and present
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calendar dates falling on or after January 1, 2000 in substantially the same
manner and with substantially the same functionality as such systems, processes,
software and hardware records, stores, processes and presents such calendar
dates falling on or before December 31, 1999, except as would not have a
Material Adverse Effect on the Company. The costs of the adaptations and
replacements referred to in the prior sentence will not have a Material Adverse
Effect on the Company.
4.17. Material Contracts. The Company Disclosure Schedule lists the
following contracts and other agreements to which the Company or any of its
Subsidiaries is a party (other than intercompany arrangements) as of the date
hereof (collectively, the "Company Contracts"):
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any person providing for lease payments in
excess of $500,000 per annum and a term of more than one year;
(b) any agreement (or group of related agreements) for the purchase or
sale of raw materials, commodities, supplies, products, or other personal
property, or for the furnishing or receipt of services, the performance of
which has a term more than six months, and involves consideration in excess
of $500,000;
(c) any partnership or joint venture agreement;
(d) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed
money, or any capitalized lease obligation, in excess of $500,000, or under
which it has imposed a lien, security interest or other encumbrance on any
of its assets, tangible or intangible, to secure such indebtedness or
obligations;
(e) any agreement which purports to limit in any material respect the
manner in which, or the localities in which, all or any material portion of
the business of the Company and its Subsidiaries, taken as a whole, or
Parent and its Subsidiaries, taken as a whole, is conducted;
(f) any agreement with any of the stockholders of the Company and
their affiliates relating to the voting, transfer or disposition of the
Company's securities;
(g) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan or
arrangement (including any employee benefit plan) for the benefit of its
current or former directors, officers, and employees;
(h) any collective bargaining agreement;
(i) all turnkey and footage drilling contracts and all daywork
drilling contracts for amounts in excess of $2,000,000 or that are not
terminable or subject to completion within 90 days;
(j) any agreement under which the consequences of a default or
termination could have a Material Adverse Effect on the Company; or
(k) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $500,000, other
than agreements entered into in the ordinary course.
Except as disclosed in the Company Disclosure Schedule, there is no contract or
agreement that is material to the business, financial condition or results of
operations of the Company and its Subsidiaries, taken as a whole. Neither the
Company nor any of its Subsidiaries is in violation or default under (nor does
there exist any condition which upon the passage of time or the giving of notice
would cause a violation or default under) any Company Contract, other than such
violations or defaults as would not have a Material Adverse Effect on the
Company. To the knowledge of the Company, none of the other parties to the
Company Contracts are in violation of or in default under (nor does there exist
any condition which upon the passage of time or the giving of notice would cause
a violation or default under) any Company Contract, other than such violations
or defaults as would not have a Material Adverse Effect on the Company.
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4.18 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company.
4.19 Opinion of Financial Advisor. The Company has received the opinion of
Donaldson, Lufkin & Jenrette Securities Corporation (a copy of which has been
delivered to Parent) to the effect that the consideration to be received in the
Merger is fair to the holders of Company Common Stock from a financial point of
view.
ARTICLE V
COVENANTS
5.1. Affirmative Covenants of the Company. The Company hereby covenants and
agrees that, prior to the Effective Time, unless otherwise expressly
contemplated by this Agreement or consented to in writing by Parent, the Company
will and will cause its Subsidiaries to:
(a) operate its business only in the usual and ordinary course
consistent with past practices.
(b) use its commercially reasonable efforts to preserve substantially
intact its business organizations, maintain its rights and franchises,
retain the services of its officers and key employees and maintain its
material relationships with its customers and suppliers.
(c) use its commercially reasonable efforts to maintain and keep its
properties and assets in as good repair and condition in all material
respects as at present, ordinary wear and tear excepted.
(d) use its commercially reasonable efforts to keep in full force and
effect insurance and bonds comparable in amount and scope of coverage to
that currently maintained; provided, however, that, in the event the
Company deems it necessary to take certain actions that would otherwise be
proscribed by clauses 5.1(a) through (c), the Company shall consult with
Parent and Parent shall consider in good faith the Company's request to
take such actions and not unreasonably withhold its consent.
5.2. Negative Covenants of the Company. Except as expressly contemplated by
this Agreement, as set forth in the Company Disclosure Schedule or otherwise
consented to in writing by Parent, from the date of this Agreement until the
Effective Time, the Company will not directly or indirectly, and will not permit
any of its Subsidiaries to directly or indirectly, do any of the following:
(a) (i) increase the compensation payable to, or to become payable to,
any director or executive officer; (ii) grant any severance or termination
pay (other than pursuant to the normal severance policy of the Company or
its Subsidiaries as in effect on the date of this Agreement) to, or enter
into any employment or severance agreement with, any director, officer or
employee; or (iii) establish, adopt, enter into or amend any employee
benefit plan or arrangement except as may be required by applicable law.
(b) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
Subsidiary of the Company to the Company or another Subsidiary of the
Company.
(c) (i) redeem, purchase or otherwise acquire any shares of its or any
of its Subsidiaries' capital stock or any securities or obligations
convertible into or exchangeable or exercisable for any shares of its or
its Subsidiaries' capital stock including, but not limited to, options,
warrants and other rights to acquire securities (other than any such
acquisition directly from any wholly owned Subsidiary of the Company in
exchange for capital contributions or loans to such Subsidiary), (ii)
effect any recapitalization; or (iii) split, combine or reclassify any of
its or its respective Subsidiaries' capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for, shares of its or its respective Subsidiaries' capital
stock.
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(d) (i) issue, deliver, award, grant or sell, or authorize or propose
the issuance, delivery, award, grant or sale (including the grant of any
security interests, liens, claims, pledges or other encumbrances) of, any
shares of any class of its or its Subsidiaries' capital stock (including
shares held in treasury), any securities convertible into or exercisable or
exchangeable for any other shares, or any rights, warrants or options to
acquire, any such shares (except for the issuance of shares upon the
exercise of Company Stock Options outstanding on the date of this Agreement
in accordance with their terms or issuances by any Subsidiary of the
Company to the Company or any other Subsidiary of the Company); (ii) amend
or otherwise modify the terms of any such rights, warrants or options the
effect of which shall be to make such terms more favorable to the holders
thereof (including, without limitation, declaring a "change of control" or
similar event thereunder); or (iii) take any action to accelerate the
vesting of any Company Stock Options.
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest valued in excess of $1 million or portion of
the assets (for a purchase price in excess of $1 million) of, or by any
other manner, any corporation, partnership, association or other business,
organization or division (other than a wholly owned Subsidiary) thereof, or
otherwise acquire or agree to acquire any assets of any other person (other
than the purchase of assets from suppliers or vendors in the ordinary
course of business and consistent with past practice) which are material,
individually or in the aggregate, to the Company and its Subsidiaries,
taken as a whole.
(f) other than (i) dispositions or proposed dispositions set forth on
the Company Disclosure Schedule, (ii) as may be necessary or required by
law to consummate the transactions contemplated hereby or (iii)
dispositions in the ordinary course of business consistent with past
practice not to exceed $50,000 individually or $250,000 in the aggregate,
sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of,
or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, any of its material assets or any material assets of any of the
Company's Significant Subsidiaries.
(g) propose or adopt any amendments to its Restated Certificate of
Incorporation, as amended, or, as to its Amended and Restated Bylaws, any
amendments that would have an adverse impact on the consummation of the
transactions contemplated by this Agreement.
(h) (i) change any of its methods of accounting in effect at December
31, 1997 or (ii) make or rescind any express or deemed election relating to
taxes, settle or compromise any claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to
taxes (except where the amount of such settlements or controversies,
individually or in the aggregate, does not exceed $250,000), or change any
of its methods of reporting income or deductions for federal income tax
purposes from those employed in the preparation of the federal income tax
returns for the taxable year ended December 31, 1997, except, in the case
of clause (i) or clause (ii), as may be required by Law or generally
accepted accounting principles.
(i) (A) spend or commit to spend more than $1 million in the aggregate
on the purchase of new or used equipment, supplies (including drill pipe
and other capital expenditures not referred to in (ii) below) (provided
that the Company shall inform Parent prior to committing to make capital
expenditures in excess of $500,000 in the aggregate), except for (i)
capital expenditures heretofore approved by the Company's Board of
Directors and described in the Company Disclosure Schedule; and (ii)
sustaining capital expenditures for drilling equipment in the ordinary
course of business consistent with past practice; or (B) except for draw
downs on the existing working capital line of credit, incur any obligation
for borrowed money or purchase money indebtedness, whether or not evidenced
by a note, bond, debenture or similar instrument, except in the ordinary
course of business consistent with past practice.
(j) take or agree to take any action that would or is reasonably
likely to result in any of the Company's representations and warranties set
forth in this Agreement being untrue or in any of the conditions to the
Merger not being satisfied.
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(k) commit to do any of the foregoing;
provided, however, that, in the event the Company deems it necessary to take
certain actions that would otherwise be proscribed by this Section 5.2, the
Company shall consult with Parent and Parent shall consider in good faith the
Company's request to take such actions.
5.3. Negative Covenants of Parent. Except as expressly contemplated by this
Agreement or otherwise consented to in writing by the Company, from the date of
this Agreement until the Effective Time, Parent will not, and will not permit
Merger Sub to, do any of the following:
(a) amend any of the material terms or provisions of the Parent Common
Stock.
(b) knowingly take any action which would result in a failure to
maintain the trading of Parent Common Stock on the American Stock Exchange.
(c) declare or pay any dividends or other distribution (whether in
cash, stock or other property) on outstanding shares of capital stock.
(d) take or agree to take any action that would or is reasonably
likely to result in any of Parent's or Merger Sub's representations and
warranties set forth in this Agreement being untrue or in any of the
conditions to the Merger not being satisfied.
(e) commit to do any of the foregoing.
5.4. Access and Information. Subject to confidentiality agreements to which
the Company or Parent or any of their respective Subsidiaries is a party, each
of the Company and Parent shall, and shall cause its Subsidiaries to, (a) afford
to the other party and its officers, directors, employees, accountants,
consultants, legal counsel, agents and other representatives (collectively, the
"Representatives") reasonable access at reasonable times upon reasonable prior
notice to its officers, employees, agents, properties, offices and other
facilities and its Subsidiaries and to the books and records thereof and (b)
furnish promptly to the other party and its Representatives such information
concerning its business, properties, contracts, records and personnel
(including, without limitation, financial, operating and other data and
information) as may be reasonably requested, from time to time, such other
party. Notwithstanding the foregoing, no party shall be required to provide any
information which it reasonably believes it may not provide to the other party
by reason of applicable law, rules or regulations, which constitutes information
protected by attorney/client privilege, or which it is required to keep
confidential by reason of contract or agreement with third parties. The parties
hereto will make reasonable and appropriate substitute disclosure arrangements
under circumstances in which the restrictions of the preceding sentence apply.
Each of Parent and the Company agrees that (i) it will, and will cause its
Representatives to, treat any information obtained hereunder in strict
accordance with Section 5.8 and (ii) it will not, and will cause its respective
Representatives not to, use any information obtained pursuant to this Section
5.4 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement.
5.5. Registration Rights. Parent hereby covenants and agrees to grant
certain registration rights as described herein to each stockholder of the
Company who shall be subject to the resale restrictions of Rule 145 and Rule 144
of the Securities Act as a result of the transactions contemplated hereby
(individually, a "Rule 145 Stockholder," and collectively, the "Rule 145
Stockholders"). The grant of registration rights contemplated hereby shall be
evidenced by a written agreement between Parent and the Rule 145 stockholders,
in form and substance reasonably satisfactory to Parent and such stockholders,
to be entered into prior to the Effective Time. Such agreement shall, among
other things, provide the Rule 145 Stockholders collectively, the right to
demand a single registration under the Securities Act of not less than 1,000,000
shares of Parent Common Stock received by them in the Merger, commencing on the
90th day after the Effective Time and ending on the second anniversary date of
the Effective Time and upon receipt of any such demand Parent shall (a) as soon
as practicable use its best efforts to register shares of the Parent Common
Stock under the Securities Act which are the subject of the demand, (b) provide
an indemnity relating to such registration pursuant to which Parent agrees to
indemnify the Rule 145 stockholders for claims or causes of action arising from
information about Parent included in the
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registration statement and (c) defray all costs and expenses of such
registration including the fees and expenses of one counsel to the selling
stockholders and all fees and expenses incurred by Parent but excluding
underwriting discounts or commissions applicable to shares sold by such
stockholders. The demand registration right shall be exercisable, at the option
of the selling stockholders, with regard to either an underwritten offering or a
shelf registration. In the event such stockholders elect a shelf registration,
Parent agrees to maintain the effectiveness of such registration for a minimum
of 180 days or until all shares covered thereby have been sold, whichever first
occurs.
5.6 No Solicitation.
(a) Except as expressly contemplated by this Agreement or otherwise
consented to in writing by Parent, from the date of this Agreement until
the earlier of the Effective Time or the date of termination of this
Agreement in accordance with its terms, the Company will not directly or
indirectly, and will not permit any of its Subsidiaries to, directly or
indirectly, initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
Company Acquisition Proposal (as defined below), or enter into discussions
or negotiate with any person or entity in furtherance of such Company
Acquisition Proposal, or enter into an agreement with respect to any
Company Acquisition Transaction (as defined below) or agree to or endorse
any Company Acquisition Proposal, or authorize or permit any of the
officers, directors or employees of the Company or any of its Subsidiaries
or any investment banker, financial advisor, attorney, accountant or other
representative retained by the Company or any of its Subsidiaries to take
any such action, and the Company shall notify Parent of all relevant terms
of any Company Acquisition Proposal received by the Company or any of its
Subsidiaries or by any such officer, director, investment banker, financial
advisor or attorney within two business days after receipt thereof, and if
such inquiry or proposal is in writing, the Company shall deliver or cause
to be delivered to Parent a copy of such inquiry or proposal; provided,
however, that nothing contained in this Agreement shall prohibit the Board
of Directors of the Company from (i) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to a Company Acquisition Proposal; or
(ii) at any time prior to the satisfaction of the condition set forth in
Section 7.1(b), furnishing information to, or entering into discussions or
negotiations with, any person or entity in connection with an unsolicited,
bona fide, written Company Acquisition Proposal, recommending the same to
the Company's stockholders or otherwise communicating with the Company's
stockholders regarding such proposal in a manner permitted by law, if, and
only to the extent that (A) the Board of Directors of the Company, after
consultation with legal counsel (which may include its regularly engaged
legal counsel), determines in good faith that such action is required for
the Board of Directors of the Company to comply with its fiduciary duties
to stockholders imposed by Delaware Law; (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such
person or entity the Company (x) provides two business days' written notice
to Parent to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or entity and (y)
obtains from such person or entity a customary confidentiality agreement;
and (C) the Company determines in good faith (after consultation with its
financial advisor) that, in light of the information furnished to it
relating to such Company Acquisition Proposal, the Company Acquisition
Transaction contemplated thereby would, if consummated, result in a more
favorable transaction than the transaction contemplated by this Agreement,
taking into account the long-term prospects and interests of the Company
and its stockholders. The Company will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
parties heretofore conducted which are prohibited pursuant to this Section
5.6(a). The Company agrees that it will take the necessary steps to
promptly inform the individuals or entities referred to in the first
sentence of this Section 5.6(a) of the obligations undertaken in this
Section 5.6(a).
(b) "Company Acquisition Proposal" means an inquiry or proposal which
relates to or contemplates a Company Acquisition Transaction.
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(c) "Company Acquisition Transaction" means any of the following
transactions:
(i) any merger, consolidation, share exchange or other business
combination involving the Company or any Subsidiary of the Company
(other than any such arrangement between the Company and any of its
Subsidiaries or among any of its Subsidiaries);
(ii) any sale, exchange, transfer or other disposition (whether in
the form of an asset sale, merger or otherwise) to any person (other
than Parent or any of its Subsidiaries) of properties or assets of the
Company or any of its Subsidiaries which constitute (A) all or
substantially all of the properties and assets of the Company, (B) all
or substantially all of the properties and assets of any Significant
Subsidiary, or a material division or other business unit of the Company
or any Significant Subsidiary, or (C) properties and assets which are
material to the business or operations of the Company at its
Subsidiaries, taken as a whole.
(iii) any tender offer or exchange offer by any person (other than
the Parent or any of its Subsidiaries) for 15% or more of the
outstanding shares of Company Common Stock; or
(iv) any acquisition of shares of Company Common Stock by any
person or group (other than Parent or any of its Subsidiaries) which
would require an amendment, waiver, termination or alteration of the
Company Rights Plan so that such acquisition would not result in such
person becoming an "Acquiring Person" under the terms of the Company
Rights Plan.
5.7. Confidentiality. Between the date of this Agreement and the Effective
Time, the parties hereto will maintain in confidence, and will cause its
Representatives to maintain in confidence, and not use to the detriment of a
party to this Agreement any information obtained from a party to this Agreement
or its Subsidiaries in connection with this Agreement or the transactions
contemplated hereby (regardless of whether such information was obtained prior
to, on or after the date of this Agreement), unless (a) such information is
already known to such receiving party or to others not bound by a duty of
confidentiality or such information becomes publicly available through no fault
of such receiving party, (b) use of such information is necessary or appropriate
in making any filing or obtaining any consent or approval required for the
consummation of the transactions contemplated hereby or (c) the furnishing or
use of such information is required by legal proceedings or applicable law or
requirement of the American Stock Exchange. Upon any termination of this
Agreement, each party will return or destroy all confidential information
provided to it by the other party.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1. Special Meeting of Company Stockholders. The Company shall promptly
after the date of this Agreement take all action necessary in accordance with
applicable law and its Restated Certificate of Incorporation, as amended, and
Amended and Restated Bylaws to convene a meeting of its stockholders to consider
and vote upon the approval of this Agreement and the Merger, and the Company
shall consult with Parent in connection therewith; provided that the Company
shall use its reasonable best efforts to hold the special meeting of
stockholders within 40 days after effectiveness of the Registration Statement.
The Company, through its Board of Directors, shall recommend approval of such
matters, subject to the terms and conditions set forth in Section 5.6.
6.2. Registration Statement; Proxy Statement.
(a) Parent promptly shall prepare and shall file with the SEC and the
American Stock Exchange a registration statement on Form S-4 under the
Securities Act (the registration statement, together with the amendments
thereto, being the "Registration Statement"), containing a proxy
statement/prospectus, in connection with the registration of the Parent
Common Stock to be issued in the Merger. The Company promptly shall prepare
and file with the SEC a proxy statement that will be the same proxy
statement/prospectus contained in the Registration Statement, and a form of
proxy with respect to the meeting of the stockholders of the Company in
connection with the Merger and
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the other transactions contemplated by this Agreement (such proxy
statement/prospectus, together with any amendments thereof or supplements
thereto, in each case in the form or forms mailed to such stockholders,
being the "Proxy Statement"). Each of Parent and the Company shall use its
best efforts to (i) cause the Registration Statement to become effective as
promptly as practicable after such filing and (ii) cause the Proxy
Statement to be mailed to stockholders of the Company at the earliest
practicable date. Parent shall take any action required to be taken under
any applicable federal or state securities laws in connection with the
issuance of shares of Parent Common Stock in the Merger. Each of Parent and
the Company shall furnish all information concerning it and the holders of
its capital stock as the other may reasonably request in connection with
such actions. As promptly as practicable after the Registration Statement
shall have become effective, the Company shall mail the Proxy Statement to
its stockholders. The Proxy Statement shall include the recommendation of
the Board of Directors of the Company in favor of the Merger subject to the
terms and conditions set forth in Section 5.6.
(b) The information supplied by the Company for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading. The information
supplied by the Company for inclusion in the Proxy Statement to be sent to
the Company's stockholders in connection with the special meeting of
stockholders to consider the Merger shall not, at the date the Proxy
Statement (or any amendment thereof or supplement thereto) is first mailed
to stockholders, at the time of the special stockholders' meeting or at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under
which they are made, not misleading. If at any time prior to the Effective
Time any event or circumstance relating to the Company or any of its
affiliates, or its or their respective officers or directors, occurs or
exists which should be set forth in an amendment to the Registration
Statement or a supplement to the Proxy Statement, the Company shall
promptly inform Parent and the Company shall cooperate with Parent in the
prompt filing with the SEC of any necessary amendment or supplement to the
Proxy Statement and the Registration Statement and, as required by law, in
disseminating the information contained in such amendment or supplement to
the stockholders of the Company. All documents that the Company is
responsible for filing with the SEC in connection with the transactions
contemplated herein will comply as to form and substance in all material
respects with the applicable requirements of the Securities Act and the
rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(c) The information supplied by Parent for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading. The information
supplied by Parent for inclusion in the Proxy Statement to be sent to the
Company's stockholders in connection with the special stockholders' meeting
shall not, at the date the Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to stockholders, at the time of the
meeting or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein, in the light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time any event or
circumstances relating to Parent or any of its respective affiliates, or to
its or their respective officers or directors, occurs or exists which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, Parent shall promptly inform the Company
and Parent shall cooperate with the Company in the prompt filing with the
SEC of any necessary amendment or supplement to the Proxy Statement and the
Registration Statement and, as required by law, in disseminating the
information contained in such amendment or supplement to the stockholders
of the Company. All documents that Parent is responsible for filing with
the SEC in connection with the transaction contemplated herein will comply
as to form and substance in all material respects with the applicable
requirements of the Securities Act and the rules and regulations thereunder
and the Exchange Act and the rules and regulations thereunder.
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(d) (i) The Company shall use its reasonable efforts to cause to be
delivered to Parent letters of PricewaterhouseCoopers LLP and, if
applicable, Grant Thornton LLP dated as of a date within five business days
before the date on which the Registration Statement shall become effective
and addressed to Parent in form and substance reasonably satisfactory to
Parent and customary in scope and substance for "comfort" letters delivered
by independent public accountants in connection with registration
statements and proxy statements similar to the Registration Statement and
Proxy Statement; and (ii) Parent shall use its reasonable efforts to cause
to be delivered to the Company a letter of PricewaterhouseCoopers LLP dated
as of a date within five business days before the date on which the
Registration Statement shall become effective and addressed to the Company
in form and substance reasonably satisfactory to the Company and customary
in scope and substance for "comfort" letters delivered by independent
public accountants in connection with registration statements and proxy
statements similar to the Registration Statement and Proxy Statement.
6.3. Appropriate Action; Consents; Filings.
(a) The Company and Parent each shall use its reasonable best efforts
to (i) take, or cause to be taken, all appropriate action, and do, or cause
to be done, all things necessary, proper or advisable under applicable law
or otherwise to consummate and make effective the transactions contemplated
by this Agreement; (ii) obtain the Parent Required Approvals and the
Company Required Approvals; and (iii) make all necessary filings, and
thereafter make any other required submissions, with respect to this
Agreement and the Merger required under (A) the Securities Act (in the case
of Parent) and the Exchange Act and the rules and regulations thereunder,
and any other applicable federal or state securities laws, (B) the HSR Act
and (C) any other applicable law; provided that Parent and the Company
shall cooperate with each other in connection with the making of all such
filings, including providing copies of all such documents to the non-filing
party and its advisors prior to filing and, if requested, accepting all
reasonable additions, deletions or changes suggested in connection
therewith. The Company and Parent shall furnish all information required
for any application or other filing to be made pursuant to the rules and
regulations of any applicable law (including all information required to be
included in the Proxy Statement and the Registration Statement) in
connection with the transactions contemplated by this Agreement.
(b) (i) Each of the Company and Parent shall give (or shall cause
their respective Subsidiaries to give) any notices to third parties, and
shall use, and cause their respective Subsidiaries to use, its reasonable
best efforts to obtain any third party consents (A) necessary, proper or
advisable to consummate the transactions contemplated in this Agreement,
(B) disclosed or required to be disclosed in the Company Disclosure
Schedule or the Parent Disclosure Schedule, (C) otherwise required under
any contracts, licenses, leases or other agreements in connection with the
consummation of the transactions contemplated herein or (D) required to
prevent a Company Material Adverse Effect from occurring prior to or after
the Effective Time or a Parent Material Adverse Effect from occurring after
the Effective Time.
(ii) In the event that either party shall fail to obtain any third
party consent described in Section 6.3(b)(i), such party shall use its
reasonable best efforts, and shall take any such actions reasonably
requested by the other party hereto, to minimize any adverse effect upon
the Company and Parent, their respective Subsidiaries, and their
respective businesses resulting, or which could reasonably be expected
to result after the Effective Time, from the failure to obtain such
consent.
6.4. Tax Treatment; Affiliates.
(a) From and after the date hereof and until the Effective Time, none
of Parent, the Company or any of their respective Subsidiaries shall
knowingly (i) take any action, or fail to take any reasonable action, as a
result of which the Merger would fail to qualify as a reorganization within
the meaning of Section 368(a) of the Code or (ii) enter into any contract,
agreement, commitment or arrangement to take or fail to take any such
action. Each of the parties shall use its reasonable best efforts to obtain
the opinion of counsel referred to in Section 7.1(d).
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(b) Following the Effective Time, neither Parent nor any of its
Subsidiaries shall knowingly take any action or knowingly cause any action
to be taken which would cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368(a) of the Code (and any
comparable provisions of applicable state or local law).
(c) The Company shall use its best efforts to obtain from any person
who may be deemed to have become an affiliate of the Company after the date
of this Agreement and on or prior to the Effective Time a written agreement
substantially in the form of Exhibit 6.4 as soon as practicable after
attaining such status.
(d) The Company shall deliver to Parent a statement dated no more than
30 days prior to the Effective Time in form and substance as is described
in Treas. Reg. sec. 1.1445-2(c)(3)(i).
6.5. Public Announcements. Parent and the Company will agree upon the
timing and content of the initial press release to be issued describing the
transactions contemplated by this Agreement, and will not make any public
announcement thereof prior to reaching such agreement unless required to do so
by applicable law or regulation. Thereafter, unless otherwise required by
applicable law or stock exchange requirements (and in that event, only if time
does not permit), Parent and the Company shall consult with each other before
issuing any press release or otherwise making any public statements with respect
to the Merger and shall not issue any such press release or make any such public
statement prior to such consultation.
6.6. AMEX Listing. Parent shall use its best efforts to cause the shares of
Parent Common Stock to be issued in the Merger to be approved for listing on the
American Stock Exchange prior to the Effective Time.
6.7. Indemnification of Directors and Officers.
(a) The Restated Certificate of Incorporation and Bylaws of the
Surviving Corporation shall contain the provisions with respect to
indemnification set forth in the Restated Certificate of Incorporation, as
amended, and Amended and Restated Bylaws of the Company on the date of this
Agreement, which provisions shall not be amended, repealed or otherwise
modified for a period of six years after the Effective Time in any manner
that would adversely affect the rights thereunder of individuals who at any
time prior to the Effective Time were directors or officers of the Company
in respect of actions or omissions occurring at or prior to the Effective
Time (including, without limitation, the transactions contemplated by this
Agreement), unless such modification is required by Law.
(b) From and after the Effective Time, the Surviving Corporation and
Parent (each, an "Indemnifying Party") shall jointly and severally
indemnify, defend and hold harmless the present and former officers and
directors of the Company or any of its Subsidiaries (collectively, the
"Indemnified Parties") against all losses, expenses, claims, damages,
liabilities or amounts that are paid in settlement of (with the approval of
Parent and the Surviving Corporation (which approval shall not unreasonably
be withheld or delayed)), or otherwise in connection with, any threatened
or actual claim, action, suit, proceeding or investigation (a "Claim"),
based in whole or in part on the fact that such person is or was a director
or officer of the Company or any of its Subsidiaries and arising out of
actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this
Agreement), in each case to the full extent permitted under Delaware Law
(and shall pay expenses (including fees and disbursements of counsel), as
incurred, in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the fullest extent permitted under
Delaware Law, upon receipt from the Indemnified Party to whom expenses are
advanced of the undertaking to repay such advances contemplated by Delaware
Law).
(c) Without limiting the foregoing, in the event any Claim is brought
against any Indemnified Party (whether arising before or after the
Effective Time) after the Effective Time (i) the Indemnified Parties may
retain the Company's regularly engaged independent legal counsel, or other
independent legal counsel satisfactory to them provided that such other
counsel shall be reasonably
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acceptable to the Surviving Corporation, (ii) the Indemnifying Parties
shall jointly and severally pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefor are
received and (iii) the Indemnifying Parties will use their reasonable best
efforts to assist in the vigorous defense of any such matter, provided that
no Indemnifying Party shall be liable for any settlement of any Claim
effected without its written consent, which consent shall not be
unreasonably withheld or delayed. Any Indemnified Parties wishing to claim
indemnification under this Section 6.7, upon learning of any such Claim,
shall notify the Indemnifying Parties (although the failure so to notify
the Indemnifying Parties shall not relieve the Indemnifying Parties from
any liability which the Indemnifying Parties may have under this Section
6.7 except to the extent such failure prejudices the Indemnifying Parties),
and shall, if requested, deliver to the Indemnifying Parties the
undertaking contemplated by Delaware Law. The Indemnified Parties as a
group may retain one law firm (in addition to local counsel) to represent
them with respect to each such matter unless there is, under applicable
standards of professional conduct (as determined by counsel to the
Indemnified Parties), a conflict on any significant issue between the
positions of any two or more Indemnified Parties, in which event, such
additional counsel as may be required may be retained by the Indemnified
Parties.
(d) Commencing at the Effective Time, the directors and officers of
Surviving Corporation shall be insured under the policies of directors and
officers insurance currently or hereafter maintained by Parent. In
addition, for a period of four years after the Effective Time, Parent shall
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by the Company and its
Subsidiaries (provided that Parent may substitute therefor policies of at
least the same coverage and amounts containing terms that are no less
advantageous in any material respect to the persons covered thereby) with
respect to claims arising from facts or events which occurred before the
Effective Time; provided that Parent shall not be required to pay an annual
premium for such insurance in excess of two times the last annual premium
paid by the Company prior to the date hereof, but in such case shall
purchase as much coverage as possible for such amount.
(e) This Section 6.7 is intended to be for the benefit of, and shall
be enforceable by, the Indemnified Parties, their heirs and personal
representatives and shall be binding on Parent, Merger Sub and the
Surviving Corporation and their representative successors and assigns. No
termination or modification of the obligations of the Indemnifying Parties
under this Section 6.7 that adversely affects the rights of any Indemnified
Party shall be effective against such Indemnified Party without his or her
prior written consent.
(f) The rights granted to the Indemnified Parties hereunder shall be
in addition to, and not in limitation of, any other rights that the
Indemnified Parties may have by contract, Delaware Law, or otherwise.
(g) In the event Parent, the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any
other person and shall not be the continuing or surviving corporation or
entity in such consolidation or merger or (ii) transfers all or
substantially all of its properties and assets to any person, then and in
either such case, proper provision shall be made so that the successors and
assigns of Parent or the Surviving Corporation, as the case may be, shall
assume the obligations set forth in this Section 6.7.
6.8. Agreement to Defend. In the event any claim, action, suit,
investigation or other proceeding by any governmental body or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages in
connection therewith, whether before or after the Effective Time, the parties
hereto agree to cooperate and use their reasonable efforts to defend against and
respond thereto.
6.9. Obligations of Merger Sub. Parent shall take all action necessary to
cause Merger Sub to approve and adopt the Agreement, to perform its obligations
hereunder and to consummate the Merger on the terms and conditions set forth in
this Agreement.
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6.10. Accounting for Merger. The Merger shall be accounted for under the
purchase method.
6.11. Executive Employment Agreement. As of or prior to the Effective Time,
Parent shall cause Nabors Drilling USA, Inc. to enter into a new employment
agreement with James E. Brown, the Chairman and Chief Executive Officer of the
Company, in substantially the form of Exhibit 6.11A.
6.12. Takeover Statutes. If any "fair price", "moratorium", "control share
acquisition" or other form of antitakeover statute or regulation shall become
applicable to the transactions contemplated hereby, each of Parent and the
Company and the members of their respective Boards of Directors shall grant such
approvals and take such actions as are reasonably necessary so that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise act to eliminate or minimize the
effects of such statute or regulation on the transactions contemplated hereby.
6.13. Employee Matters. The Surviving Corporation shall be responsible for
all severance obligations payable to its employees terminated after the
Effective Time, in accordance with its severance policies, if any, as in effect
at the time of such termination. Notwithstanding the foregoing, in the event an
employee of the Company listed in Exhibit 6.13 and still employed by the Company
immediately prior to the Effective Time is terminated by the Surviving
Corporation (or an affiliate) within one year of the Effective Time, Parent
shall cause the Surviving Corporation (or such affiliate) to pay such terminated
employee the amounts specified opposite such employee's name on Exhibit 6.13, in
lieu of any severance otherwise payable by the Surviving Corporation (or such
affiliate) under any severance agreement, policy or program in effect at the
time of such termination.
6.14. Stockholder Agreements.
(a) From and after the date of this Agreement and ending on the date
of termination of this Agreement, the Company agrees not to register the
transfer (book-entry or otherwise) of any certificate or uncertificated
interest representing any of the shares beneficially owned by the
stockholders signatory to the Stockholder Agreements (excluding shares with
respect to which such stockholder does not possess sole power to dispose or
direct the disposition) unless such transfer is permitted under the terms
of the applicable Stockholders Agreement.
(b) The Company represents to Parent and Merger Sub that, except as
disclosed in Schedule 4.5, paragraph 2 of the Company Disclosure Schedule,
none of the execution and delivery of the Stockholder Agreements by the
parties thereto, the consummation of the transactions contemplated thereby
or compliance by the stockholders signatory thereto with any of the
provisions thereof will trigger a "change in control" or similar provision
of any contract, agreement or understanding to which the Company or any of
Company's Subsidiaries is a party, or by which any of their respective
properties or assets are bound.
ARTICLE VII
CLOSING CONDITIONS
7.1. Conditions to Obligations of Each Party Under this Agreement. The
respective obligations of each party to effect the Merger and the other
transactions contemplated herein shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which may
be waived, in whole or in part, to the extent permitted by applicable law:
(a) Effectiveness of the Registration Statement. The Registration
Statement shall have been declared effective by the SEC under the
Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceedings
for that purpose shall have been initiated by the SEC.
(b) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the holders of a majority of the outstanding
shares of the Company Common Stock.
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(c) No Order. No governmental entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction
or other order (whether temporary, preliminary or permanent) which is in
effect and which has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger.
(d) Tax Opinion. The Company shall have received an opinion of Baker &
Botts, L.L.P., and Parent shall have received an opinion of Baker &
McKenzie, each dated the Effective Time, subject to the assumptions and
conditions set forth therein, to the effect that (i) the Merger will be
treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code; (ii) each of Parent, Merger Sub and
the Company will be a party to reorganization within the meaning of Section
368(b) of the Code; (iii) no gain or loss will be recognized by the
Company, Parent or Merger Sub as a result of the Merger; and (iv) no gain
or loss will be recognized by a stockholder of the Company as a result of
the Merger, except that gain (if any) realized by a stockholder of the
Company as a result of the Merger will be recognized to the extent of the
amount of cash received by such stockholder and income or gain may be
recognized by stockholders in special circumstances (such as a stockholder
who acquired Company Common Stock through exercise of employee stock
options or otherwise as compensation for employment). In rendering such
opinions, Baker & Botts, L.L.P. and Baker & McKenzie may receive and rely
upon representations contained in certificates of the Company, Parent,
Merger Sub and others.
(e) HSR Act. The applicable waiting period under the HSR Act shall
have expired or been terminated.
(f) AMEX. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing on the American Stock Exchange,
subject to notice of issuance.
7.2. Additional Conditions to Obligations of Parent. The obligations of
Parent to effect the Merger and the other transactions contemplated in this
Agreement, unless otherwise waived in writing, are also subject to the following
conditions:
(a) Representations and Warranties. Each of the representations and
warranties of the Company contained in this Agreement shall be true and
correct when made and on and as of the Effective Time as if made on and as
of such date, except where failure to be so true and correct would not have
a Material Adverse Effect on the Company, and except that those
representations and warranties which address matters only as of a
particular date shall remain true and correct as of such date, except where
the failure to be so true and correct would not have a Material Adverse
Effect on the Company. Solely for purposes of this Section 7.2(a) and in
determining compliance with the condition(s) set forth herein, any
representation and warranty made by the Company in this Agreement shall be
read and interpreted as if the qualification stated therein with respect to
materiality or the Material Adverse Effect on the Company were not
contained therein. Parent shall have received a certificate of the
President of the Company to such effect.
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Effective Time. Parent shall have received a certificate of
the President or Chief Financial Officer of the Company to such effect.
(c) Other Agreements. The affiliate agreements to be entered into
prior to the Effective Time, as contemplated by Section 6.4 shall be in
full force and effect.
(d) Company Material Adverse Effect. Since the date of this Agreement,
the Company shall not have suffered a Material Adverse Effect.
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7.3. Additional Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger and the other transactions contemplated in this
Agreement, unless otherwise waived in writing, is also subject to the following
conditions:
(a) Representations and Warranties. Each of the representations and
warranties of Parent and Merger Sub contained in this Agreement shall be
true and correct when made and on and as of the Effective Time as if made
on and as of such date, except where the failure to be so true and correct
would not have a Material Adverse Effect on Parent, and except that those
representations and warranties which address matters only as of a
particular date shall remain true and correct as of such date, except where
the failure to be so true and correct would not have a Material Adverse
Effect on Parent. Solely for purposes of this Section 7.3(a) and in
determining compliance with the condition(s) set forth herein, any
representation and warranty made by the Parent in this Agreement shall be
read and interpreted as if the qualification stated therein with respect to
materiality or Material Adverse Effect on Parent were not contained
therein. The Company shall have received a certificate of the President of
Parent to such effect.
(b) Agreements and Covenants. Parent shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Effective Time. The Company shall have received a certificate of the
President of Parent to that effect.
(c) Parent Material Adverse Effect. Since the date of this Agreement,
Parent shall not have suffered a Material Adverse Effect.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1. Termination.
(a) This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of this Agreement and the
Merger by the stockholders of the Company, only in the following ways:
(i) by mutual written consent of Parent and the Company;
(ii) by Parent, upon an intentional breach of any covenant or
agreement on the part of the Company set forth in this Agreement, or if
any material representation or warranty of the Company shall be or shall
have become untrue, in either case such that the conditions set forth in
Section 7.2(a) or Section 7.2(b) would not be satisfied (a "Terminating
Company Breach"), provided that if such Terminating Company Breach is
curable by the Company through the exercise of its reasonable best
efforts and for so long as the Company continues to exercise such
reasonable best efforts, Parent may not terminate this Agreement under
this Section 8.1(a)(ii);
(iii) by the Company, upon an intentional breach of any covenant or
agreement on the part of Parent or Merger Sub set forth in this
Agreement, or if any material representation or warranty of Parent or
Merger Sub shall be or shall have become untrue, in either case such
that the conditions set forth in Section 7.3(a) or Section 7.3(b) would
not be satisfied (a "Terminating Parent Breach"), provided that if such
Terminating Parent Breach is curable by Parent or Merger Sub through the
exercise of its reasonable best efforts and for so long as Parent or
Merger Sub continues to exercise such reasonable best efforts, the
Company may not terminate this Agreement under this Section 8.1(a)(iii);
(iv) by either Parent or the Company, if there shall be any order,
decree or ruling of any United States federal or state court of
competent jurisdiction, or any United States federal or state
governmental, regulatory or administrative authority, which is final and
nonappealable, restraining, enjoining or otherwise preventing the
consummation of the Merger;
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(v) by either Parent or the Company, if the Merger shall not have
been consummated before September 30, 1999 (unless the failure to
consummate the Merger by such date shall be due to the action or failure
to act of the party seeking to terminate this Agreement);
(vi) by either Parent or the Company, if the stockholders' meeting
provided for in Section 6.1 shall have been held and the Agreement shall
fail to receive the stockholder approval required by Section 7.1(b) at
such meeting (including any adjournments and postponements thereof);
(vii) by Parent, if, (A) the Board of Directors of the Company
withdraws, or materially modifies or materially changes, its
recommendation of this Agreement or the Merger in a manner adverse to
Parent or Merger Sub or shall have resolved to do any of the foregoing;
(B) the Board of Directors of the Company (i) shall have recommended to
the stockholders of the Company a Company Acquisition Proposal or (ii)
after the expiration of ten business days following the public
announcement (or, in the case of a tender offer, following the
commencement of such tender offer) of any Company Acquisition Proposal,
shall have (1) failed to recommend against accepting such Company
Acquisition Proposal or (2) taken no position with respect thereto or
(iii) resolved to do any of the foregoing; or (C) the Company shall have
effected an amendment, waiver, termination or other alteration of the
provisions of the Company Rights Plan in such a manner that any person
(other than Parent or Merger Sub) shall have been permitted to acquire
"beneficial ownership" or the right to acquire beneficial ownership of,
or any "group" (as such terms are defined under Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder),
shall have been formed which beneficially owns, or has the right to
acquire beneficial ownership of, more than 15% of the then outstanding
shares of capital stock of the Company, in each case without triggering
the Company Rights Plan; or
(viii) by the Company, if the Board of Directors of the Company
determines that proceeding with the Merger would be inconsistent with
its fiduciary obligations by reason of a Company Acquisition Proposal as
to which the Company has made the determinations and taken the actions
described in clauses (A), (B) and (C) of the proviso contained in
Section 5.6(a), and elects to terminate this Agreement effective prior
to the satisfaction of the condition set forth in Section 7.1(b);
provided that the Company may not effect such termination pursuant to
this Section 8.1(a)(viii) unless and until (A) Parent receives at least
five business days' prior written notice from the Company of its
intention to effect such termination pursuant to this Section
8.1(a)(viii); (B) during such period, the Company shall, and shall cause
its respective financial and legal advisors to, consider any adjustment
in the terms and conditions of this Agreement that Parent may propose;
and provided, further, that any termination of this Agreement pursuant
to this Section 8.1(a)(viii) shall not be effective until the Company
has made the termination payment required by Section 8.5(b).
(b) Notwithstanding any of the foregoing, the right of any party
hereto to terminate this Agreement pursuant to Section 8.1(a) shall remain
operative and in full force and effect regardless of any investigation made
by or on behalf of any party hereto, any person controlling any such party
or any of their respective officers or directors, whether prior to or after
the execution of this Agreement.
8.2. Effect of Termination. Except as provided in Section 8.5 or Section
9.1, in the event of the termination of this Agreement pursuant to Section
8.1(a), this Agreement shall forthwith become void, there shall be no liability
on the part of Parent, Merger Sub or the Company or any of their respective
officers or directors to the other and all rights and obligations of any party
hereto shall cease, except that nothing herein shall relieve any party for any
breach of this Agreement.
8.3. Amendment. This Agreement may be amended by the parties hereto by
action taken by or on behalf of their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that, after approval of the
Merger by the stockholders of the Company, no amendment shall be made which by
Delaware Law requires the further approval of stockholders. This Agreement may
not be amended except by an instrument in writing signed by the parties hereto.
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8.4. Waiver. At any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any of the obligations or other acts
of the other parties hereto, (b) waive any inaccuracies in the representations
and warranties of the other party contained herein or in any document delivered
pursuant hereto and (c) waive compliance by the other parties with any of the
agreements or conditions contained herein. Any such extension or waiver shall be
valid only if set forth in an instrument in writing signed by the party or
parties to be bound thereby.
8.5. Fees; Expenses and Other Payments.
(a) Except as provided in Section 8.5(b) and Section 8.5(c), each
party shall bear its own costs and expenses in connection with this
Agreement and the transactions contemplated hereby provided, however, that
the allocable share of each of Parent and the Company for all costs and
expenses related to printing, filing and mailing the Registration Statement
and the Proxy Statement and all SEC and other regulatory filing fees
incurred in connection with the Registration Statement and the Proxy
Statement shall be one-half. Notwithstanding anything to the contrary, all
of the costs and expenses in connection with this Agreement and the
transactions contemplated hereby incurred by the Company and the Parent
shall, upon the consummation of the Merger, be borne by the Surviving
Corporation.
(b) If this Agreement is terminated for any reason pursuant to Section
8.1(a)(vi), (vii) or (viii), then the Company shall pay Parent a fee of $5
million, plus all reasonable third party costs incurred by Parent
(including, but not limited to costs for attorneys, accountants and other
advisors) prior to the time of such termination in cash by wire transfer to
an account designated by Parent; provided that such third party costs shall
not exceed $500,000.
(c) If this Agreement is terminated by either the Parent or the
Company pursuant to Section 8.1(a)(ii) or (iii) (as the case may be), then
the other party shall pay the party that terminated the Agreement a fee of
$7.5 million (in the case of a termination by Parent pursuant to Section
8.1(a)(ii)) or a fee of $15.0 million (in the case of a termination by the
Company pursuant to Section 8.1(a)(iii)).
(d) The parties agree that the amounts provided in Section 8.5(b) and
(c) payable upon the occurrence of the events specified therein have been
determined by negotiation and reflect their best estimate and judgment of
the monetary value of the losses and damages to be incurred in connection
with, and time, effort, expense and cost of opportunity associated with,
the transactions contemplated in this Agreement, and the parties agree to
accept payment of such amount as liquidated damages in full and complete
satisfaction of all claims and expenses arising from the occurrence of such
events (including, but not limited to, claims for specific performance).
Any payment required to be made pursuant to Section 8.5(b) or (c) shall be
made not later than two business days after delivery to the party required
to make such payment of notice of demand for payment and shall be made by
wire transfer of immediately available funds to an account designated in
such notice. Nothing in this Section 8.5(d) shall affect the rights of
either party under the Company Stock Option Agreement.
ARTICLE IX
GENERAL PROVISIONS
9.1. Effectiveness of Representations, Warranties and Agreements.
(a) Except as set forth in Section 9.1(b), the representations,
warranties and agreements of each party hereto shall remain operative and
in full force and effect regardless of any investigation made by or on
behalf of any other party hereto, any person controlling any such party or
any of their officers or directors, whether prior to or after the execution
of this Agreement.
(b) The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this
Agreement pursuant to Article VIII, except that the agreements set forth in
Article I and II, and Sections 5.5, 6.7, 6.10 and 6.13 shall survive the
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Effective Time and those set forth in Sections 5.7, 8.2, 8.5 and Article IX
shall survive the termination of this Agreement.
9.2. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered, mailed or transmitted, and shall be effective upon
receipt, if delivered personally, sent by expedited courier or messenger
service, mailed by registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like changes of address) or sent by
electronic transmission to the telecopier number specified below:
(a) If to Parent or Merger Sub:
Nabors Industries, Inc.
515 West Greens Road, Suite 1200
Houston, Texas 77067
Attention: Anthony G. Petrello
Telecopier No.: (281) 775-8188
with a copy to:
Nabors Corporate Services, Inc.
515 West Greens Road, Suite 1200
Houston, Texas 77067
Attention: Legal Department
Telecopier No.: (281) 775-8431
(b) If to the Company:
Bayard Drilling Technologies, Inc.
4005 NW Expressway
Suite 550E
Oklahoma City, Oklahoma 73116-1679
Attention: James E. Brown
Telecopier No.: (405) 840-9553
with a copy to:
Baker & Botts, L.L.P.
2001 Ross Avenue
Dallas, Texas 75201-2916
Attention: Geoffrey L. Newton
Telecopier No.: 214/953-6503
Notice to a "copy to" address shall be provided as a courtesy, but shall not be
deemed to be actual notice received by a party for any purpose. Any party may
change the address to which notices, requests, demands, claims and other
communications hereunder are to be delivered by giving the other parties notice
in the manner herein set forth.
9.3. Certain Definitions. For purposes of this Agreement, the term:
(a) "affiliate" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person.
(b) "business day" means any day other than a day on which banks in
the State of New York are authorized or obligated to be closed.
(c) "control" (including the terms "controlled," "controlled by" and
"under common control with") means the possession, directly or indirectly,
of the power to direct or cause the direction of the
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management or policies of a person, whether through the ownership of stock,
by contract or credit arrangement or otherwise.
(d) "knowledge" or "known" shall mean, with respect to any matter in
question, if an executive officer of the Company or Parent, as the case may
be, has actual knowledge of such matter.
(e) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d) of the Exchange Act).
(f) "Significant Subsidiary" or "Significant Subsidiaries" means any
Subsidiary of the Company or Parent, as the case may be, that would
constitute a Significant Subsidiary of such party within the meaning of
Rule 1-02 of Regulation S-X of the SEC.
(g) "Subsidiary" or "Subsidiaries" of the Company, Parent, the
Surviving Corporation or any other person, means any corporation,
partnership, limited liability company, joint venture or other legal entity
of which the Company, Parent, the Surviving Corporation or such other
person, as the case may be (either alone or through or together with any
other Subsidiary), owns, directly or indirectly, 50% or more of the capital
stock or other equity interests the holders of which are generally entitled
to vote for the election of the board of directors or other governing body
of such corporation or other legal entity.
9.4. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
9.5. Severability. If any term or other provision of this Agreement is
determined to be invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner to the end that the transactions contemplated hereby are fulfilled to the
extent possible.
9.6. Entire Agreement. This Agreement (together with the Exhibits) and the
Company Stock Option Agreement and the constitute the entire agreement of the
parties and supersede all prior agreements and undertakings, both written and
oral, between the parties, or any of them, with respect to the subject matter
hereof.
9.7. Assignment. This Agreement shall not be assigned by operation of law
or otherwise except Merger Sub may, without the Company's approval, assign its
interests to any wholly owned Subsidiary of Parent.
9.8. Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied (other than the provisions of Article II and Sections 6.7 and
6.11), is intended to or shall confer upon any other person any right, benefit
or remedy of any nature whatsoever under or by reason of this Agreement.
9.9. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of any party hereto in the exercise of any right hereunder
shall impair such right or be construed to be a waiver of, or acquiescence in,
any breach of any representation, warranty or agreement herein, nor shall any
single or partial exercise of any such right preclude other or further exercise
thereof or of any other right. Except as set forth in Section 8.5(d), all rights
and remedies existing under this Agreement are in addition to, and not exclusive
of, any rights or remedies otherwise available.
9.10. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law.
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9.11. Jurisdiction. Each party hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court for the District of Delaware or
any court of the State of Delaware located in the City of Wilmington in any
action, suit or proceeding arising in connection with this Agreement, and agrees
that any such action, suit or proceeding shall be brought only in such court
(and waives any objection based on forum non conveniens or any other objection
to venue therein); provided, however, that such consent to jurisdiction is
solely for the purpose referred to in this Section 9.11 and shall not be deemed
to be a general submission to the jurisdiction of said Courts or in the State of
Delaware other than for such purpose. PARENT AND THE COMPANY HEREBY WAIVE ANY
RIGHT TO A TRIAL BY JURY IN CONNECTION WITH ANY SUCH ACTION, SUIT OR PROCEEDING.
9.12. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
NABORS INDUSTRIES, INC
By: /s/ ANTHONY G. PETRELLO
-----------------------------------
Anthony G. Petrello
President and Chief Operating
Officer
NABORS ACQUISITION CORP. VII
By: /s/ ANTHONY G. PETRELLO
-----------------------------------
Anthony G. Petrello
President
BAYARD DRILLING TECHNOLOGIES, INC.
By: /s/ JAMES E. BROWN
-----------------------------------
James E. Brown
President
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<PAGE> 184
ANNEX B
Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
February 12, 1999
Board of Directors
Bayard Drilling Technologies, Inc.
4005 NW Expressway, Suite 550
Oklahoma City, OK 73116
Dear Sirs:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of common stock, par value $0.01 per share ("Company
Common Stock"), of Bayard Drilling Technologies, Inc. (the "Company") of the
Consideration (as defined below) to be received pursuant to the terms of the
Agreement and Plan of the Merger (the "Merger Agreement"), dated as of October
19, 1998 and as amended, by and among Nabors Industries, Inc. ("Nabors"), Nabors
Acquisition Corp. VII ("Merger Sub"), a wholly owned subsidiary of Nabors, and
the Company, pursuant to which Nabors Acquisition Corp. VII will be merged (the
"Merger") with and into the Company.
Pursuant to the Merger Agreement, each share of Company Common Stock will
be converted, subject to certain exceptions, into the right to receive (i)
0.3375 shares of common stock, $0.10 par value per share ("Nabors Common
Stock"), of Nabors and (ii) $0.30 in cash (collectively, the "Consideration").
In arriving at our opinion, we have reviewed the Merger Agreement, Stock
Option Agreement dated October 19, 1998 (the "Stock Option Agreement") by and
among Nabors and the Company, and the Stockholder Agreements dated October 19,
1998 (the "Stockholder Agreements") between Nabors, Merger Sub and certain
stockholders (the Stockholder Agreements, together with the Stock Option
Agreement and the Merger Agreement, the "Agreements"). We also have reviewed
financial and other information that was publicly available or furnished to us
by the Company and Nabors, including information provided during discussions
with their respective managements. Included in the information provided during
discussions with the respective managements were certain financial projections
of the Company for the period beginning January 1, 1998 and ending December 31,
2002 prepared by the management of the Company. In addition, we have compared
certain financial and securities data of the Company and Nabors with various
other companies whose securities are traded in public markets, reviewed the
historical stock prices and trading volumes of Company Common Stock and Nabors
Common Stock, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion. We were
not requested to, nor did we, solicit the interest of any other party in
acquiring the Company.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and Nabors or
their respective representatives, or that was otherwise reviewed by us. In
particular, we have relied upon the estimates of management of the Company of
the operating synergies achievable as a result of the Merger and upon our
discussion of such synergies with the management of Nabors. With respect to the
financial projections supplied to us, we have assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company. We have not assumed any
responsibility for making an independent evaluation of any assets or liabilities
or for making any independent verification of any of the information reviewed by
us. We have relied as to certain legal matters on advice of counsel to the
Company.
<PAGE> 185
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion as to the prices
at which Nabors Common Stock will actually trade at any time. Our opinion does
not address (i) the relative merits of the Merger and the other business
strategies being considered by the Company's Board of Directors, (ii) the
business decision of the Company's Board of Directors to proceed with the Merger
or (iii) the fairness of any terms of the Agreements, other than the
Consideration to be received by the holders of the Company Common Stock in the
Merger. Our opinion does not constitute a recommendation to any stockholder as
to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ acted as lead managing
underwriter for the initial public offering of the Company Common Stock in
November 1997. DLJ and the Company are currently involved in class action
litigation relating to such offering. In addition, DLJ acted as lead managing
underwriter for the issuance of the Company's 11% Senior Notes in June 1998 and
has advised the Company with respect to its adoption of the shareholders rights
plan in August 1998.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Consideration to be received in the Merger is fair to
the holders of Company Common Stock from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ D. DWIGHT SCOTT
----------------------------------
D. Dwight Scott
Managing Director
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<PAGE> 186
ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
Appraisal Rights. (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
<PAGE> 187
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of the notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the
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merger or consolidation, the record date shall be such effective date. If
no record date is fixed and the notice is given prior to the effective
date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware, or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
C-3
<PAGE> 189
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
<PAGE> 190
BAYARD DRILLING TECHNOLOGIES, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD MARCH 16, 1999
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The signatory of this Proxy, by executing on the reverse side of this
Proxy, hereby appoints and constitutes James E. Brown and David E. Grose, III,
and each of them, with full power of substitution, with the powers the signatory
of this Proxy would possess if personally present, to vote all shares of Bayard
Drilling Technologies, Inc. Common Stock entitled to be voted by the signatory
at the Special Meeting of Stockholders to be held at 10:00 a.m., local time, on
March 16, 1999, or at any reconvened meeting after any adjournment or
postponement thereof, on the matter set forth on the reverse side in accordance
with any directions given by the signatory and, in their discretion, on all
other matters that may properly come before the Special Meeting or any
reconvened meeting after any adjournment or postponement thereof.
IMPORTANT - PLEASE SIGN AND DATE ON THE REVERSE SIDE AND RETURN PROMPTLY.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED ON THE
REVERSE SIDE. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR ITEM 1.
THIS PROXY WILL BE VOTED AS DIRECTED BELOW, OR IF NO DIRECTION IS INDICATED,
WILL BE VOTED "FOR" ITEM 1. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM
1.
<PAGE> 191
BAYARD DRILLING TECHNOLOGIES, INC.
SPECIAL MEETING OF STOCKHOLDERS
Please mark your vote like this [X]
1. Adoption of the Merger Agreement as described in the accompanying Proxy
Statement/Prospectus.
[ ] For [ ]Against [ ]Abstain
[ ] I (WE) PLAN TO ATTEND THE SPECIAL MEETING OF
STOCKHOLDERS ON MARCH 16, 1999.
Please sign exactly as your name appears hereon.
Executors, administrators, guardians, and others
signing in a fiduciary capacity should indicate
such capacity when signing. If shares are held
jointly, each holder should sign. If a
corporation, please sign in full corporate name by
duly authorized officer. If a partnership, please
sign in partnership name by authorized person.
Date
---------------------------------------------
Signature(s)
-------------------------------------
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<PAGE> 192
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Nabors Industries, Inc.
We have audited the accompanying consolidated balance sheets of Nabors
Industries, Inc. and Subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Nabors
Industries, Inc. and Subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------------
Coopers & Lybrand L.L.P.
Houston, Texas
November 12, 1997
