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Filed pursuant to Rule 424(b)(3)
Registration No. 333-59623
PROSPECTUS
BAYARD DRILLING TECHNOLOGIES, INC.
OFFER TO EXCHANGE ITS 11% SENIOR NOTES DUE 2005, SERIES B FOR ANY AND ALL OF
ITS OUTSTANDING 11% SENIOR NOTES DUE 2005, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON August 28,
1998, UNLESS EXTENDED.
Bayard Drilling Technologies, a Delaware corporation, ("Bayard" or the
"Company"), hereby offers (the "Exchange Offer"), upon the terms and conditions
set forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its 11% Senior Notes due June 30, 2005, Series B (the "Exchange Notes"),
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which this Prospectus
is a part, for each $1,000 principal amount of its outstanding 11% Senior Notes
due June 30, 2005, Series A (the "Old Notes"), of which $100,000,000 principal
amount is outstanding. The form and terms of the Exchange Notes are the same as
the form and terms of the Old Notes (which they are intended to replace) except
that the Exchange Notes will bear a Series B designation and have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer. See "The Exchange Offer." The Exchange Notes will
evidence the same debt as the Old Notes (which they are intended to replace) and
will be issued under and be entitled to the benefits of the Indenture (the
"Indenture") dated June 26, 1998 among the Company, the Guarantors (as
hereinafter defined) and U.S. Trust Company of Texas, N.A., as Trustee (the
"Trustee"), governing the Old Notes. See "The Exchange Offer" and "Description
of Exchange Notes."
The Exchange Notes will mature on June 30, 2005. Interest on the Exchange
Notes will be payable semi-annually on June 30 and December 31 of each year,
commencing on December 31, 1998. The Company will not be required to make any
mandatory sinking fund or redemption payments with respect to the Exchange
Notes. The Exchange Notes will not be redeemable prior to June 30, 2003, on or
after which the Exchange Notes will be redeemable, in whole or in part, at the
option of the Company, at the redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages (as hereinafter defined), 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 Exchange Notes with the net proceeds of a Qualified Equity
Offering (as hereinafter defined) at a redemption price equal to 111% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of redemption, provided that at least $65
million in aggregate principal amount of Exchange Notes remains outstanding
immediately after the occurrence of such redemption. See "Description of
Exchange Notes -- Optional Redemption." Upon a Change of Control (as hereinafter
defined) each holder of the Exchange Notes will have the right to require the
Company to repurchase all or any part of such holder's Exchange Notes at a price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the date of repurchase. See
"Description of Exchange Notes -- Change of Control." (Cover text continued on
next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 31, 1998
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The Old Notes were issued by the Company in an offering (the "Old Notes
Offering") consummated on June 26, 1998. The Company used $75 million of the
proceeds from the sale of the Old Notes to finance the acquisition (the
"TransTexas Acquisition") of 25 drilling rigs and certain related equipment and
other assets from TransTexas Gas Corporation ("TransTexas"), which occurred
concurrently with the Old Notes Offering. The remainder of the net proceeds to
the Company from the Old Notes Offering have been, or will be, used for general
corporate purposes.
The Exchange Notes will be senior unsecured obligations of the Company
and will 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. The Company is a
holding company and conducts substantially all of its operations through its
wholly owned subsidiaries. The Exchange Notes will be guaranteed (the
"Guarantees") by the present and future domestic Subsidiaries (as hereinafter
defined) of the Company (the "Guarantors"). The Guarantees will be senior
unsecured obligations of each Guarantor and will rank pari passu in right of
payment with all senior indebtedness and other senior obligations of such
Guarantor. The holders of secured indebtedness of the Company and the Guarantors
will have claims with respect to the assets constituting collateral for such
indebtedness that are prior to claims of holders of the Exchange Notes. See
"Description of Exchange Notes." As of June 15, 1998, on a pro forma basis after
giving effect to the TransTexas Acquisition (as hereinafter defined) and the Old
Notes Offering, the Company had approximately $121.1 million of outstanding
senior indebtedness, of which $21.1 million is secured by certain assets of the
Subsidiaries.
The Company will accept for exchange any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York time, on August 28,
1998, unless extended by the Company in its sole discretion to no later than the
30th business day (or, with the Initial Purchasers' consent, to no later than
the 40th business day) after the registration statement to which this Prospectus
relates is declared effective (the "Expiration Date"). Tenders of Old Notes may
be withdrawn at any time prior to 5:00 p.m. on the Expiration Date. The Exchange
Offer is subject to certain customary conditions. The Old Notes were sold by the
Company on June 26, 1998 to the Initial Purchasers (as hereinafter defined) in
the Old Notes Offering, which was a transaction effected without registration
under the Securities Act in reliance upon an exemption under the Securities Act.
The Initial Purchasers subsequently placed the Old Notes in the United States
with qualified institutional buyers in reliance upon Rule 144A under the
Securities Act and outside the United States with non-U.S. persons in reliance
on Regulation S under the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold or otherwise transferred unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered hereunder in order to satisfy the obligations of the Company under the
Registration Rights Agreement (the "Exchange Offer Registration Rights
Agreement") entered into by the Company in connection with the Old Notes
Offering. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the Exchange Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes. See "The Exchange Offer -- Purpose
and Effect of the Exchange Offer" and "-- Resale of the Exchange Notes." Each
broker-dealer (a "Participating Broker-Dealer") that receives Exchange Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Notwithstanding the
foregoing, any purchaser of Old Notes who is an "affiliate" of the Company or
who intends to participate in the Exchange Offer for the purpose of distributing
the Exchange Notes may be deemed to be an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make
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this Prospectus available to any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of Distribution."
There has not previously been any public market for the Old Notes or the
Exchange Notes. Although the Initial Purchasers have informed the Company that
they intend to make a market in the Exchange Notes, they are not obligated to do
so, and any such market-making activities with respect to the Exchange Notes may
be interrupted or discontinued at any time without notice. The Company does not
intend to list the Exchange Notes on any securities exchange or to seek approval
for quotation through any automated quotation system.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and will be subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Old Notes will continue to be subject to the
existing restrictions upon transfer thereof and the Company generally will have
no further obligation to such holders to provide for registration under the
Securities Act of the Old Notes held by them. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Notes could be adversely affected. See "Risk Factors -- Exchange
Offer Procedures" and "Exchange Offer -- Consequences of Failure to Exchange."
The Exchange Notes will be available initially only in book-entry form.
The Company expects that the Exchange Notes issued pursuant to this Exchange
Offer will be issued in the form of one or more Global Notes (as hereinafter
defined), which will be deposited with, or on behalf of, The Depository Trust
Company ("DTC" or the "Depositary") and registered in its name or in the name of
Cede & Co., its nominee. Beneficial interests in a Global Note representing the
Exchange Notes will be shown on, and transfers thereof will be effected through,
records maintained by the Depositary and its participants. After the initial
issuance of the Global Notes, Exchange Notes in certificated form will be issued
in exchange for a Global Note only on the terms set forth in the Indenture. See
"Description of Exchange Notes -- Book Entry, Delivery, Form and Transfer."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
This Prospectus, together with the Letter of Transmittal, is being sent
to all registered holders of Old Notes as of July 31, 1998.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No dealer-manager is being used in connection
with this Exchange Offer. The Company will pay all expenses incurred by it
incident to the Exchange Offer. See "Use of Proceeds" and "Plan of
Distribution."
The Exchange Offer is not being made to, nor will tenders be accepted
from or on behalf of, holders of the Old Notes in any jurisdiction in which the
making of the Exchange Offer or acceptance thereof would not be in compliance
with the laws of such jurisdiction or would otherwise not be in compliance with
any provision of any applicable security law.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical fact included in this Prospectus, including without
limitation certain statements under the captions "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," may constitute forward-looking statements.
Forward-looking statements can often, but not always, be identified by
terminology such as "anticipate," "believe," "estimate," "intend" and "expect"
and similar expressions. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed in this Prospectus,
including without limitation in conjunction with the forward-looking statements
included in this Prospectus and in the section of this Prospectus entitled "Risk
Factors" under the headings "Cyclical Conditions; Recent Weakening of Demand for
Drilling Services," "Substantial Leverage," "Holding Company Structure,"
"Ranking of the Exchange Notes," "Restrictions Imposed by Lenders," "Dependence
on Oil and Gas Industry," "Concentration of Customer Base," "Limited Operating
History," "Management of Growth; Risks of Acquisition Strategy," "Shortage of
Qualified and Experienced Labor," "Competition," "TransTexas Drilling Alliance,"
"Class Action Litigation," "Operating Hazards and Uninsured Risks," "Shortage of
Drilling Equipment and Supplies," "Capital Requirements and Liquidity,"
"Reliance on Key Personnel," "Control by Existing Management and Stockholders;
Voting Agreement among Certain Stockholders," "Inability to Purchase Exchange
Notes Upon a Change of Control," "Governmental Regulation and Environmental
Matters," "Risks Associated with Footage and Turnkey Drilling," "Lack of Public
Market for the Notes," "Fraudulent Conveyance Considerations" and "Exchange
Offer Procedures; Consequences of Failure to Exchange." All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements. The Company disclaims any intention or obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-4 (the "Exchange Offer Registration Statement," which term shall
encompass all amendments, exhibits and schedules thereto) pursuant to the
Securities Act, and the rules and regulations promulgated thereunder, covering
the Exchange Notes being offered hereby. This Prospectus does not contain all of
the information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Company and the Exchange Offer,
reference is made to the Exchange Offer Registration Statement. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
In connection with the Company's initial public offering of 11,040,000
shares of its common stock, par value $0.01 per share ("Common Stock"),
consummated in November 1997 (the "Initial Public Offering"), the Company became
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Commission. The
Exchange Offer Registration Statement and such other reports, proxy statements
and other information filed by the Company with the Commission can be inspected
at, and copies may be obtained at prescribed rates from, the public reference
facilities maintained by the Commission at its principal offices located at
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549, as well as at the
Commission's regional offices located at Seven World Trade Center, New York, New
York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. The Exchange Offer Registration Statement and such
other reports, proxy statements and other information may also be obtained from
the web site that the Commission maintains at http://www.sec.gov. Reports, proxy
statements and other information concerning the Company can also be inspected at
the offices of the American Stock Exchange, 86 Trinity Place, New York 10016,
where the Common Stock is listed.
The Company will furnish periodic reports to the Trustee, which will make
them available upon request to the holders of the Exchange Notes.
To permit compliance with Rule 144A in connection with resales of Old
Notes, the Company will furnish upon the request of the holder of an Old Note
and prospective purchaser designated by such holder the information required to
be delivered under Rule 144A(d)(4) under the Securities Act if at the time of
such request the Company is not a reporting company under Section 13 or 15(d) of
the Exchange Act or exempt from reporting pursuant to Rule 12g3-2(b) thereunder.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus. Unless otherwise indicated or the context otherwise requires,
the terms "Bayard" and the "Company" include Bayard Drilling Technologies, Inc.
and its predecessors and subsidiaries. All capitalized terms used in this
Prospectus with respect to the Old Notes or the Exchange Notes (collectively,
the "Notes") and not otherwise defined herein have the meanings set forth under
"Description of Exchange Notes -- Certain Definitions." Unless otherwise
indicated, the information contained herein (including the historical and pro
forma financial information) relating to periods prior to June 26, 1998, the
date of the TransTexas Acquisition, does not give effect to the TransTexas
Acquisition. The 1997 pro forma financial results presented herein reflect
operating results attributable to all acquisitions completed by the Company
during 1997.
THE COMPANY
The Company is a leading provider of contract land drilling services to
major and independent oil and gas companies. As of June 15, 1998, pro forma for
the TransTexas Acquisition, the Company's rig fleet consisted of 88 rigs, of
which 73 were being marketed and 15 were available for refurbishment. For the
three months ended March 31, 1998, and the months of April and May, 1998, the
Company experienced overall utilization rates of approximately 85%, 78% and 70%,
respectively, for its marketed rigs (excluding the 25 drilling rigs (21 of which
are operational and four of which require refurbishment) acquired in the
TransTexas Acquisition (the "TransTexas Rigs")). See "-- Recent Operating
Performance."
The Company's fleet consists primarily of rigs capable of deep drilling
applications (well depths of 15,000 feet or greater). The Company believes that
deep drilling targets are more attractive to oil and gas companies due to new
technologies, including (i) three-dimensional seismic techniques, (ii)
increasingly accurate down hole measurement devices and (iii) improved guidance
systems and directional drilling motors for horizontal and directional wells. Of
the Company's 88 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. The
Company's large percentage of diesel electric silicon controlled rectifier
("SCR") rigs, comprising 31 of its 88 rigs, positions the Company's fleet as one
of the most technically advanced in the industry.
The Company was formed in December 1996 as the successor to Anadarko
Drilling Company ("Anadarko"), which owned ten rigs. Through June 15, 1998, pro
forma for the TransTexas Acquisition, the Company had acquired 78 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.
For the quarter ended March 31, 1998, the Company reported revenues of
$24 million, EBITDA of $6 million and net income of $1.8 million. For the year
ended December 31, 1997, pro forma for the acquisitions completed in that year,
the Company reported revenue of $81.4 million, EBITDA of $18.2 million and net
income of $3.7 million. Because the TransTexas Rigs were utilized solely for
TransTexas' internal purposes, the 1997 pro forma data included in this
Prospectus does not give effect to the TransTexas Acquisition.
CORE OPERATING AREAS
The Company's rig fleet is currently concentrated in two core operating
regions--the Mid-Continent region and the Gulf Coast region. With the completion
of the TransTexas Acquisition the Company added a third core operating region in
South Texas. The Company is among the largest rig suppliers in each of these
regions.
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MID-CONTINENT REGION
The Mid-Continent region is comprised principally of Oklahoma, North
Texas and the Texas Panhandle. At June 15, 1998, the Company had 38 rigs
marketed in the Mid-Continent region and was the most active drilling contractor
in the region. The Company'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 the Company to meet the specific well depths and mobility needs of
producers in that region. At June 5, 1998, 153 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 June 15, 1998, the Company had 14
rigs marketed in the Gulf Coast region, including 13 diesel electric SCR rigs.
The Company believes that its high quality equipment, including diesel electric
SCR rigs, powerful mud pumps and high horsepower drawworks, give the Company a
competitive advantage in attracting premium jobs with customers engaged in
multi-well drilling programs in this region. At June 5, 1998, 110 rigs were
being utilized 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 the Company'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.
SOUTH TEXAS REGION
The South Texas region is comprised of the southern portion of onshore
Texas. At June 15, 1998, pro forma for the TransTexas Acquisition, the Company
had 21 rigs available to be marketed in the South Texas region (of which nine
rigs were being utilized by TransTexas) and four rigs available to be
refurbished as market conditions warrant. The TransTexas Rigs have been utilized
historically only to meet the internal drilling requirements of TransTexas. With
the completion of the TransTexas Acquisition, the Company intends to begin to
actively market the acquired rigs not being utilized by TransTexas under the
Alliance Agreement (as hereinafter defined). At June 5, 1998, 119 rigs were
being utilized 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. The Company believes that the TransTexas Rigs
operating in this region are well suited for the mobility, drilling flexibility
and hydraulic efficiency required for this region's drilling applications.
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RIG FLEET
The following table sets forth, as of June 15, 1998, certain information
with respect to the drilling rigs owned by the Company and the rigs acquired in
the TransTexas Acquisition. This table includes information for (i) the 52 rigs
marketed by the Company at June 15, 1998, (ii) the 11 rigs available to be
refurbished as market conditions warrant and (iii) the 25 rigs acquired by the
Company in the TransTexas Acquisition. See "Business--Drilling Equipment and
Supplies."
<TABLE>
<CAPTION>
DEPTH CAPACITY (FEET)
---------------------------------------------------
7,000 10,000 15,000 20,000
TO TO TO OR
9,999 14,999 19,999 GREATER TOTAL
<S> <C> <C> <C> <C> <C>
Rigs Owned at June 15, 1998:
Gulf Coast Region:
SCR .......................................... 0 0 0 13 13
Mechanical ................................... 0 0 1 0 1
--------- --------- --------- --------- ---------
Total ........................................ 0 0 1 13 14
Mid-Continent Region:
SCR .......................................... 0 0 3 5 8
Mechanical ................................... 1 14 8 7 30
--------- --------- --------- --------- ---------
Total ........................................ 1 14 11 12 38
Available for Refurbishment:
SCR .......................................... 0 0 4 6 10
Mechanical ................................... 0 1 0 0 1
--------- --------- --------- --------- ---------
Total ........................................ 0 1 4 6 11
RIGS ACQUIRED FROM TRANSTEXAS:
South Texas Region:
Mechanical ................................... 0 2 7 12 21
Available for Refurbishment:
Mechanical ................................... 0 1 3 0 4
Total Rigs (Including TransTexas Rigs) .. 1 18 26 43 88
========= ========= ========= ========= =========
</TABLE>
BUSINESS STRATEGY
The Company believes that growth in earnings and cash flow can be
achieved by pursuing the following business strategy:
OPERATING A TECHNOLOGICALLY ADVANCED RIG FLEET
The Company 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 the Company's
rigs include engines, pumps and drilling mud systems that represent the best
drilling technology available and that the Company 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, the Company 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. The Company 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
The Company 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 June 15, 1998, pro forma
for the TransTexas Acquisition, 78% of the Company's rig fleet
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had deep drilling capability (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 due to their
greater operational flexibility and efficiency.
FOCUSING ON CORE MARKETS
The Company 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. The Company is the largest provider of drilling rigs in Oklahoma and is
among the largest operators of deep rigs in the onshore Gulf Coast region. The
TransTexas Acquisition will make the Company one of the largest suppliers of
drilling rigs in the South Texas region and positions the Company to mobilize
additional rigs in that region as market conditions warrant.
DEVELOPING AND MAINTAINING RELATIONSHIPS WITH OPERATORS
In order to maximize the utilization rate of its rig fleet and to
minimize exposure to market downturns, the Company seeks to maintain and build
relationships with operators committed to active domestic drilling programs. The
Company's largest current customers include Apache Corporation, Chesapeake
Energy Corporation ("Chesapeake"), Enron Oil and Gas Company, Marathon Oil
Company, Sonat Exploration Company ("Sonat") and Union Pacific Resources
Corporation ("UPR"). Each of these companies was among the most active onshore
operators in the United States during the last three years. As a result of the
Alliance Agreement (as hereinafter defined), the Company 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
three months ended March 31, 1998, the three largest customers for the Company's
contract drilling services were Chesapeake, UPR and Sonat, which accounted for
approximately 17%, 12% and 10% of total revenues, respectively.
ACQUIRING AND REFURBISHING ADDITIONAL RIGS AND RELATED EQUIPMENT
The Company intends to pursue selective acquisitions of additional rigs
and related equipment, including top drive drilling systems. Additionally, the
Company 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 June 26, 1998, the date of the TransTexas
Acquisition, the Company had acquired 78 additional rigs (net of sales).
THE TRANSTEXAS ACQUISITION
The TransTexas Acquisition was consummated on June 26, 1998, concurrently
with the closing of the Old Notes Offering.
In the TransTexas Acquisition, the Company acquired certain assets of
TransTexas, including (i) 25 drilling rigs (21 of which are operational and
include drill pipe and four of which require refurbishment) and related
equipment (including approximately 325,000 feet of surplus drill pipe), (ii) a
drilling support facility located in Laredo, Texas and related maintenance and
repair equipment and (iii) trucks and equipment used for rig hauling activities.
All of the TransTexas Rigs are mechanical rigs capable of drilling to depths of
12,000 feet or greater, with 12 of the rigs capable of drilling to depths of
20,000 feet or greater. The Company will pay cash consideration of $75 million
in the TransTexas Acquisition and intends to offer positions to approximately
200 TransTexas employees currently involved in its drilling operations.
In connection with the TransTexas Acquisition, the Company and TransTexas
entered into a drilling alliance agreement (the "Alliance Agreement"). The
Alliance Agreement provides that, for a period of 30 months, if TransTexas
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engages in any land drilling activities in Alabama, Louisiana, Mississippi,
Oklahoma, New Mexico and Texas (the "Alliance Area"), TransTexas will engage the
Company to provide up to 15 rigs for wells on which TransTexas serves as
operator. Immediately following the consummation of the TransTexas Acquisition,
eight of the TransTexas Rigs were being utilized by TransTexas. Although the
Company expects TransTexas to continue to utilize certain of the TransTexas Rigs
during the term of the Alliance Agreement, there can be no assurance that
TransTexas will do so and, therefore, there can be no assurance as to the number
of TransTexas Rigs (or other drilling rigs) that the Company will ultimately
provide to TransTexas under the Alliance Agreement or of the timing or receipt
of revenues therefrom.
RECENT OPERATING PERFORMANCE
The Company reported net income for the three months ended March 31, 1998
of $1.8 million on revenues of $24 million compared with a loss of $84,000 on
revenues of $4.1 million for the three months ended March 31, 1997. EBITDA
increased to $6 million for the first quarter of 1998 from $869,000 in the first
quarter of 1997. These increases are due to the growth in the Company's rig
fleet from 11 marketed rigs at March 31, 1997 to 51 marketed rigs at March 31,
1998.
Of the 52 rigs being marketed by the Company at June 15, 1998, 14 were
located in the Gulf Coast region and 38 in the Mid-Continent region. In the Gulf
Coast region, the Company had nine rigs under contract and five rigs available
for work. In the Mid-Continent region, the Company had 27 rigs under contract,
10 rigs available, and one rig undergoing repairs.
For the first quarter of 1998, the Company experienced a decline in
average rig utilization to approximately 85% from its 1997 average rig
utilization of 93%. In April and May 1998, the Company's average rig utilization
rate declined further to approximately 78% and 70%, respectively. In the
Mid-Continent region, the Company experienced utilization rates of 88% during
the first quarter of 1998, 83% during April 1998 and 80% during May 1998. The
Company was the most active drilling contractor in the Mid-Continent region
during the first quarter of 1998. The Gulf Coast market weakened during the
first five months of 1998, producing utilization rates of 80% during the first
quarter of 1998, 64% during April 1998 and 41% during May 1998, during which
time the Company has been attempting to transition rigs from Chesapeake and UPR
to other operators. Since December 1997, Chesapeake has released five rigs and
UPR has released three rigs in the Gulf Coast region. On June 15, 1998,
Chesapeake and UPR were utilizing five and three rigs in the Gulf Coast region,
respectively. However, there can be no assurance that Chesapeake, UPR or other
customers of the Company will not release additional rigs in the future.
The Company's operating results are substantially affected by industry
conditions such as the levels and volatility of market prices of oil and gas. In
recent months, the market price for oil has declined significantly, resulting in
a decrease in demand for rigs targeting oil reserves. Over the same period, gas
prices have declined to a lesser extent than oil prices, as has the demand for
gas drilling rigs. However, there can be no assurance that gas prices and
related demand for gas drilling rigs will not decline significantly in the
future. In the first quarter of 1998, approximately 93% of the Company's
revenues and 97% of its operating income were generated from natural gas
drilling activities. See "Risk Factors -- Cyclical Conditions; Weakening of
Demand for Drilling Services."
5
<PAGE> 11
THE OLD NOTES OFFERING
<TABLE>
<S> <C>
OLD NOTES . . . . . . . . . . . . . . . The Old Notes were sold by the Company on June 26, 1998 to
Donaldson Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc., BT Alex. Brown and Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated (the "Initial
Purchasers"), pursuant to a Purchase Agreement (the "Purchase
Agreement") dated June 19, 1998. The Initial Purchasers
subsequently resold the Old Notes in the United States to
qualified institutional buyers in reliance on Rule 144A under
the Securities Act and outside the United States to non-U.S.
persons in reliance on Regulation S under the Securities Act.
EXCHANGE OFFER REGISTRATION RIGHTS
AGREEMENT . . . . . . . . . . . . . . . Pursuant to the Purchase Agreement, the Company and the
Purchasers entered into a Registration Rights Agreement dated
June 19, 1998 (the "Exchange Offer Registration Rights
Agreement") which grants the holders of the Old Notes certain
exchange and registration rights. The Exchange Offer is
intended to satisfy such exchange rights, which terminate
upon the consummation of the Exchange Offer.
</TABLE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
SECURITIES OFFERED . . . . . . . . . . $100,000,000 principal amount of 11% Senior Notes due 2005,
Series B (the "Exchange Notes").
THE EXCHANGE OFFER . . . . . . . . . . $1,000 principal amount of the Exchange Notes in exchange for
each $1,000 principal amount of Old Notes. As of the date
hereof, $100,000,000 aggregate principal amount of Old Notes are
outstanding. The Company will issue the Exchange Notes to
holders on or promptly after the Expiration Date. See "The
Exchange Offer."
Based on an interpretation by the staff of the Commission set forth in
Exxon Capital Holdings Corp., SEC No-Action Letter, available April
13, 1989, and similar no-action letters issued to third parties, the
Company believes that Exchange Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course
of such holder's business and that such holder does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes.
</TABLE>
6
<PAGE> 12
<TABLE>
<S> <C>
Each Participating Broker-Dealer that receives Exchange Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating Broker-Dealer in
connection with resales of Exchange Notes received in exchange for Old
Notes where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other
trading activities (other than a resale of an unsold allotment from
the original sale of Old Notes). The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this
Prospectus available to any Participating Broker-Dealer for use
in connection with any such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of
the Exchange Notes cannot rely on the position of the staff of the
Commission enunciated in the relevant no- action letters and, in
the absence of an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Failure to comply with
such requirements in such instance may result in such holder incurring
liability under the Securities Act for which the holder is not
indemnified by the Company. See "The Exchange Offer -- Resale of the
Exchange Notes."
EXPIRATION DATE . . . . . . . . . . . . 5:00 p.m., New York time, on August 28, 1998 unless the Exchange
Offer is extended, in which case the term "Expiration Date" means
the latest date and time to which the Exchange Offer is extended.
ACCRUED INTEREST ON THE NOTES . . . . . Each Exchange Note will bear interest from the most recent date
to which interest has been paid or duly provided for on the Old
Note surrendered in exchange for such Exchange Note or, if no
interest has been paid or duly provided for on such Old Note,
from June 26, 1998. Interest on the Exchange Notes is payable
on June 30 and December 31 of each year, commencing on December
31, 1998.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after
the last date to which interest has been paid or duly provided for on
the Old Notes prior to the original issue date of the Exchange Notes or,
if no such interest has been paid or duly provided for, will not receive
any accrued interest on such Old Notes, and will be deemed to have
waived the right to receive any interest on such Old Notes accrued
from and after June 26, 1998. See "The Exchange Offer -- Interest on
the Exchange Notes."
</TABLE>
7
<PAGE> 13
<TABLE>
<S> <C>
CONDITIONS TO THE EXCHANGE OFFER . . . The Exchange Offer is subject to certain customary conditions,
which may be waived by the Company. See "The Exchange Offer --
Conditions."
PROCEDURES FOR TENDERING OLD NOTES . . Each holder of Old Notes wishing to accept the Exchange Offer
must complete, sign and date the accompanying Letter of
Transmittal, or a facsimile thereof, in accordance with the
instructions contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such facsimile, together
with the Old Notes and any other required documentation to U.S.
Trust Company of Texas, N.A., as exchange agent (the "Exchange
Agent"), at the address set forth in the Letter of Transmittal.
By executing the Letter of Transmittal, each holder will
represent to the Company that, among other things, the Exchange
Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that
neither the holder nor any such other person has any arrangement
or understanding with any person to participate in the
distribution of such Exchange Notes and that neither the holder
nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act. See "The Exchange Offer --
Purpose and Effect of the Exchange Offer" and "The Exchange
Offer -- Procedures for Tendering."
UNTENDERED OLD NOTES; CONSEQUENCES OF
FAILURE TO EXCHANGE . . . . . . . . . . Following the consummation of the Exchange Offer, holders of Old
Notes eligible to participate but who do not tender their Old
Notes will not have any further exchange rights and such Old
Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Old
Notes could be adversely affected. The Old Notes that are not
exchanged pursuant to the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be resold only (i)
to the Company, (ii) pursuant to an effective registration
statement under the Securities Act, (iii) pursuant to Rule 144A
or Rule 144 under the Securities Act, (iv) outside the United
States to a foreign person pursuant to the requirements of Rule
904 under the Securities Act, or (v) pursuant to some other
exemption under the Securities Act (and based upon an opinion of
counsel, if the Company so requests). See "The Exchange Offer
-- Consequences of Failure to Exchange."
</TABLE>
8
<PAGE> 14
<TABLE>
<S> <C>
SHELF REGISTRATION STATEMENT . . . . . In the event that (i) the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) in certain
circumstances the holder notifies the Company that it is unable
to participate in the Exchange Offer or is unable to use this
Prospectus, the Company will cause to be filed with the
Commission, no later than 45 days after the date that the
Company determines the Exchange Offer is not permitted or, if
earlier, the date the Company receives such notice from a holder
(the "Filing Deadline"), a shelf registration statement (the
"Shelf Registration Statement"). If required, the Company will
use its reasonable best efforts to cause the Shelf Registration
Statement to be declared effective on or before the 180th day
after the Filing Deadline. The Company has agreed to maintain
the effectiveness of the Shelf Registration Statement, under
certain circumstances, for a maximum of two years following the
effective date of the Shelf Registration Statement.
SPECIAL PROCEDURES FOR BENEFICIAL Any beneficial owner whose Old Notes are registered in the name
OWNERS . . . . . . . . . . . . . . . . of a broker, dealer, commercial bank, trust company or other
nominee and who wishes to tender should contact such registered
holder promptly and instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner wishes to tender on
such owner's own behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering its Old Notes, either
make appropriate arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed bond power from
the registered holder. The transfer of registered ownership may take
considerable time. The Company will keep the Exchange Offer open for not
less than 20 business days in order to provide for the transfer of
registered ownership. See "The Exchange Offer -- Procedures for
Tendering."
GUARANTEED DELIVERY PROCEDURES . . . . Holders of Old Notes who wish to tender their Old Notes and
whose Old Notes are not immediately available or who cannot
deliver their Old Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to the Exchange
Agent (or comply with the procedures for book-entry transfer)
prior to the Expiration Date must tender their Old Notes
according to the guaranteed delivery procedures set forth in
"The Exchange Offer -- Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS . . . . . . . . . . . Tenders may be withdrawn at any time prior to 5:00 p.m., New
York time, on the Expiration Date. See "The Exchange Offer --
Withdrawal of Tenders."
</TABLE>
9
<PAGE> 15
<TABLE>
<S> <C>
ACCEPTANCE OF OLD NOTES AND DELIVERY OF
EXCHANGE NOTES . . . . . . . . . . . . The Company will accept for exchange, subject to the conditions
described under "The Exchange Offer -- Conditions," any and all
Old Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York time, on the Expiration Date. The
Exchange Notes issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
USE OF PROCEEDS . . . . . . . . . . . . There will be no cash proceeds to the Company from the exchange
pursuant to the Exchange Offer. See "Use of Proceeds."
EXCHANGE AGENT . . . . . . . . . . . . U.S. Trust Company of Texas, N.A. The Exchange Agent also
serves as trustee under the Indenture.
</TABLE>
THE EXCHANGE NOTES
<TABLE>
<S> <C>
GENERAL . . . . . . . . . . . . . . . . The form and terms of the Exchange Notes are the same as the
form and terms of the Old Notes (which they are intended to
replace) except that (i) the Exchange Notes bear a Series B
designation and (ii) the Exchange Notes have been registered
under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. Additionally, the holders of
Exchange Notes will not be entitled to certain rights under the
Exchange Offer Registration Rights Agreement, including the
provisions providing for Liquidated Damages in certain
circumstances, which rights will terminate when the Exchange
Offer is consummated. See "The Exchange Offer -- Purpose and
Effect of the Exchange Offer." The Exchange Notes will evidence
the same debt as the Old Notes and will be entitled to the
benefits of the Indenture. See "Description of Exchange Notes."
The Old Notes and the Exchange Notes are referred to herein
collectively as the "Notes."
SECURITIES OFFERED . . . . . . . . . . . $100,000,000 principal amount of the Company's 11% Senior Notes due
2005, Series B.
MATURITY DATE . . . . . . . . . . . . . . June 30, 2005.
INTEREST . . . . . . . . . . . . . . . . Interest on the Exchange Notes will accrue at a rate of 11% per
annum and will be payable semi-annually in cash in arrears on June
30 and December 31 of each year, commencing December 31, 1998.
</TABLE>
10
<PAGE> 16
<TABLE>
<S> <C>
GUARANTEES . . . . . . . . . . . . . . . The Company is a holding company which conducts operations through
its wholly owned subsidiaries. The Exchange Notes will be
unconditionally guaranteed, jointly and severally, by each of the
Guarantors. The Guarantees will be senior unsecured obligations of
each Guarantor and will rank pari passu in right of payment with
all other indebtedness and senior obligations of such Guarantor
that are not subordinated by their terms to other indebtedness of
such Guarantor. In addition, the Guarantees will be effectively
subordinated to secured indebtedness of the Guarantors, including
guarantees of indebtedness under an $18.2 million term loan (the
"Term Loan") among the Company, The CIT Group/Equipment Financing,
Inc. ("CIT") and Fleet Capital Corporation ("Fleet"), and a $10
million revolving loan facility (the "Revolving Loan") between
Fleet and the Company (collectively, the "Loan Agreements"), which
is secured by certain assets of the Guarantors. See "Description
of Exchange Notes--Guarantees of Exchange Notes."
RANKING OF THE EXCHANGE NOTES . . . . . . The Exchange Notes will be senior unsecured obligations of the
Company, ranking 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. The holders of secured indebtedness
of the Company (including indebtedness secured by certain assets of
the Subsidiaries under the Company's Loan Agreements) will have
claims with respect to the assets constituting collateral for such
indebtedness that are prior to claims of holders of the Exchange
Notes and the Trustee. As of June 15, 1998, on a pro forma basis
after giving effect to the issuance of the Notes and the completion
of the TransTexas Acquisition, the Company had approximately $121.1
million of outstanding senior indebtedness, of which $21.1 million
was secured by certain assets of the Subsidiaries. See "Description
of Exchange Notes--Guarantees of Exchange Notes" and "--General."
OPTIONAL REDEMPTION . . . . . . . . . . . The Exchange Notes will be redeemable, at the Company's option, in
whole or in part from time to time on or after June 30, 2003, at
the redemption prices set forth herein, plus accrued and unpaid
interest to the redemption date. In the event the Company
consummates one or more Qualified Equity Offerings on or prior to
June 30, 2001, the Company at its option may use all or a portion
of the net cash proceeds from such Qualified Equity Offerings to
redeem up to 35% of the aggregate principal amount of the Exchange
Notes at a redemption price equal to 111% of the aggregate
principal amount thereof, together with accrued and unpaid interest
to the date of redemption, provided that at least $65 million of
the aggregate principal amount of Exchange Notes remains
outstanding immediately after such redemption. See "Description of
Exchange Notes--Optional Redemption."
</TABLE>
11
<PAGE> 17
<TABLE>
<S> <C>
CHANGE OF CONTROL . . . . . . . . . . . . Upon a Change of Control, each holder of Exchange Notes will have
the right to require the Company to repurchase all or any part of
such holder's Exchange Notes at a purchase price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase. See "Description of Exchange
Notes--Change of Control."
CERTAIN COVENANTS . . . . . . . . . . . . The Indenture contains certain covenants, including, but not
limited to, covenants limiting the Company and its Subsidiaries
with respect to the following: (i) transactions with affiliates,
(ii) dividend and other restricted payments, (iii) the incurrence
of additional indebtedness by the Company and the Subsidiaries and
the issuance of preferred stock, (iv) dividend and other payment
restrictions affecting the Subsidiaries, (v) asset sales, (vi) sale
and lease-back transactions, (vii) liens, (viii) the issuance of
additional guarantees by the Guarantors, (ix) changes in business
and (x) mergers and consolidations. See "Description of Exchange
Notes--Certain Covenants" and "--Consolidation, Merger, Conveyance,
Lease or Transfer."
</TABLE>
RISK FACTORS
See "Risk Factors," beginning on page 15 hereof, for a discussion of
certain factors that should be considered by investors in connection with the
Exchange Offer.
12
<PAGE> 18
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA
FINANCIAL AND OPERATING DATA
The following table sets forth summary historical financial and operating
data for the Company for each of the years in the three year period ended
December 31, 1997, for the three months ended March 31, 1997 and 1998, and as of
December 31, 1997 and March 31, 1998. The financial results for the period ended
and as of December 31, 1997 include the results of the Company's consolidated
subsidiaries, Trend, beginning May 1, 1997, Ward, beginning May 30, 1997, and
Bonray, beginning October 16, 1997. The Company's historical results with
respect to periods prior to December 31, 1996 reflect the operations of its
predecessor, Anadarko. The pro forma consolidated operating data for the year
ended December 31, 1997 gives effect to the Trend Acquisition, the Ward
Acquisition and the Bonray Acquisition (each as hereinafter defined) and the
reduction of interest expense resulting from payment of certain Subordinated
Notes from proceeds of the Initial Public Offering, all of which occurred at
various dates in 1997, as if such transactions occurred at January 1, 1997. The
1997 pro forma data set forth below does not give pro forma effect to the
TransTexas Acquisition because the TransTexas Rigs were utilized by TransTexas
solely for internal purposes and generated no revenues. The consolidated
financial data for the three months ended March 31, 1997 and 1998 is derived
from the unaudited financial statements of the Company. In the opinion of
management, the financial data for the three months ended March 31, 1997 and
1998 reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such data. The following information should
be read together with Management's Discussion and Analysis of Financial
Condition and Results of Operations, the historical financial statements of the
Company, including the notes thereto, and the Pro Forma Consolidated Financial
Data, including the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ ------------------------
1995 1996 1997 1997 1997 1998
HISTORICAL PRO FORMA HISTORICAL
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ....................... $ 7,708 $ 9,853 $ 55,747 $ 81,373 $ 4,111 $ 23,962
Operating expenses:
Drilling and other ................. 6,122 7,699 40,705 59,704 3,047 17,221
Depreciation and amortization ...... 791 1,126 7,943 11,576 876 3,169
General and administrative ......... 880 658 1,868 3,440 195 755
--------- --------- --------- --------- --------- ---------
Total operating expenses ....... 7,793 9,483 50,516 74,720 4,118 21,145
--------- --------- --------- --------- --------- ---------
Operating income (loss) .............. (85) 370 5,231 $ 6,653 (7) 2,817
=========
Interest expense and financing cost .. (3) (11) (3,065) -- (145) (367)
Other income (expense) ............... (134) 71 1,178 -- 17 582
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes .... (222) 430 3,344 -- (135) 3,032
Income tax expense(1) ................ -- 163 1,428 -- 51 1,275
--------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary loss ........... $ (222) $ 267 $ 1,916 -- $ (84) $ 1,757
========= ========= ========= ========= ========= =========
CASH FLOW DATA:
Operating activities ................. $ 310 $ (462) $ (1,308) -- $ 3,043 $ 6,975
Investing activities ................. (1,710) (10,441) (86,470) -- (14,441) (26,676)
Financing activities ................. 1,400 15,866 132,117 -- 8,476 (1,863)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997 MARCH 31, 1998
------------ ------------------------------
HISTORICAL HISTORICAL AS ADJUSTED(2)
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments................................................ $ 50,182 $ 28,262 $ 41,701
Working capital, excluding current portion of long-term debt........ 56,404 33,662 47,101
Property, plant and equipment, net.................................. 155,673 179,807 254,807
Total assets........................................................ 240,488 246,594 338,283
Long-term debt, including current portion........................... 32,610 30,698 122,387
Total stockholders' equity.......................................... 178,462 180,232 180,232
</TABLE>
13
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -----------------------
1995 1996 1997 1997 1998
HISTORICAL HISTORICAL
(UNAUDITED)
(IN THOUSANDS, EXCEPT RIG AND DAY RATE DATA)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(3)................................... $ 706 $ 1,496 $13,174 $ 869 $ 5,986
Capital expenditures........................ 2,088 10,578 86,980 13,711 27,094
Ratio of EBITDA to interest expense......... 235.3x 136.0x 4.3x 6.0x 16.3x
Ratio of earnings to fixed charges(4)....... 18.2x 1.7x 3.9x
PRO FORMA AS ADJUSTED DATA: (2)
EBITDA(3)................................... $18,229
Cash interest expense....................... 12,659 $ 3,003
Ratio of EBITDA to cash interest expense.... 1.4x 2.0x
Ratio of net debt to EBITDA (5)............. 4.4x NM
DRILLING RIG ACTIVITY DATA:
Total rigs at end of period................. 8 17 63 11 63
Marketed rigs at end of period.............. 8 8 49 11 51
Average utilization rate of drilling rigs
available for service(6).................. 86% 88% 93% 99% 85%
Average day rate(7)......................... $ 4,298 $ 4,731 $ 5,393 $ 4,618 $ 5,957
</TABLE>
(1) Since the Company's predecessor was a nontaxable entity, income tax
expense is presented on a pro forma basis (assuming a 38% statutory rate)
for the year ended December 31, 1996.
(2) Reflects each of the following transactions as if they occurred on the
first day of the relevant period: (i) the repayment by the Company of
25% ($6.2 million) of the outstanding principal amount of the Term Loan,
(ii) the repayment and retirement of the $2.52 million principal amount
of Subordinated Notes previously held by Energy Spectrum (as hereinafter
defined) and (iii) the issuance of the Notes. While interest expense
related to the Notes is reflected, no adjustment has been made to
reflect potential revenues deriving from the operation of the TransTexas
Rigs. The Company used $75 million of the net proceeds of the Old Notes
Offering to fund the purchase price of the TransTexas Acquisition.
(3) EBITDA represents operating income before depreciation and amortization.
EBITDA is frequently used by securities analysts and is presented herein
to provide additional information about the Company'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.
(4) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes plus
fixed charges less capitalized interest) by fixed charges (interest
expense plus capitalized interest and the portion of operating lease
rental expense that represents the interest factor).
(5) Net debt is defined as total debt less cash and cash equivalents.
(6) 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.
(7) Represents total contract drilling revenues (excluding mobilization, cost
reimbursements and fuel), divided by the total number of days the
Company's drilling rig fleet operated during the period, divided by the
average number of rigs in operation.
14
<PAGE> 20
RISK FACTORS
An investment in the Exchange Notes offered hereby involves a high degree
of risk. Prospective investors should carefully consider and evaluate the
following factors relating to the Company and the Exchange Notes, together with
the information and financial data set forth elsewhere in this Prospectus, prior
to participating in the Exchange Offer.
CYCLICAL CONDITIONS; RECENT WEAKENING OF DEMAND FOR DRILLING SERVICES
Historically, the contract drilling industry has been cyclical, with
significant volatility in profitability and rig values. This industry
cyclicality has been due to changes in the level of domestic oil and gas
exploration and development activity and the available supply of drilling rigs.
The market for contract land drilling services has generally been depressed
since 1982, when oil and gas prices began to weaken following a period of
significant increase in new drilling rig capacity. Since that time and except
during occasional upturns, there have been substantially more drilling rigs
available than necessary to meet demand in most operating and geographic
segments of the domestic drilling industry, including the geographic areas in
which the Company operates.
Although the Company believes that improved technologies 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 in recent months and there can be no assurance that
such decline will not continue. The recent decline in oil and gas prices has
caused demand for the Company's drilling services, and therefore the Company's
rig utilization rates, to decrease in recent periods. The Company's 1997 average
rig utilization rate was approximately 93%. For the three months ended March 31,
1998, however, the Company's average rig utilization rate declined to
approximately 85%. In April and May 1998, the Company's average rig utilization
rate declined to approximately 78% and 70%, respectively. The Company believes
that this decrease in utilization is due to an overall weakening of demand for
land drilling services in its two core markets and, more specifically, by
releases of rigs by Chesapeake and UPR, its two largest customers. The generally
reduced demand for land drilling services in the first quarter of 1998 is
believed by the Company to be attributable to the lower prices received for oil
and gas production, and to widespread uncertainty among potential customers as
to the future level and trend of oil and gas prices. Oil prices have continued
to decline in the second quarter and in June reached their lowest level since
1986. The average revenues per rig day worked received by the Company under its
most recently awarded day rate drilling contracts in its core domestic markets
have reflected an average decline of approximately 15% in the Gulf Coast region,
and have remained relatively stable in the Mid-Continent region, from that
received under prior day rate contracts for the same or comparable rigs. If
these industry conditions persist or worsen, they could have a material adverse
effect on the Company's financial condition and results of operations. The
Company cannot predict the future level of demand for its contract drilling
services and resulting rig utilization rates, future conditions in the contract
drilling industry or future contract drilling rates.
SUBSTANTIAL LEVERAGE
The Company has a substantial amount of indebtedness. As of March 31,
1998, on a pro forma basis after giving effect to the Old Notes Offering, the
TransTexas Acquisition, the repayment and retirement of the Subordinated Notes
(which occurred in April 1998) and the repayment of $6.2 million of the
principal amount outstanding under the Term Loan (which occurred in May 1998),
the Company would have had approximately $122.4 million of consolidated
indebtedness and a ratio of debt to total capitalization of 40%. See
"Capitalization." The Indenture permits the Company to incur additional
indebtedness under certain conditions, and the Company expects that it may incur
additional indebtedness to the extent it is permitted to do so.
The degree to which the Company is leveraged could have important
consequences to the Company and the holders of the Notes, including the
following: (i) funds available for the Company's operations or capital
expenditures will be reduced as a result of the dedication of a substantial
portion of the Company's net cash flow from operations to the payment of
principal of and interest on the indebtedness (including the Notes), (ii) the
Company's ability to obtain additional financing may be impaired, (iii) the
Company may be more vulnerable to economic downturns and more limited in its
ability to withstand competitive pressures than competitors that are not as
highly leveraged, (iv) financial
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and other restrictive covenants which are imposed on the Company as a result of
its indebtedness (including by the Indenture) could limit the Company's
operating and financial flexibility and, if violated, create an event of default
resulting in material adverse effects on the Company, (v) certain of the
Company's borrowings, primarily under the Loan Agreements, will be at variable
rates of interest which could cause the Company to be vulnerable to increases in
interest rates and (vi) the Company's ability to pursue acquisitions and other
business opportunities may be impaired.
The ability of the Company to make principal and interest payments under
long-term indebtedness (including the Exchange Notes) and bank loans will be
dependent upon the Company's future performance, which is subject to financial,
economic and other factors, some of which are beyond its control. There can be
no assurance that the current level of operating results of the Company will
continue or improve.
HOLDING COMPANY STRUCTURE
The Company is a holding company and substantially all of its operations
are conducted through its subsidiaries. As a result, the Company expects that
funds necessary to meet its debt service obligations will be provided primarily
by distributions or advances from the subsidiaries. All of the current
subsidiaries of the Company will execute Guarantees. If the Guarantees were not
enforced for any reason, the Company's cash flow and, consequently, its ability
to service its indebtedness, including the Exchange Notes, would be dependent on
its ability to gain access to the cash flow of the Guarantors (whether through
loans, dividends, distributions or otherwise) and would be subject to any legal,
contractual or other restrictions that could hinder or prevent the Company from
doing so. The Guarantors are separate and distinct legal entities from the
Company and, except under the terms of the Guarantees, have no obligation,
contingent or otherwise, to pay any amounts due in respect of the Notes or to
make any amounts available for the payment thereof. In addition, many
jurisdictions recognize suretyship defenses available to guarantors such as the
Guarantors which could create an impediment to the enforcement of the
Guarantees. Although the Guarantors will generally waive all such defenses,
there can be no assurance that such waivers will be enforceable. In general, if
the Guarantees were not enforced for any reason, the Exchange Notes would be
effectively subordinated to all indebtedness and other obligations of the
Guarantors to other third parties.
With respect to any future Unrestricted Subsidiary (as hereinafter
defined) of the Company, the holders of the Exchange Notes will have no direct
claim against the assets of such future subsidiary and such future subsidiary
will have no obligation in respect of the payment of the principal amount of or
interest on the Exchange Notes. Any claim that the Company might have by virtue
of its status as a stockholder of such subsidiary would be effectively
subordinated to the claims of every creditor of such subsidiary, including trade
creditors and the holders of subordinated indebtedness of such subsidiary. Any
intercompany obligations that such future subsidiary owed to the Company could
also be subordinated or treated as equity claims under the laws of the
applicable jurisdiction. See "--Fraudulent Conveyance Considerations" and
"Description of Exchange Notes."
RANKING OF THE EXCHANGE NOTES
The Exchange Notes will be senior unsecured obligations of the Company,
will rank pari passu in right of payment with all existing and future senior
indebtedness and other obligations of the Company and will rank senior in right
of payment to any future subordinated indebtedness of the Company. The Company's
obligations under the Exchange Notes will be jointly and severally guaranteed by
the Guarantors. Currently, 12 rigs owned by certain of the Subsidiaries and
certain equipment and drilling contracts related to such rigs, substantially all
of the Subsidiaries' accounts receivable and other intangibles, certain property
owned by the Company in El Reno, Oklahoma and certain other assets are pledged
as security for other indebtedness, including under the Loan Agreements. As of
June 15, 1998, the Company had $18.2 million of indebtedness outstanding under
the Term Loan, $2.9 million of other secured indebtedness and no indebtedness
outstanding under the Revolving Loan. The Guarantors have guaranteed the
obligations under the Loan Agreements. Accordingly, the lenders under the Loan
Agreements and other secured debt of the Company have claims with respect to the
rigs and other assets constituting collateral for any indebtedness thereunder
and the assets of any subsidiary guaranteeing such indebtedness, which will be
satisfied to the extent of their collateral prior to the unsecured claims of
holders of the Exchange Notes. In the event of a default on the Exchange
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Notes or a bankruptcy, liquidation or reorganization of the Company, such assets
will be available to satisfy obligations with respect to the indebtedness
secured thereby before any payment therefrom could be made on the Exchange
Notes.
In addition, the Exchange Notes are effectively subordinated to the
claims of all of the creditors, including trade creditors and tort claimants, of
the Company's subsidiaries that are not Guarantors and to all secured creditors
of the Guarantors. In the event of an insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up of the business of any subsidiary of
the Company that is not a Guarantor, creditors of such subsidiary generally will
have the right to be paid in full before any distribution will be made to the
Company or the holders of the Exchange Notes. In addition, certain financing
arrangements that the Company's subsidiaries are party to may impose
restrictions on the ability of the Company to gain access to the cash flow or
assets of its subsidiaries. See "--Restrictions Imposed by Lenders,"
"Description of Certain Indebtedness" and "Description of Exchange
Notes--General."
RESTRICTIONS IMPOSED BY LENDERS
The instruments governing the indebtedness of the Company impose
significant operating and financial restrictions on the Company. Such
limitations will affect, and in many respects significantly restrict or
prohibit, among other things, the ability of the Company to pay dividends, make
investments, incur additional indebtedness, repay indebtedness prior to its
stated maturity, sell assets or engage in mergers and acquisitions. These
restrictions could limit the ability of the Company to effect future financings,
make needed capital expenditures, withstand a future downturn in the Company's
business or the economy in general, or otherwise conduct necessary corporate
activities. The Loan Agreements also contain a number of financial covenants
that require the Company to meet certain financial ratios and tests and provide
that a "change of control" will constitute an event of default. A failure to
comply with the obligations contained in the Loan Agreements or the Indenture,
if not cured or waived, could permit acceleration of the related indebtedness
and acceleration of indebtedness under other instruments that contain
cross-acceleration or cross-default provisions. If the Company were obligated to
repay all or a significant portion of its indebtedness, there can be no
assurance that the Company would have sufficient cash to do so or that the
Company could successfully refinance such indebtedness. Other indebtedness of
the Company that may be incurred in the future may contain financial or other
covenants more restrictive than those applicable to the Loan Agreements or the
Exchange Notes. In addition, the obligations of the Company under the Loan
Agreements will be secured by certain assets of the Guarantors and the Indenture
will permit other senior indebtedness to be secured. In the case of an event of
default under the Loan Agreements or such other secured indebtedness, the
lenders thereunder would be entitled to exercise the remedies available to a
secured lender under applicable law. See "Description of Exchange Notes--Certain
Covenants."
DEPENDENCE ON OIL AND GAS INDUSTRY
The Company's revenues, cash flows and earnings are substantially
dependent upon, and affected by, the level of domestic oil and gas exploration
and development activity. Such activity and the resulting level of demand for
contract land drilling and related services are directly influenced by many
factors over which the Company has no control. Such factors include, among
others, the market prices of oil and gas, market expectations about future
prices, the volatility of such prices, the cost of producing and delivering oil
and gas, government regulations and trade restrictions, local and international
political and economic conditions, levels of production by, and other activities
of, the Organization of Petroleum Exporting Countries and other oil and gas
producers, the development of alternate energy sources and the long-term effects
of worldwide energy conservation measures. As a result of significant recent
decreases in oil prices, substantial uncertainty exists as to the future level
of oil and gas exploration and development activity. There can be no assurance
that the current level of oil and gas exploration and development activity will
be maintained or that demand for the Company's contract drilling services will
reflect the level of such activity.
CONCENTRATION OF CUSTOMER BASE
During the three months ended March 31, 1998, the three largest customers
for the Company's contract drilling services were Chesapeake, UPR and Sonat,
which accounted for approximately 17%, 12% and 10% of total revenues,
respectively. Additionally, as a result of the Alliance Agreement, TransTexas
became a significant customer of the Company. Under the Alliance Agreement,
TransTexas may utilize up to 15 of the Company's rigs. Immediately
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following the consummation of the TransTexas Acquisition on June 26, 1998,
TransTexas was utilizing eight of the Company's rigs under the Alliance
Agreement. Chesapeake has reduced its drilling program in the Gulf Coast region,
an area in which it utilizes a number of the Company's rigs. Since late November
1997, Chesapeake has released six rigs under contract with the Company that it
was using in the Gulf Coast region. As of June 15, 1998, Chesapeake continued to
utilize five of the Company's rigs; however, there can be no assurance that
Chesapeake or any of the Company's other principal customers (including
TransTexas) will employ the Company's services in the future or that the loss of
any of such customers or adverse developments affecting the ability of such
customers to pay for the Company's services would not have a material adverse
effect on the Company's financial condition and results of operations.
LIMITED OPERATING HISTORY
The Company was founded in December 1996 as the successor to Anadarko,
which had operated as a contract land drilling rig service company since 1982 in
Oklahoma. Although Anadarko was owned by and provided drilling services to AnSon
Partners Limited Partnership (together with its affiliates, "APLP") prior to
December 1996, Anadarko had also provided drilling services to 23 different
third party customers between 1982 and December 1996. Prior to December 1996,
however, the Company had not operated as an independent entity. Although the
President and Chief Executive Officer of the Company had been employed by
Anadarko for 14 years and several other key employees of the Company had been
with Anadarko for extended periods, much of the Company's management group has
been assembled recently. Despite the extensive experience and qualifications of
many of the recently added individual managers, there can be no assurance that
the management group will be able to manage the stand-alone entity as a cohesive
team or to implement effectively the Company's business strategy. The pro forma
financial results presented herein include the operating results of drilling
rigs which were not under the Company's control and may not be indicative of the
Company's future operating results.
MANAGEMENT OF GROWTH; RISKS OF ACQUISITION STRATEGY
The Company has experienced rapid and substantial growth since its
formation as a result of acquisitions. The Company anticipates the further
expansion of the Company's drilling fleet through additional selective
acquisitions. Certain risks are inherent in an acquisition strategy, such as
increasing leverage and debt service requirements and combining disparate
company cultures, which could adversely affect the Company's operating results.
Continued growth and the process of integrating such acquired businesses may
involve unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's financial and other resources. No
assurance can be given that the Company will be able to continue to identify
suitable acquisition opportunities, negotiate acceptable terms, obtain financing
for acquisitions on satisfactory terms or successfully acquire identified
targets. There can be no assurance that the Company will be able to successfully
manage and integrate the acquired businesses and assets into its existing
operations or that it will be able to successfully maintain the market share
attributable to operable drilling rigs acquired by the Company. If the Company
is unable to manage its growth and successfully integrate the acquired
businesses into the Company's existing operations, or if the Company encounters
unexpected costs or liabilities in the acquired businesses, the Company's
results of operations or financial condition could be materially adversely
affected. See "Business -- Business Strategy."
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 the Company's growth strategy if it is unable
to purchase additional drilling rigs or related equipment on favorable terms.
There can be no assurance that the Company will be able to compete successfully
in the future for acquisitions of available drilling rigs or related equipment,
or that such competition will not have a material adverse effect on the
Company's business, financial condition and results of operations.
SHORTAGE OF QUALIFIED AND EXPERIENCED LABOR
Increases in both onshore and offshore domestic oil and gas exploration
and production since 1995 and resultant increases in contract drilling activity
have at times created, and may in the future create, a shortage of qualified
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drilling rig personnel in the industry. If the Company is unable to attract and
retain sufficient qualified operating personnel, its ability to market and
operate its drilling rigs will be restricted. In addition, labor shortages could
result in wage increases, which could reduce the Company's operating margins and
have a material adverse effect on the Company's financial condition and results
of operations.
COMPETITION
The contract drilling industry is a highly competitive and fragmented
business characterized by high capital and maintenance costs. As a result, even
though the Company has the fifth largest active land drilling rig fleet in the
United States, the Company believes 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 the Company
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 the Company's competitors have greater financial and
human resources than the Company, 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 the Company in periods of high rig utilization. There can
be no assurance that the Company will be able to compete successfully against
its competitors in the future or that the level of competition will allow the
Company to obtain adequate margins from its drilling services.
TRANSTEXAS DRILLING ALLIANCE
In connection with the TransTexas Acquisition, the Company and TransTexas
entered into the Alliance Agreement, which provides that, for a period of 30
months, if TransTexas engages in any land drilling activities in the Alliance
Area, TransTexas will engage the Company to provide up to 15 rigs for wells on
which TransTexas serves as operator. Although immediately following the
consummation of the TransTexas Acquisition on June 26, 1998, TransTexas was
utilizing eight of the Company's rigs under the Alliance Agreement, the Alliance
Agreement does not guarantee any minimum utilization of the TransTexas Rigs (or
other drilling rigs) and there can be no assurance as to the level of
TransTexas' drilling requirements during the term of the Alliance Agreement or
that any of the TransTexas Rigs not employed under the Alliance Agreement can be
effectively marketed to other customers of the Company. If TransTexas or any of
the Company's other significant customers determine to reduce drilling activity
for any reason, the Company's financial condition and results of operations
could be materially and adversely affected.
Under the Alliance Agreement, all drilling rigs will be provided on pre-
agreed terms under separate drilling contracts to be entered into by the
parties. Although the Company believes that, as of the date hereof, the pre-
agreed day rates provided for under the Alliance Agreement approximate
prevailing market rates in the South Texas region, there can be no assurance
that such rates will continue to be competitive throughout the term of the
Alliance Agreement.
Pursuant to the terms of the purchase agreement entered into in
connection with the TransTexas Acquisition (the "TransTexas Purchase
Agreement"), at the time of the closing of the TransTexas Acquisition,
TransTexas entered into an escrow agreement and placed into escrow $2 million
(the "TransTexas Security Arrangement") to secure the obligations of TransTexas
under any drilling contracts entered into pursuant to the Alliance Agreement.
Although the Company will have recourse to the TransTexas Security Arrangement,
such arrangement is not intended to and will not cover all credit or collection
risks that may arise in connection with the performance of the Alliance
Agreement and related drilling contracts. Any failure on the part of TransTexas
or any of the Company's other significant customers to pay all amounts due for
drilling services provided by the Company (whether as a result of financial
difficulties experienced by such customers or for any other reason) could have a
material adverse effect on the Company and its business, financial condition or
results of operations.
CLASS ACTION LITIGATION
A purported class action lawsuit is currently 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
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the Company, alleging violations of federal and state securities laws in
connection with the Initial Public Offering. The lawsuit alleges, among other
things, that the registration statement and prospectus for the Initial Public
Offering contained materially false and misleading information and omitted to
disclose material facts. The Company believes the allegations in the lawsuit are
without merit and is defending vigorously the claims brought against it. The
Company is required under certain circumstances to indemnify the named
directors, officers, underwriters and selling stockholders against losses
incurred as a result of such lawsuits and to advance to such parties ongoing
legal expenses incurred in connection with the defense. The Company expects to
continue to incur legal expenses on its behalf and on behalf of such officers,
directors, underwriters and selling stockholders in connection with this
litigation. In addition, defending this litigation has and will likely continue
to result in the diversion of management's attention from the day-to-day
operations of the Company's business. The Company is unable to predict the
outcome of this lawsuit or the costs to be incurred in connection with its
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. See "Business--Legal Proceedings."
OPERATING HAZARDS AND UNINSURED RISKS
The Company'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,
drilling contracts provide for the division of responsibilities between a
drilling company and its customer, and the Company seeks to obtain
indemnification from its customers by contract for certain of these risks. To
the extent not transferred to customers by contract, the Company seeks
protection against certain of these risks through insurance. Although the
Company believes that it is adequately insured for public liability and property
damage to others and injury or death to persons in accordance with industry
standards with respect to its operations, no assurance can be given that such
insurance will be sufficient to protect the Company against liability for all
consequences of well disasters, personal injury, extensive fire damage or damage
to the environment. No assurance can be given that the Company will be able to
maintain adequate insurance in the future at rates it considers reasonable or
that any particular types of coverage will be available. The occurrence of
events, including any of the above-mentioned risks and hazards, that are not
fully insured or the failure of a customer to meet its indemnification
obligations could subject the Company to significant liability and could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business--Operating Hazards and Insurance."
SHORTAGE OF DRILLING EQUIPMENT AND SUPPLIES
There is a general shortage of certain drilling equipment and supplies
used in the Company's business. Because, until recent years, the land drilling
industry was characterized by an oversupply of land rigs, 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 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 the Company, 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. There
can be no assurance that a continued shortage of such equipment and supplies
will not result in a material increase in the costs incurred by the Company to
refurbish and maintain its rigs.
The Company requires a substantial amount of drill pipe in order to
achieve the drilling depths required by its customers. 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 24 months
and has required orders for new drill pipe to be placed at least one year in
advance of expected use. While the Company believes it currently has sufficient
drill pipe
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for its existing rigs, in the event the shortage continues, the Company may be
unable to obtain the drill pipe required to expand its contract drilling
operations.
CAPITAL REQUIREMENTS AND LIQUIDITY
The oil and gas contract drilling industry is capital intensive. The
Company's cash flow from operations and the continued availability of credit are
subject to a number of variables, including the Company's utilization rate,
operating margins and ability to maintain costs and obtain contracts in a
competitive industry. There can be no assurance that the Company's cash flow
from operations, proceeds from the Old Notes Offering and the Initial Public
Offering and present borrowing capacity will be sufficient to fund its
anticipated capital expenditures and working capital requirements. The Company
may from time to time seek additional financing, either in the form of bank
borrowings, sales of the Company's debt or equity securities or otherwise.
Except for the Notes and the Company's loan agreements with its lenders, the
Company has no agreements for any such financing and there can be no assurance
as to the availability or terms of any such financing. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Liquidity" and "Description of Certain
Indebtedness." To the extent the Company's capital resources and cash flow from
operations are at any time insufficient to fund its activities or repay its
indebtedness as due, the Company will need to raise additional funds through
public or private financings or additional borrowings. No assurance can be given
as to the Company's ability to obtain any such capital resources. If the Company
is at any time not able to obtain the necessary capital resources, its financial
condition and results of operations could be materially adversely affected.
RELIANCE ON KEY PERSONNEL
The success of the Company's business is highly dependent upon the
services, efforts and abilities of James E. Brown, the Company's President and
Chief Executive Officer and certain other officers and key employees,
particularly Edward S. Jacob, III, the Company's Executive Vice
President--Operations & Marketing, David E. Grose, III, the Company's Vice
President and Chief Financial Officer, and Ron Tyson, the Company's
Construction Manager. The business of the Company could be materially and
adversely affected by the loss of any of these individuals. The Company does
not maintain key man life insurance on the lives of any of its executive
officers or key employees. The Company has employment agreements with Messrs.
Brown, Jacob and Grose. See "Management--Executive Compensation."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS; VOTING AGREEMENT AMONG CERTAIN
STOCKHOLDERS
The Company's directors, executive officers and holders of more than 5%
of the Common Stock beneficially own approximately 27.7% of the outstanding
shares of Common Stock. In addition, holders of approximately 25.0% of the
outstanding shares of Common Stock are parties to a stockholders and voting
agreement (the "Stockholders and Voting Agreement") with the Company that
provides for, among other things, the nomination of certain individuals for
election to the Board of Directors of the Company (the "Board"). Pursuant to the
Stockholders and Voting Agreement, each of APLP and Energy Spectrum Partners LP
("Energy Spectrum") are entitled to nominate one person for election to the
Board, subject to maintaining certain ownership thresholds. Each of APLP, Energy
Spectrum, a group of individuals consisting of Mike Liddell, Mark Liddell and
Charles E. Davidson (the "DLB Group"), and Carl B. Anderson, III are obligated
to vote all of their shares of Common Stock for the election of such nominees.
Accordingly, if all stockholders who are party to the Stockholders and Voting
Agreement were to act in concert, they would be able to nominate up to two
members of the Board and exercise significant influence over the Company's
affairs. The Stockholders and Voting Agreement also requires that any transferee
of stock from a party thereto (other than sales into the public market) be bound
by the terms thereof as a condition precedent to such transfer. See "Principal
Stockholders" and "Certain Relationships and Related Transactions--Stockholders
and Voting Agreement."
INABILITY TO PURCHASE EXCHANGE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined in the Indenture),
the Company will be required to offer to repurchase all of the outstanding Notes
at a price equal to 101% of the principal amount thereof, plus accrued
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and unpaid interest and Liquidated Damages, if any, to the repurchase date.
There can be no assurance that the Company would have sufficient resources to
repurchase the Notes upon the occurrence of a Change of Control. The failure to
repurchase all of the Notes tendered to the Company would constitute an event of
default under the Indenture. Furthermore, the repurchase of the Notes by the
Company upon a Change of Control might result in a default on the part of the
Company in respect of other indebtedness of the Company, as a result of the
financial effect of such repurchase on the Company or otherwise. The change of
control repurchase feature of the Notes may have anti-takeover effects and may
delay, defer or prevent a merger, tender offer or other takeover attempt. See
"Description of Exchange Notes."
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
The domestic oil and gas industry is 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. Except for the handling of solid wastes directly generated from the
operation and maintenance of the Company's drilling rigs, such as waste oils and
wash water, it is the Company's practice to require its customers to
contractually assume responsibility for compliance with environmental
regulations. However, the Company's operations are vulnerable to certain risks
arising from the numerous environmental health and safety laws and regulations.
These laws and regulations may restrict the types, quantities and concentration
of various substances that can be released into the environment in connection
with drilling activities, require reporting of the storage, use or release of
certain chemicals and hazardous substances, require removal or cleanup of
contamination under certain circumstances, and impose substantial civil
liabilities or criminal penalties. Environmental laws and regulations may impose
strict liability, rendering a person liable for environmental damage without
regard to negligence or fault, and could expose the Company to liability for the
conduct of, or conditions caused by, others, or for acts of the Company that
were in compliance with all applicable laws at the time such acts were
performed. Moreover, there has been a trend in recent years toward stricter
standards in environmental, health and safety legislation and regulation which
is likely to continue.
The Company has made and will continue to make expenditures to comply
with governmental regulations, including environmental, health and safety
requirements. As part of the Bonray Acquisition, the Company 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 the Company at closing, the Company did not require DLB to indemnify
the Company with respect to such expenditures or remedial actions. While the
Company has not determined whether and to what extent such expenditures or
remedial actions may be necessary or advisable, based on the presently available
information, the Company does not believe that such expenditures will exceed $1
million. There can be no assurance, however, that the Company will not incur
material liability with respect to this property or any of the Company's other
properties or operations. The Company cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings, whether
additional laws and regulations will be adopted, or the effect such changes may
have on the Company's business, financial condition or results of operations.
Because the requirements imposed by such laws and regulations are subject to
change, the Company is unable to forecast the ultimate cost of compliance with
such requirements. The modification of existing laws and regulations or the
adoption of new laws or regulations curtailing exploratory or development
drilling for oil and gas for economic, political, environmental or other reasons
could have a material adverse effect on the Company by limiting drilling
opportunities. See "Business--Government Regulation and Environmental Matters."
RISKS ASSOCIATED WITH FOOTAGE AND TURNKEY DRILLING
The Company in the past has performed drilling services under footage and
turnkey contracts and may enter into such arrangements in the future. Revenues
from footage contracts accounted for approximately 2% of total revenues during
the year ended December 31, 1997 and the Company had no turnkey contracts during
such period. As of June 15, 1998, the Company was operating five rigs under
footage contracts. The Company expects that the number of its rigs operating
under footage contracts will increase in the future unless the market for
drilling rigs improves. Under footage contracts, the Company is paid a fixed
amount for each foot drilled, regardless of the time required or
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the problems encountered in drilling the well. Under turnkey drilling contracts,
the Company 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. In addition, the Company provides technical
expertise and engineering services, as well as most of the equipment required
for the well, and is compensated only when the contract terms have been
satisfied. On a turnkey well, the Company often subcontracts for related
services and manages the drilling process. The risks to the Company under
footage and turnkey contracts are substantially greater than under daywork
contracts because the Company assumes most of the risks associated with drilling
operations that in a daywork contract are generally assumed by the operator,
including risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns,
abnormal drilling conditions and risks associated with subcontractors' services,
supplies, cost escalation and personnel. While the Company's current strategy is
to operate primarily under daywork contracts, management continually analyzes
market conditions, customer requirements, rig demand and the experience of its
personnel to determine how to most profitably contract its fleet. If the Company
were to encounter less favorable conditions within its industry, competitive
pressures and customer demands might require it to consider entering into a
larger number of footage and turnkey drilling contracts. Accordingly, there can
be no assurance that the Company will not suffer a loss that is not insured as a
result of entering into such contracts, and any such uninsured loss could have a
material adverse effect on the Company's financial position and results of
operations. See "Business--Contract Drilling Operations."
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes will constitute a new class of securities with no
established trading market. The Company does not intend to list the Exchange
Notes on any national securities exchange or to seek the admission thereof for
trading on any automated dealer quotation system. The Company has been advised
by the Initial Purchasers that they intend to make a market in the Exchange
Notes; however, the Initial Purchasers are not obligated to do so and any such
market-making activities may be discontinued at any time without notice. No
assurance can be given as to the liquidity of any trading market for the
Exchange Notes. If a market for the Exchange Notes were to develop, the Exchange
Notes could trade at prices that may be higher or lower than their principal
amount, depending upon many factors, including prevailing interest rates, the
Company's operating results and the markets for similar securities.
Historically, the market for non-investment grade debt such as the Exchange
Notes has been subject to disruptions that have caused substantial volatility in
the prices of securities similar to the Exchange Notes. There can be no
assurance that, if a market for the Exchange Notes were to develop, such a
market will not be subject to similar disruptions. See "Description of Exchange
Notes," and "Notice to Investors."
FRAUDULENT CONVEYANCE CONSIDERATIONS
The Company believes that the indebtedness represented by the Notes has
been incurred for proper purposes and in good faith, and that, based on present
forecasts, asset valuations and other financial information, after the
consummation of the Old Notes Offering and the Exchange Offer, the Company will
be solvent, will have sufficient capital for carrying on its business and will
be able to pay its debts as they mature. Notwithstanding the Company's belief,
however, if a court of competent jurisdiction in a suit by an unpaid creditor or
a representative of creditors (such as a trustee in bankruptcy or a debtor-
in-possession) were to find that, at the time of the incurrence of such
indebtedness, the Company was insolvent, was rendered insolvent by reason of
such incurrence, was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, or intended to hinder, delay or defraud its creditors, and the
indebtedness was incurred for less than reasonably equivalent value, then such
court could, among other things, (i) void all or a portion of the Company's
obligations to the holders of the Exchange Notes, the effect of which would be
that the holders of the Exchange Notes may not be repaid in full and/or (ii)
subordinate the Company's obligations under the Exchange Notes to other existing
and future indebtedness of the Company to a greater extent than would otherwise
be the case, the effect of which would be to entitle such other creditors to be
paid in full before any payment could be made on the Exchange Notes.
The Company's obligations under the Exchange Notes will be guaranteed,
jointly and severally, by each of the Guarantors. The Company believes that
indebtedness represented by the Guarantees has been incurred by the Guarantors
for proper purposes and in good faith, and that, based on present forecasts,
asset valuations and other
23
<PAGE> 29
financial information, after the consummation of the Old Notes Offering and the
Exchange Offer, each of the Guarantors will be solvent, will have sufficient
capital for carrying on its business and will be able to pay its debts as they
mature. Notwithstanding the Company's belief, however, if a court of competent
jurisdiction in a suit by an unpaid creditor or a representative of creditors
(such as a trustee in bankruptcy or a debtor-in-possession) were to find that,
at the time of the incurrence of such indebtedness, the Guarantors were
insolvent, were rendered insolvent by reason of such incurrence, were engaged in
a business or transaction for which their remaining assets constituted
unreasonably small capital, intended to incur, or believed that they would
incur, debts beyond their ability to pay such debts as they matured, or intended
to hinder, delay or defraud their creditors, and that the indebtedness was
incurred for less than reasonably equivalent value, then such court could, among
other things, (i) void all or a portion of such Guarantors' obligations to the
holders of the Exchange Notes, the effect of which would be that the holders of
the Exchange Notes may not be repaid in full and/or (ii) subordinate such
Guarantors' obligations under the Exchange Notes to other existing and future
indebtedness of such Guarantors to a greater extent than would otherwise be the
case, the effect of which would be to entitle such other creditors to be paid in
full before any payment could be made on the Exchange Notes. Among other things,
a legal challenge to a guarantee on fraudulent conveyance grounds may focus on
the benefits, if any, realized by the Guarantors as a result of the issuance by
the Company of the Exchange Notes.
EXCHANGE OFFER PROCEDURES; CONSEQUENCES OF FAILURE TO EXCHANGE
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for Exchange Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer, registration rights under the Exchange Offer
Registration Rights Agreement generally will terminate. In addition, any holder
of Old Notes who tenders in the Exchange Offer for the purpose of participating
in a distribution of the Exchange Notes may be deemed to have received
restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transactions. Each Participating Broker-Dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution." To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected. See "The Exchange Offer."
24
<PAGE> 30
THE COMPANY
The Company was formed in December 1996 as a Delaware corporation through
a series of affiliated entity transactions in which the Company became the
successor to Anadarko, the contract drilling subsidiary of privately held APLP.
In connection with the formation of the Company (i) APLP contributed ten
drilling rigs, including two rigs requiring refurbishment, for shares of Common
Stock, (ii) Roy T. Oliver and related entities exchanged six additional drilling
rigs for shares of Common Stock, (iii) Energy Spectrum contributed cash for
shares of Common Stock and (iv) Chesapeake entered into drilling contracts with
two-year terms for six of the Company's rigs in consideration for an option to
purchase shares of Common Stock (together, the "Formation Transactions"). Since
the Formation Transactions, the Company has expanded its business and enhanced
its original fleet through the transactions described below.
o Trend Acquisition. In May 1997, the Company completed the
acquisition of Trend Drilling Co. and its 14 rigs ("Trend") for
$18 million in cash and 250,000 shares of Common Stock (the "Trend
Acquisition").
o Ward Acquisition. Also in May 1997, the Company acquired the
assets of Ward Drilling Company, Inc. including six rigs ("Ward")
for $8 million in cash, 400,000 shares of Common Stock and
warrants to purchase an additional 200,000 shares of Common Stock
(the "Ward Acquisition").
o Bonray Acquisition. In October 1997, the Company acquired Bonray
Drilling Corporation ("Bonray") from DLB Oil & Gas, Inc. ("DLB")
for 3,015,000 shares of Common Stock (the "Bonray Acquisition").
In the Bonray Acquisition, the Company acquired 13 rigs, including
seven rigs with depth capacities of 15,000 feet or greater and two
diesel electric SCR rigs.
o Oliver Acquisition. In January 1998, the Company purchased six
additional rigs from R.T. Oliver Drilling, Inc. for approximately
$14 million in cash (the "Oliver Acquisition"). The Company
expects to refurbish and purchase complementary equipment,
including drill pipe, for these rigs as market conditions warrant.
o Individual Rig Acquisitions. In addition to the Trend, Ward,
Bonray and Oliver Acquisitions, through March 31, 1998, the
Company invested $5.5 million to acquire six rigs in five
transactions involving purchases of individual rigs or rig
components (the "Individual Rig Acquisitions" and, together with
the Formation Transactions, the Trend, Ward, Bonray and Oliver
Acquisitions, the "Consolidation Transactions"). In addition,
the Company has purchased one rig for approximately $54,000 and
has two rigs which may be assembled from inventoried components.
In August 1997, the Company sold one rig.
o Initial Public Offering. In November 1997, the Company completed
the Initial Public Offering of 11,040,000 shares of Common Stock.
Of the total shares sold in the Initial Public Offering, the
Company sold 4,229,050 shares of Common Stock and received net
proceeds of $89.5 million. Through March 31, 1998, the Company
used $34.3 million of such proceeds to purchase machinery and
equipment.
o Refurbishment. The Consolidation Transactions included a number
of rigs in need of refurbishment. From January 1, 1997 through
March 31, 1998, the Company completed refurbishment of 14 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 1, 1997 and March 31, 1998. At March 31, 1998,
the Company had 12 additional rigs in various stages of
refurbishment. The Company has 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.
The Company placed one of its construction project rigs into
service during May 1998 and anticipates refurbishing and placing
the remaining eleven rigs into service as market conditions
warrant.
o Holding Company Reorganization. Prior to the consummation of the
Old Notes Offering, the Company completed a reorganization of its
corporate structure and obtained the release of certain collateral
for its secured indebtedness. In the reorganization of the
corporate structure, Bayard and its subsidiaries Trend, Bayard
Drilling, L.L.C. ("Bayard LLC") and Bonray transferred
substantially all of their drilling rigs, associated equipment
25
<PAGE> 31
and other assets to a wholly owned partnership, Bayard Drilling,
L.P. ("Bayard Drilling"), subject to the transferors' secured
indebtedness, in exchange for the assumption by Bayard Drilling of
associated liabilities and the issuance by Bayard Drilling of
partnership interests. Concurrently with the transfers, (i) the
Company's secured lenders under the Loan Agreements released from
liens securing the Term Loan all assets except 12 drilling rigs
and associated equipment and released from liens securing the
Revolving Loan all drilling rigs and drilling contracts, except
the 12 rigs remaining as collateral under the Term Loan and the
drilling contracts associated with those 12 rigs, (ii) Bayard
Drilling and its general partner Bayard LLC issued guarantees in
favor of the lenders and (iii) the Company repaid approximately
$6.2 million of its indebtedness to CIT and Fleet under the Term
Loan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and
Liquidity" and "Description of Certain Indebtedness."
o TransTexas Acquisition. In June 1998, the Company acquired 25
rigs and related equipment from TransTexas for $75 million in
cash. See "The TransTexas Acquisition."
The Company's principal executive offices are located at 4005 Northwest
Expressway, Suite 550E, Oklahoma City, Oklahoma 73116, and its telephone number
at such offices is (405) 840-9550.
26
<PAGE> 32
THE TRANSTEXAS ACQUISITION
Concurrently with the consummation of the Old Notes Offering on June 26,
1998, the Company completed the TransTexas Acquisition, resulting in the
acquisition by Bayard Drilling of 25 rigs and related equipment for aggregate
cash consideration of $75 million.
On May 26, 1998, Bayard Drilling entered into the TransTexas Purchase
Agreement providing for the purchase from TransTexas of certain assets,
including (i) 25 drilling rigs and related equipment (including approximately
745,000 feet of drill pipe), (ii) a drilling support facility located in Laredo,
Texas and related maintenance and repair equipment, (iii) trucks and equipment
used for rig hauling activities, (iv) certain rental equipment used in the
drilling business and (v) certain office equipment, permits and licenses and
other assets used in connection with the drilling operations conducted by
TransTexas. All of the acquired rigs are mechanical rigs capable of drilling to
depths of 12,000 feet or greater, with 12 of the rigs capable of drilling to
depths of 20,000 feet or greater. Since the TransTexas Acquisition, the Company
has hired approximately 300 persons formerly employed in TransTexas' drilling
and trucking operations.
The TransTexas Purchase Agreement contains a covenant prohibiting
TransTexas and its affiliates, for a period of 30 months, from (i) providing any
land drilling services for hire in the Alliance Area or (ii) hiring or
attempting to hire any employee of Bayard Drilling or any of its affiliates.
The TransTexas Purchase Agreement contains customary provisions relating
to indemnification for certain liabilities. Under the TransTexas Purchase
Agreement, TransTexas has agreed to indemnify Bayard Drilling against (i) debts,
liabilities and obligations arising prior to the closing date in connection with
its land drilling operations and (ii) liabilities for breaches on the part of
TransTexas of its representations and warranties. Likewise, Bayard Drilling has
agreed to indemnify TransTexas against (i) debts, liabilities and obligations
arising after the closing date in connection with its land drilling operations
(to the extent that TransTexas has not made representations and warranties
regarding such matters to Bayard Drilling) and (ii) liabilities on the part of
Bayard Drilling for breaches of its representations and warranties.
In connection with the TransTexas Acquisition, Bayard Drilling and
TransTexas entered into the Alliance Agreement. The Alliance Agreement provides
that, for a period of 30 months, if TransTexas engages in any land drilling
activities in the Alliance Area, TransTexas will engage Bayard Drilling to
provide up to 15 of the TransTexas Rigs (or any reasonably equivalent drilling
rigs designated by Bayard Drilling) for wells on which TransTexas serves as
operator.
Under the Alliance Agreement, all drilling rigs will be provided by
Bayard Drilling to TransTexas on pre-agreed terms under separate drilling
contracts to be entered into by the parties. The dayrates set forth in such
drilling contracts shall be revised (i) on a quarterly basis to reflect any
actual increases or decreases in the compensation paid to employees (including
benefit costs) of Bayard Drilling and (ii) on the fifteenth month anniversary of
the Alliance Agreement by mutual agreement of Bayard Drilling and TransTexas
(or, if the parties fail to agree, by decision of an arbitrator as required to
ensure that the drilling contracts reflect commercially reasonable
arrangements). The Company believes that, as of the date of the Alliance
Agreement, the day rates provided for under the Alliance Agreement approximated
prevailing market rates in the South Texas region. However, there can be no
assurance that such rates will continue to be competitive throughout the term of
the Alliance Agreement.
Bayard Drilling will not be required to provide any drilling rig to
TransTexas (i) if TransTexas in good faith requires the commencement of drilling
activities at any proposed drilling site less than 20 days after notice to
Bayard Drilling and Bayard Drilling determines that it is not able to provide a
rig on the accelerated schedule or (ii) if no drilling rig of a type requested
by TransTexas is available within a 125 mile radius of the proposed drilling
site (unless TransTexas agrees to bear all moving costs associated with
transporting the rig to the well site). If Bayard Drilling is not able to
provide drilling rigs to TransTexas under the circumstances set forth in clauses
(i) and (ii) above, TransTexas may obtain a drilling rig for such well site from
a third party other than Bayard Drilling.
27
<PAGE> 33
The term of the Alliance Agreement will be 30 months from June 26, 1998,
unless it is sooner terminated by (i) Bayard Drilling if TransTexas fails to
make any payment as and when required under any drilling contract, (ii) either
party upon 30 days' prior written notice if there is a material breach by the
other party of any obligation under the Alliance Agreement or the drilling
contracts, taken as a whole, which has a material adverse effect on the
performance of the breaching party under such agreements or (iii) either party
upon the insolvency or bankruptcy of the other party.
Immediately following the consummation of the TransTexas Acquisition,
eight of the TransTexas Rigs were being utilized by TransTexas under the
Alliance Agreement. Although the Company expects TransTexas to continue to
utilize certain of the TransTexas Rigs during the term of the Alliance
Agreement, there can be no assurance that TransTexas will do so and, therefore,
no assurance can be given as to the number of TransTexas Rigs (or other drilling
rigs) that Bayard Drilling will ultimately provide to TransTexas under the
Alliance Agreement or of the timing or receipt of revenues therefrom.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. The Exchange Offer is intended to satisfy certain
of the Company's obligations under the Exchange Offer Registration Rights
Agreement. The Old Notes surrendered in Exchange for the Exchange Notes will be
retired and canceled and cannot be reissued. Accordingly, the issuance of the
Exchange Notes will not result in any increase in the outstanding debt of the
Company.
The net proceeds of the sale of the Old Notes were approximately $96.8
million, after deducting the discount to the Initial Purchasers and estimated
expenses of the Old Notes Offering. The Company used $75 million of such
proceeds to fund the TransTexas Acquisition. All remaining proceeds have been or
will be used for general corporate purposes, possibly including acquisitions of
additional drilling rigs and related equipment.
28
<PAGE> 34
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 on an historical and as adjusted basis. The information presented below
on an as adjusted basis reflects each of the following transactions as if they
occurred on March 31, 1998: (i) the repayment by the Company of $6.2 million of
the outstanding principal amount of the Term Loan, (ii) the repayment and
retirement of the $2.52 million principal amount of Subordinated Notes
previously held by Energy Spectrum, (iii) the Old Notes Offering and (iv) the
TransTexas Acquisition. The table should be read in conjunction with "Selected
Consolidated Financial and Operating Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Pro Forma Consolidated Financial Data of the Company
and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
HISTORICAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash and investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,262 $ 41,701
========= ==========
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . $ 7,450 $ 7,450
--------- ----------
Long-term debt:
Term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,137 14,937 (1)
Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,111 -- (1)
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 100,000
--------- ----------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . 23,248 114,937
--------- ----------
Stockholders' equity:
Preferred Stock, par value $0.01 per share; no shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common Stock, par value $0.01 per share; 18,183,945 shares
outstanding(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 182
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 180,413 180,413
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . (363) (363)
--------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 180,232 180,232
--------- ----------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . $ 210,930 $ 302,619
========= ==========
</TABLE>
(1) In April 1998, the Company repaid and retired the $2.52 million
principal amount of Subordinated Notes held by Energy Spectrum. On May
14, 1998, the Company used a portion of the remaining proceeds of the
Initial Public Offering to repay $6.2 million of the amount outstanding
under the Term Loan. As of June 15, 1998, no borrowings were
outstanding under the Revolving Loan, approximately $18.2 million was
outstanding under the Term Loan and approximately $2.9 million was
outstanding on three amortizing term notes secured by certain of the
Company's top drives (the "Top Drive Notes"). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Liquidity" and "Certain
Relationships and Related Transactions--Chesapeake Transactions."
(2) Does not include (i) 815,100 shares of Common Stock subject to issuance
pursuant to outstanding options awarded under the Company's 1997 Stock
Option and Stock Award Plan (the "Employee Stock Plan") (30,500 of which
relate to options awarded after March 31, 1998), (ii) 100,000 shares of
Common Stock subject to issuance pursuant to options awarded under the
Company's 1997 Non- Employee Directors' Stock Option Plan (the "Director
Stock Plan") (25,000 of which relate to options awarded after March 31,
1998) or (iii) 297,000 shares of Common Stock subject to issuance
pursuant to outstanding warrants issued by the Company. See
"Management--1997 Stock Option and Stock Award Plan," "--1997 Non-
Employee Directors' Stock Option Plan" and "Certain Relationships and
Related Transactions."
29
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The historical 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 the Company and include the results of the Company's consolidated
subsidiaries, Trend, beginning May 1, 1997, Ward, beginning May 30, 1997, and
Bonray, beginning October 16, 1997. The historical 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 the
Company and relate to the operations of Anadarko, the predecessor of the
Company, and include, generally, the financial results of the operation of eight
rigs.
The historical financial data presented in the table below for the year
ended December 31, 1993 and at the end of the three month periods ended March
31, 1997 and 1998 are derived from the unaudited consolidated financial
statements of the Company. In the opinion of management of the Company, such
unaudited consolidated condensed financial statements include all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the financial data for such periods. The results for the three months ended
March 31, 1998 are not necessarily indicative of the results to be achieved for
the full year.
The data presented below should be read together with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements of the Company, including the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- ----------------------
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 $ 4,111 $ 23,962
Other .............................. -- -- 303 60 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total revenues ................. 8,349 9,910 7,708 9,853 55,747 4,111 23,962
--------- --------- --------- --------- --------- --------- ---------
Operating expense:
Drilling ........................... 7,690 8,572 6,075 7,653 40,705 3,047 17,221
Depreciation, depletion and
amortization ..................... 1,374 1,557 791 1,126 7,943 876 3,169
General and administrative ......... 819 786 880 658 1,868 195 755
Other .............................. -- -- 47 46 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total operating costs .......... 9,883 10,915 7,793 9,483 50,516 4,118 21,145
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) .............. (1,534) (1,005) (85) 370 5,231 (7) 2,817
--------- --------- --------- --------- --------- --------- ---------
Other income and (expense):
Interest expense and financing
cost ............................. (30) (18) (3) (11) (3,065) (145) (367)
Interest income .................... -- -- -- -- 597 17 496
Gain (loss) on sale of assets ...... -- 366 (131) 54 544 -- 52
Other income (expense) ............. 24 -- (3) 17 37 -- 34
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes .............................. (1,540) (657) (222) 430 3,344 (135) 3,032
Income tax expense(1) ................ -- -- -- 163 1,428 51 1,275
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary loss ................. $ (1,540) $ (657) $ (222) $ 267 $ 1,916 $ (84) $ 1,757
========= ========= ========= ========= ========= ========= =========
Earnings (loss) per share before
extraordinary loss:
Basic .............................. $ (.04) $ .05 $ .21 $ (.01) $ .10
========= ========= ========= ========= =========
Diluted ............................ $ (.04) $ .05 $ .17 $ (.01) $ .10
========= ========= ========= ========= =========
Cash Flow Data:
Operating activities ................. $ (51) $ 445 $ 310 $ (462) $ (1,308) $ 3,043 $ 6,975
Investing activities ................. (1,671) (454) (1,710) (10,441) (86,470) (14,441) (26,676)
Financing activities ................. 1,722 9 1,400 15,866 132,117 8,476 (1,863)
</TABLE>
30
<PAGE> 36
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- ----------------------
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 $ 48,091 $ 246,594
Working capital (deficit),
excluding current portion of
long-term debt ................. 711 802 12 4,974 56,404 (20) 33,662
Total long-term debt, including
current portion ................ 365 -- -- 7,000 32,610 15,537 30,698
Total stockholders' equity ....... (913) (54) (276) 26,251 178,462 26,185 180,232
OTHER FINANCIAL DATA:
EBITDA(2) ........................ $ (160) $ 552 $ 706 $ 1,496 $ 13,174 $ 869 $ 5,986
Capital expenditures ............. 1,671 1,183 2,088 10,578 86,980 13,711 27,094
Ratio of EBITDA to interest
expense ........................ 30.7x 235.3x 136.0x 4.3x 6.0x 16.3x
Ratio of earnings to fixed
charges(3) ..................... 18.2x 1.7x 3.9x
DRILLING RIG ACTIVITY DATA
(UNAUDITED):
Total rigs at end of period ...... 8 7 8 17 63 11 63
Marketed rigs at end of period ... 8 7 8 8 49 11 51
Average utilization rate of
drilling rigs available for
service(4) ..................... 71% 84% 86% 88% 93% 99% 85%
Average day rate(5) .............. $ 4,332 $ 4,148 $ 4,298 $ 4,731 $ 5,393 $ 4,618 $ 5,957
</TABLE>
============
(1) Since the Company's predecessor was a nontaxable entity, income tax
expense is presented on a pro forma basis (assuming a 38% statutory rate)
for the year ended December 31, 1996.
(2) EBITDA represents operating income (loss) before depreciation and
amortization. EBITDA is frequently used by securities analysts and is
presented herein to provide additional information about the Company'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) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes plus
fixed charges less capitalized interest) by fixed charges (interest
expense plus capitalized interest and the portion of operating lease
rental expense that represents the interest factor).
(4) 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.
(5) Represents total contract drilling revenues (excluding mobilization, cost
reimbursements and fuel), divided by the total number of days the
Company's drilling rig fleet operated during the period, divided by the
average number of rigs in operation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Prospectus.
GENERAL
The Company's operations have been significantly affected by an
acquisition program which has transformed the Company from a regional competitor
with ten rigs in late 1996 to the fifth largest land drilling fleet in the
United States, with a total of 88 rigs. The historical financial results
presented herein do not include the effects of the TransTexas Acquisition (25
rigs) but do reflect the effects of the Formation Transactions (16 rigs), the
Trend Acquisition (14 rigs), the Ward Acquisition (6 rigs), the Bonray
Acquisition (13 rigs), the Oliver Acquisition (6 rigs), the Individual Rig
Acquisitions (6 rigs) and the addition of three other rigs available for
refurbishment (one of which was purchased for approximately $54,000 and two of
which were assembled from inventoried components), for the periods following
such transactions and events. In addition, the historical financial results
include periods in which a number of rigs were being refurbished and did not
contribute to revenues. Accordingly, the Company does not believe that the
historical statements of operations presented herein are necessarily indicative
of the Company's future operating results, particularly in light of the
magnitude of its recent acquisitions and rig refurbishment projects. See
"Business--Formation and Other Transactions."
DOMESTIC LAND DRILLING INDUSTRY OVERVIEW
Demand for the Company'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.
The Company's operating margins are influenced by contract drilling
rates, operating costs and drilling rig utilization. Although the Company
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. The recent decline in oil and gas
prices has contributed to a decrease in the Company's rig utilization rates from
88% for the fourth quarter of 1997 to 85% for the first quarter of 1998, 78% for
April 1998 and 70% for May 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 the Company'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. The Company 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, the Company has completed the Consolidation
Transactions and in June 1998 consummated the TransTexas Acquisition. The
Formation Transactions involved the issuance of an aggregate of 5,600,000 shares
of Common Stock in consideration for the contribution to the Company of 16 rigs
and $10 million in cash. At the time of the Formation Transactions, the Company
entered into a $24 million term loan facility with CIT, principally for the
refurbishment of certain of the Company's rigs. In May 1997, contemporaneously
with the Trend Acquisition and in anticipation of the Ward Acquisition, the
Company completed a financing transaction in which it (i) issued to Chesapeake
and Energy Spectrum additional shares of Common Stock, and two series of
warrants together
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<PAGE> 38
with subordinated notes due May 1, 2003 (the "Subordinated Notes") for $28.5
million in cash and (ii) increased the availability under its debt facilities
from $24 million to $40.5 million (collectively, the "May Financing").
The Company'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 March 31, 1998, the Company 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, and approximately $62 million on refurbishments and
other related equipment purchases, including drill pipe. As a result, the
Company's net property and equipment increased from $27 million at December 31,
1996 to $155.7 million at December 31, 1997 and $179.8 million at March 31,
1998. The Company's principal sources of liquidity have been the issuance of
Common Stock, warrants to purchase Common Stock, the Subordinated Notes and
borrowings under Loan Agreements. See "Description of Certain Indebtedness."
The most significant change in the Company's balance sheet from December
31, 1996 to March 31, 1998 was a $152.8 million increase in net property and
equipment. During this same period, long-term debt, net of current maturities,
increased by $17.2 million and stockholders' equity increased by $154 million.
These changes are a direct result of the acquisition and financing transactions,
including the Initial Public Offering, described herein.
From December 31, 1996 to March 31, 1998, the Company's working capital
position increased by $22.1 million to $26.2 million. This was primarily the
result of the increase in cash resulting from proceeds of the Initial Public
Offering.
OPERATING ACTIVITIES
During the year ended December 31, 1996, the Company 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 (i) increase in accounts receivable of $2.1 million, (ii)
increase in other assets totaling $185,000 and (iii) 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. The Company generated cash from operations of
$10.8 million and working capital changes used $12.1 million.
During the three months ended March 31, 1998, net cash provided from
operating activities totaled $6.9 million. The Company generated cash from
operations of $6.1 million and working capital changes provided $813,000.
INVESTING ACTIVITIES
During the year ended December 31, 1996, the Company 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 Common Stock issued to acquire
rigs in the Formation Transactions.
During the year ended December 31, 1997, the Company 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 Common Stock valued at $42.3
million.
During the three months ended March 31, 1998, the Company invested $27
million in fixed assets, including $11.1 million in the Oliver Acquisition. Rig
refurbishments consisted of $25.1 million, and $1.6 million was invested in
drill pipe and other drilling related equipment.
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<PAGE> 39
FINANCING ACTIVITIES
During the year ended December 31, 1996, the Company raised $15.9 million
from financing activities. The Company borrowed $7 million during the year under
the Term Loan as described below. The Company also issued 3,600,000 shares of
Common Stock for assets and cash and made debt payments totaling $900,000 during
the year.
During the year ended December 31, 1997, the Company obtained $132.1
million from financing activities, including net borrowings under the Loan
Agreements totaling $25.8 million and $107.1 million from the issuance of Common
Stock. The proceeds from these transactions were used to fund the Company's
working capital requirements and capital expenditures as discussed above.
During the three months ended March 31, 1998, the Company's payments
under the Loan Agreements totaled $1.8 million.
RECENT EVENTS AND FUTURE ACTIVITIES
The Company has 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. The Company placed one of its construction project
rigs into service during May 1998 and anticipates refurbishing and placing the
remaining such rigs into service as market conditions warrant.
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.
In June 1998, the Company consummated the Old Notes Offering, resulting in
net proceeds to the Company of approximately $96.8 million, after deducting
discounts to the Initial Purchasers and estimated expenses of the Old Notes
Offering. Concurrently with the Old Notes Offering, the Company consummated the
purchase of the drilling business of TransTexas, utilizing $75 million of the
net proceeds from the sale of the Old Notes. See "--The TransTexas Acquisition."
The Company believes that the balance of the proceeds from the Initial
Public Offering and the Old Notes Offering, cash flow from operations and, to
the extent available, borrowings under the Revolving Loan Agreement will be
sufficient to meet its anticipated capital requirements for 1998. As of July 17,
1998, the Company had approximately $17.8 million of borrowings outstanding
under the Term Loan and no borrowings outstanding under the Revolving Loan, and
cash or cash equivalents of approximately $33 million.
Until shortly before the issuance of the Old Notes, Bayard and Trend were
co-borrowers under a Revolving Loan Agreement (the "Old Revolving Loan
Agreement") with Fleet that provided revolving credit loans, subject to a
borrowing base comprised of a portion of the co-borrowers' accounts receivable,
of up to $10 million ($2 million of which is available for letters of credit)
for general corporate purposes. In connection with the reorganization of the
Company's corporate structure in May 1998, Bayard entered into an amendment and
restatement of the Old Revolving Loan Agreement (the "Revolving Loan Agreement")
that resulted in a release of Trend as a co-borrower. Trend, Bayard LLC, Bayard
Drilling and Bonray have guaranteed the Company's obligations under the
Revolving Loan Agreement, which are also secured by the accounts receivable, 12
drilling rigs and certain other assets of Bayard, Trend, Bonray, Bayard LLC and
Bayard Drilling. 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. The Company believes it has adequate liquidity
for its needs in the near term. 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. See "Description of Certain
Indebtedness."
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<PAGE> 40
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1997 1998
----------------------------------- -----------------------------------
GULF COAST MID-CONTINENT TOTAL GULF COAST MID-CONTINENT TOTAL
(IN THOUSANDS, EXCEPT RIG AND PER DAY DATA)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked(1) ........... 561 270 831 1,006 2,750 3,756
Average revenues per day(2) .. $ 5,132 $ 4,563 $ 4,947 $ 8,026 $ 5,777 $ 6,380
Average costs per day(3) ..... 3,781 3,430 3,667 5,436 4,273 4,585
Average margin per day(4) .... 1,351 1,133 1,280 2,589 1,504 1,795
Drilling revenues ............ $ 2,879 $ 1,232 $ 4,111 $ 8,074 $ 15,888 $ 23,962
Drilling costs(5) ............ 2,121 926 3,047 5,469 11,752 17,221
Operating margin ............. 758 306 1,064 2,605 4,136 6,741
Utilization rate ............. 99% 100% 99% 80% 88% 85%
</TABLE>
(1) Rig days worked represents the number of rigs being marketed by the
Company 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.
(2) Represents total contract drilling revenues (including mobilization
revenues and reimbursement for fuel and other costs) divided by the total
number of rig days worked by the Company's drilling rig fleet marketed
during the period.
(3) Represents direct operating costs divided by the total number of rig days
worked by the Company's drilling fleet marketed during the period.
(4) Represents the difference between average revenues per day and average
costs per day.
(5) Drilling costs exclude depreciation and amortization and general and
administrative expenses.
Drilling revenues increased approximately $19.8 million, or 483% to $23.9
million for the three months ended March 31, 1998, from $4.1 million for the
three months ended March 31, 1997. Drilling revenues increased due to a 2,925
day, or 352%, increase in rig days worked, and a $1,433, or 29%, 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 March 31,
1998, the Company had 51 rigs available for service. The increase in rigs
available for service was principally the result of acquisitions consummated in
1997. Rig days worked consisted of 1,006 days worked in the Gulf Coast region
and 2,750 days worked in the Mid-Continent region. Increases in revenues per day
were a result of the increase in the dayrates and the average number of land
drilling rigs being marketed by the Company, offset by a decrease in the
utilization rate from 99% to 85%.
Drilling costs increased by approximately $14.2 million, or 465%, to
$17.2 million for the three months ended March 31, 1998, from $3 million for the
three months ended March 31, 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 2,925 day increase in the days worked.
The Company's operating margin increased by approximately $5.7 million,
or 534%, to $6.7 million for the three months ended March 31, 1998, as compared
to $1.1 million for the three months ended March 31, 1997. The increase in
operating margin resulted from the increase in the average revenue per day and
the increase in days worked.
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<PAGE> 41
Depreciation and amortization expense increased by $2.3 million, or 262%,
to $3.2 million for the three months ended March 31, 1998, as compared to
$876,000 for the three months ended March 31, 1997. The increase was primarily
due to additional depreciation associated with the acquisitions consummated in
1997.
General and administrative expense increased by $560,000, or 287%, to
$755,000 for the three months ended March 31, 1998, from $195,000 for the same
period of 1997 due primarily to increased payroll costs associated with new
management and increased corporate staff and increased legal fees due to the
Company's acquisition activities and public status.
Interest expense was $367,000 for the three months ended March 31, 1998,
as compared to $145,000 for the three months ended March 31, 1997.
Other income increased for the three months ended March 31, 1998, as
compared to the three months ended March 31, 1997, primarily due to interest
income received on funds being invested in short-term investments.
For the three months ended March 31, 1998, the income tax provision was
$1.2 million, compared to $51,000 for the three months ended March 31, 1997.
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(1).................................... 2,029 3,672 5,807 9,479
Average revenues per day(2)........................... $4,826 $ 6,426 $ 5,536 $ 5,881
Average costs per day(3).............................. 3,772 5,031 3,828 4,294
Average margin per day(4)............................. 1,054 1,395 1,708 1,587
Drilling revenues..................................... $9,793 $23,598 $32,149 $55,747
Drilling costs(5)..................................... 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>
(1) Rig days worked represents the number of rigs being marketed by the
Company 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.
(2) Represents total contract drilling revenues (including mobilization
revenues and reimbursement for fuel and other costs) divided by the total
number of rig days worked by the Company's drilling rig fleet marketed
during the period.
(3) Represents direct operating costs divided by the total number of rig days
worked by the Company's drilling fleet marketed during the period.
(4) Represents the difference between average revenues per day and average
costs per day.
(5) Drilling costs exclude depreciation and amortization and general and
administrative expenses.
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. Drilling revenues increased due to 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
36
<PAGE> 42
of December 31, 1997, the Company 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 was primarily due to
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 due primarily to increased payroll costs associated with new
management and increased corporate staff and increased professional fees due to
the Company'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 due to increased debt outstanding
during 1997.
Other income increased for the year ended December 31, 1997 as compared
to the year ended December 31, 1996, primarily due to gains on the sale of
assets.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
YEAR ENDED
DECEMBER 31,
----------------------------
1995 1996
(IN THOUSANDS, EXCEPT RIG
AND PER DAY DATA)
<S> <C> <C>
Rig days worked(1) . . . . . . . . . . . . 1,489 2,029
Average revenues per day(2) . . . . . . . . $4,973 $4,826
Average costs per day(3) . . . . . . . . . 4,080 3,772
Average margin per day(4) . . . . . . . . . 893 1,054
Drilling revenues . . . . . . . . . . . . . 7,405 9,793
Drilling costs(5) . . . . . . . . . . . . . 6,075 7,653
Operating margin . . . . . . . . . . . . . 1,330 2,140
Utilization rate . . . . . . . . . . . . . 86% 88%
</TABLE>
- ------------------
(1) Rig days worked represents the number of rigs being marketed by the
Company 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.
(2) Represents total contract drilling revenues (including mobilization
revenues and reimbursement for fuel and other costs) divided by the total
number of rig days worked by the Company's drilling rig fleet marketed
during the period.
37
<PAGE> 43
(3) Represents direct operating costs divided by the total number of rig days
worked by the Company's drilling fleet marketed during the period.
(4) Represents the difference between average revenues per day and average
costs per day.
(5) Drilling costs exclude depreciation and amortization and general and
administrative expenses.
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 due to 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, due to an overall improvement
in the contract drilling market.
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 was primarily due to 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, due to the 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.
The Company's income tax expense of $163,000 in 1996 was attributable to
the Company's profitable operations.
The Company had net income of $267,000 in 1996 as compared to a net loss
of $222,000 in 1995. The Company's net loss in 1995 includes net losses from the
sale of assets, for which there was no similar transaction in 1996.
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.
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<PAGE> 44
BUSINESS
GENERAL
The Company is a leading provider of contract land drilling services to
major and independent oil and gas companies. As of June 15, 1998, pro forma for
the TransTexas Acquisition, the Company's rig fleet consisted of 88 rigs, of
which 73 were being marketed and 15 were available for refurbishment. For the
three months ended March 31, 1998, and the months of April and May, 1998, the
Company experienced overall utilization rates of approximately 85%, 78% and 70%,
respectively, for its marketed rigs (excluding the TransTexas Rigs).
The Company's fleet consists primarily of rigs capable of deep drilling
applications (well depths of 15,000 feet or greater). The Company believes that
deep drilling targets are more attractive to oil and gas companies due to new
technologies, including (i) three-dimensional seismic techniques, (ii)
increasingly accurate down hole measurement devices and (iii) improved guidance
systems and directional drilling motors for horizontal and directional wells. Of
the Company's 88 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. The
Company's large percentage of SCR rigs, comprising 31 of its 88 rigs, positions
the Company's fleet as one of the most technically advanced in the industry.
The Company was formed in December 1996 as the successor to Anadarko,
which owned ten rigs. Through June 15, 1998, pro forma for the TransTexas
Acquisition, the Company had acquired 78 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
The Company's rig fleet is currently concentrated in two core operating
regions--the Mid-Continent region and the Gulf Coast region. With the completion
of the TransTexas Acquisition the Company added a third core operating region in
South Texas. The Company 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 June 15, 1998, the Company had 38 rigs
marketed in the Mid-Continent region and was the most active drilling contractor
in the region. The Company'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 the Company to meet the specific well depths and mobility needs of
producers in that region. At June 5, 1998, 153 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 June 15, 1998, the Company had 14
rigs marketed in the Gulf Coast region, including 13 diesel electric SCR rigs.
The Company believes that its high quality equipment, including diesel electric
SCR rigs, powerful mud pumps and high horsepower drawworks, give the Company a
competitive advantage in attracting premium jobs with customers engaged in
multi-well drilling programs in this region. At June 5, 1998, 110 rigs were
being utilized 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 the Company'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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<PAGE> 45
SOUTH TEXAS REGION
The South Texas region is comprised of the southern portion of onshore
Texas. At June 15, 1998, pro forma for the TransTexas Acquisition, the Company
had 21 rigs available to be marketed in the South Texas region (of which 8 rigs
were being utilized by TransTexas) and four rigs available to be refurbished as
market conditions warrant. The TransTexas Rigs have been utilized historically
only to meet the internal drilling requirements of TransTexas. With the
completion of the TransTexas Acquisition, the Company intends to begin to
actively market the acquired rigs not being utilized by TransTexas under the
Alliance Agreement. At June 5, 1998, 119 rigs were being utilized 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. The Company believes that the TransTexas 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
The Company believes that growth in earnings and cash flow can be
achieved by pursuing the following business strategy:
OPERATING A TECHNOLOGICALLY ADVANCED RIG FLEET
The Company 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 the Company's
rigs include engines, pumps and drilling mud systems that represent the best
drilling technology available and that the Company 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, the Company 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. The Company 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
The Company 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 June 15, 1998, pro forma
for the TransTexas Acquisition, 78% of the Company's rig fleet had deep drilling
capability (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 due to their greater
operational flexibility and efficiency.
FOCUSING ON CORE MARKETS
The Company 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. The Company is the largest provider of drilling rigs in Oklahoma and is
among the largest operators of deep rigs in the onshore Gulf Coast region. The
TransTexas Acquisition makes the Company one of the largest suppliers of
drilling rigs in South Texas and positions the Company to mobilize additional
rigs in that region as market conditions warrant.
DEVELOPING AND MAINTAINING RELATIONSHIPS WITH OPERATORS
In order to maximize the utilization rate of its rig fleet and to
minimize exposure to market downturns, the Company seeks to maintain and build
relationships with operators committed to active domestic drilling programs.
The
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Company's largest current customers include Apache Corporation, Chesapeake,
Enron Oil and Gas Company, Marathon Oil Company, Sonat and UPR. Each of these
companies was among the most active onshore operators in the United States
during the last three years. As a result of the Alliance Agreement, the Company
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 three months ended March 31, 1998, the three
largest customers for the Company's contract drilling services were Chesapeake,
UPR and Sonat, which accounted for approximately 17%, 12% and 10% of total
revenues, respectively.
ACQUIRING AND REFURBISHING ADDITIONAL RIGS AND RELATED EQUIPMENT
The Company intends to pursue selective acquisitions of additional rigs
and related equipment, including top drive drilling systems. Additionally, the
Company 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 June 26, 1998, the date of the TransTexas
Acquisition, the Company has acquired 78 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 due to
numerous factors, including the length of its drill pipe and the drilling
conditions of any particular well. The intended well depth and the drill site
conditions determine the rig, drill pipe length and other equipment needed to
complete a well. The Company'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 June 15, 1998, pro forma for the TransTexas Acquisition, the
Company's fleet included 31 rigs that are diesel electric SCR rigs and 57 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. The Company 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. The Company 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, the Company 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 the Company a competitive advantage
in attracting premium jobs with customers engaged in multi-well horizontal
drilling programs. The majority of the Company's rigs employ diesel engines
manufactured by Caterpillar, Inc. as the rigs' main power sources. The Company
believes that such engines are lighter and more fuel efficient than other
available engines, thus saving the Company and its customers money in terms of
lower trucking costs and reduced fuel consumption.
Finally, the Company has begun equipping certain of its deep drilling
rigs with top drive drilling systems. Top drives provide the Company'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
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operations and in well control situations. Currently, the Company has five rigs
equipped with top drives and has ordered one additional top drive.
RIG FLEET
The following table identifies certain information as of June 15, 1998
regarding the rigs owned and operated by the Company and the rigs acquired in
the TransTexas Acquisition.
<TABLE>
<CAPTION>
HORSEPOWER
RIG DEPTH ------------
NO. CAPACITY DRAWWORKS RIG TYPE(1) DRAWWORKS(2) TOTAL(3) STATUS
<S> <C> <C> <C> <C>
GULF COAST REGION
21 30,000 Continental Emsco C-3 SCR 3,000 4,400 Available
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 Working
14 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Working
15 25,000 Mid Continent U-1220-EB(4) SCR 2,500 3,600 Available
16 25,000 Mid Continent U-1220-EB(4) SCR 2,500 3,600 Available
17 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Working
18 25,000 Mid Continent U-1220-EB(4) SCR 2,500 3,600 Working
22 25,000 National 1320-UE(4) SCR 2,000 3,300 Working
23 25,000 Gardner Denver 1500-E(4) SCR 2,000 3,600 Available
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 Working
4 18,000 Mid Continent U-712-A Mechanical 1,200 2,700 Working
MID-CONTINENT REGION
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 Working
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 Working
59 20,000 Oilwell 860 Mechanical 1,500 2,700 Available
60 20,000 National 1320-M Mechanical 2,000 2,700 Working
61 20,000 National 110-M Mechanical 1,500 2,700 Available
62 20,000 Mid Continent U914 SCR 1,500 2,700 Available
5 16,000 Gardner Denver 800 Mechanical 1,000 2,900 Available
8 16,000 National 80-B Mechanical 1,000 1,650 Working
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 Working
34 16,000 Ideco E-900 SCR 900 1,800 Working
39 16,000 Ideco E-900 SCR 900 2,350 Working
47 16,000 Ideco H-900 Mechanical 900 1,650 Working
51 16,000 Oilwell 760 Mechanical 1,000 1,650 Working
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 Working
38 13,000 Mid Continent U-36A Mechanical 600 1,650 Working
41 13,000 Mid Continent U-36A Mechanical 600 1,650 Available
9 12,000 Gardner Denver 500 Mechanical 650 2,250 Working
43 12,000 Superior 700 Mechanical 650 1,450 Working
45 12,000 Gardner Denver 500 Mechanical 650 1,450 Working
53 12,000 Unit U-40 Mechanical 850 1,650 Working
57 12,000 National 55 Mechanical 550 2,000 Working
58 12,000 Ideco 750 Mechanical 750 1,650 Repairing
28 11,000 BDW 650 Mechanical 650 1,350 Working
37 11,000 Gardner Denver 500 Mechanical 650 1,900 Working
</TABLE>
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<TABLE>
<C> <C> <C> <C> <C> <C> <C>
30 10,000 Brewster N-42 Mechanical 550 1,725 Working
56 10,000 Cooper LTD 750 Mechanical 750 1,550 Available
55 7,500 Cooper LTD 550 Mechanical 550 1,400 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 50
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
54 10,000 National 50-A Mechanical 450 900
TRANSTEXAS RIGS
86 25,000 National 1320 Mechanical 2,000 2,700 Working
80 20,000 National 110-M Mechanical 1,500 2,700 Working
81 20,000 National 110-M Mechanical 1,500 2,700 Available
82 20,000 National 110-M Mechanical 1,500 2,700 Working
83 20,000 National 110-M Mechanical 1,500 2,700 Available
84 20,000 National 110-M Mechanical 1,500 2,700 Working
85 20,000 National 110-M Mechanical 1,500 2,700 Working
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 Working
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 Working
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 Working
70 12,000 Cabot 900 Mechanical 900 2,570 Available
TRANSTEXAS RIGS AVAILABLE FOR REFURBISHMENT
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>
- ----------------------
(1) "SCR" denotes a diesel electric silicon controlled rectifier rig.
"Mechanical" denotes a mechanical rig powered by diesel engines.
(2) Drawworks horsepower represents the amount of input power required to
achieve the maximum hoisting capability of the drawworks.
(3) Total horsepower represents the maximum horsepower produced by a rig's
diesel engines for consumption by the drilling equipment.
(4) Five rigs in the Gulf Coast region are equipped with National PS350/500
top drives.
Drilling rigs and related equipment deteriorate over time unless they are
operated and maintained properly. The Company 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 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, the Company acquired 45
trucks which will be utilized to move the Company's drilling rigs and related
equipment. The fleet includes various types of trucks, including pole, winch,
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tandem and hauling vehicles. Additionally, the Company acquired approximately 60
lowboy and float trailers, three cranes and three forklifts.
There is a general shortage of certain drilling equipment and supplies
used in the Company's business. Because, until recent years, the land drilling
industry was characterized by an oversupply of land rigs, 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 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 the Company, 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
and has required orders for new drill pipe to be placed at least one year in
advance of expected use. The Company 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 the
Company 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 the Company's ability to refurbish
its construction project rigs and obtain contracts for its marketed rigs.
CONTRACT DRILLING OPERATIONS
The Company'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 the Company'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 the
Company 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. The Company has ongoing relationships with a
number of customers that often engage a specific rig for the drilling of
consecutive wells.
At June 15, 1998, all of the Company's working rigs were operating under
daywork contracts except for five rigs which were operating under footage
contracts. In addition, the Company and its predecessors in the past have
performed drilling services under turnkey contracts and the Company may do so
again in the future. Revenues from daywork contracts accounted for approximately
98% and 97% of total drilling revenues (excluding mobilization revenues) during
the year ended December 31, 1997 and the three months ended March 31, 1998,
respectively, with the remainder from footage contracts.
Daywork Contracts. Under daywork contracts, the Company provides a
drilling rig with required personnel to the operator, who supervises the
drilling of the well. The Company is paid based on a negotiated fixed rate per
day while the rig is utilized. The rates for the Company'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 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 the Company. 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 the Company generally bears no part of the
usual capital risks associated with oil and gas exploration (such as time delays
for various reasons, including stuck drill pipe and blowouts).
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Footage and Turnkey Contracts. Under footage contracts, the Company is
paid a fixed amount for each foot drilled, regardless of the time required or
the problems encountered in drilling the well. The Company pays more of the
out-of-pocket costs associated with footage contracts compared to daywork
contracts. Under turnkey contracts, the Company 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. The Company
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 the Company under footage and turnkey contracts are
substantially greater than under daywork contracts because the Company 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. See "Risk Factors--Risks Associated with Footage and Turnkey
Drilling."
CUSTOMERS AND MARKETING
The Company's customers include major oil companies and independent oil
and gas producers. During the three months ended March 31, 1998, the three
largest customers for the Company's contract drilling services were Chesapeake,
UPR and Sonat, which accounted for approximately 17%, 12% and 10% of total
revenues, respectively. Chesapeake recently announced that it was reducing its
drilling program in the Gulf Coast region, an area in which it utilizes a number
of the Company's rigs. In late 1997, Chesapeake released two rigs under contract
with the Company and has subsequently released three additional rigs it was
using in the Gulf Coast region. As of June 15, 1998, Chesapeake was utilizing
five of the Company's rigs; however, there can be no assurance that Chesapeake
or any of the Company's other principal customers will continue to employ the
Company'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 the Company's financial condition and results of operations.
The Company 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 the Company nor the customer is legally required to
honor these commitments, the Company strives to satisfy such commitments in
order to maintain good customer relations.
The Company'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 the
Formation Transactions, Chesapeake and its operating subsidiary (collectively
referred to in this discussion as "Chesapeake") entered into drilling contracts
(the "Chesapeake Drilling Agreements") with the Company pursuant to which
Chesapeake agreed to engage six of the Company's rigs for two-year terms. For
the year ended December 31, 1997, the Company 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 the areas of operation, less $100
per day. The Company 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, the Company had the option to terminate the contract for such rig at
the conclusion of operations at the well then being drilled. In December 1997,
the Company and Chesapeake were unable to agree on an appropriate rate
adjustment, so the Company exercised its option to terminate the Chesapeake
Drilling Agreements. At June 15, 1998, three of the Company's six rigs formerly
covered by the Chesapeake Drilling Agreements remained under contract with
Chesapeake on a well-to-well basis.
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COMPETITION
The contract drilling industry is a highly competitive and fragmented
business characterized by high capital and maintenance costs. As a result, even
though the Company has the fifth largest active land drilling rig fleet in the
United States, the Company 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 the Company
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 the Company's competitors have greater financial and
human resources than the Company, 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 the Company 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 the Company's growth strategy if it is unable
to purchase additional drilling rigs or related equipment on favorable terms.
See "Risk Factors--Competition" and "--Management of Growth; Risks of
Acquisition Strategy."
OPERATING HAZARDS AND INSURANCE
The Company'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, the
Company seeks to obtain indemnification from its customers by contract for
certain of these risks. To the extent not transferred to customers by contract,
the Company 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.
The Company's insurance coverage for property damage to its rigs and
drilling equipment is based on the Company'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.
The Company'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. The Company
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 the Company against liability for all consequences of well
disasters, extensive fire damage or damage to the environment. See "Risk
Factors--Operating Hazards and Uninsured Risks."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
GENERAL
The Company'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 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 the Company.
In addition, the Company'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.
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ENVIRONMENTAL REGULATION
The Company'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. The Company 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 the Company's activities. In general, under various
applicable environmental programs, the Company 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. The Company 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 the Company's drilling rigs, such as waste oils and
wash water, it is the Company'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 the Company to liability for the conduct of or conditions caused by
others, or for acts of the Company 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 the
Company.
Environmental regulations that affect the Company's customers also have
an indirect impact on the Company. 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
the Company's operations include the following:
Oil Pollution Act and Clean Water Act. The Oil Pollution Act of 1990
("OPA") amends certain provisions of the federal Water Pollution Control Act of
1972, commonly referred to as the Clean Water Act ("CWA"), 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 OPA, 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 ("EPA") 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. In the event that a discharge occurs at a well site at which the
Company is conducting drilling or pressure pumping operations, the Company may
be exposed to claims that it is liable under the CWA or similar state laws.
Certain of the Company's operations are also subject to EPA regulations,
including regulations that require the preparation and implementation of spill
prevention control and countermeasure ("SPCC") plans to address the possible
discharge of oil into navigable waters. Where so required, the Company has SPCC
plans in place.
Superfund. The Comprehensive Environmental, Response, Compensation, and
Liability Act, as amended ("CERCLA"), also known as the "Superfund" Law,
imposes liability, without regard to fault or the legality of the
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original conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include (i) the
current owner and operator of a facility from which hazardous substances are
released, (ii) owners and operators of a facility at the time any hazardous
substances were disposed, (iii) generators of hazardous substances who arranged
for the disposal or treatment at or transportation to such facility of hazardous
substances and (iv) transporters of hazardous substances to disposal or
treatment facilities selected by them. The Company 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, the Company has not been named
a potentially responsible party under CERCLA or any similar state Superfund
laws.
Hazardous Waste Disposal. The Company'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, the Company 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 the
Company at closing, the Company did not require DLB to indemnify the Company
with respect to such expenditures or remedial actions. While the Company has not
determined whether and to what extent such expenditures or remedial actions may
be necessary or advisable, based on the presently available information, the
Company does not believe that such expenditures will exceed $1 million.
Management believes that the Company and its operations are in material
compliance with applicable environmental laws and regulations.
HEALTH AND SAFETY MATTERS
The Company's facilities and operations are also governed by laws and
regulations, including the federal Occupational Safety and Health Act ("OSHA"),
relating to worker health and workplace safety. As an example, the Occupational
Safety and Health Administration has issued the Hazard Communication Standard
("HCS") requiring employers to identify the chemical hazards at their facilities
and to educate employees about these hazards. HCS applies to all private-sector
employers, including the oil and gas exploration and producing industry. HCS
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. The Company 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 OSHA regulations. While it is not anticipated that the
Company will be required in the near future to expend material amounts by reason
of such health and safety laws and regulations, the Company is unable to predict
the ultimate cost of compliance with these changing regulations.
FACILITIES AND OTHER PROPERTY
The Company 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, the Company 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. The Company 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 $1,400 per month. As part of the Bonray Acquisition, the Company
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, the Company acquired
approximately 24 acres of land in Laredo, Texas with office and warehouse
facilities totaling approximately 125,000 square feet. The Company considers all
of its facilities to be in good operating condition and adequate for their
present uses.
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<PAGE> 54
EMPLOYEES
As of July 20, 1998, the Company had approximately 985 employees, of
which approximately 150 were salaried and approximately 835 were employed on
an hourly basis. This includes approximately 300 recently hired employees who
were formerly involved in TransTexas' drilling and trucking operations. None of
the Company's employees is represented by any collective bargaining unit.
Management believes that the Company's relationship with its employees is good.
LEGAL PROCEEDINGS
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. In each of these lawsuits, the 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 joined in Yuan's motion to be appointed as lead plaintiffs in the
Yuan federal court suit.
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 Bayard and Sperry-Sun Drilling Services, Inc. on
May 29, 1998 in the District Court of Oklahoma County in the State of Oklahoma.
R.C. Taylor Companies, Inc., the plaintiff in that lawsuit, seeks actual and
punitive damages for costs allegedly incurred in connection with a directional
drilling project that utilized one of the Company's rigs.
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.
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<PAGE> 55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
Company's directors and executive officers, including their respective ages.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
James E. Brown . . . . . . . 46 Chairman of the Board, President and Chief
Executive Officer
Edward S. Jacob, III . . . . 45 Executive Vice President--Operations & Marketing
David E. Grose, III . . . . . 45 Vice President and Chief Financial Officer
Carl B. Anderson, III . . . . 42 Director
Mark Liddell . . . . . . . . 43 Director
Merrill A. Miller, Jr. . . . 47 Director
Sidney L. Tassin . . . . . . 41 Director
Lew O. Ward . . . . . . . . . 67 Director
</TABLE>
James E. Brown is Chairman of the Board and has served as President and
Chief Executive Officer and as a director of the Company since its formation in
1996. From 1992 until joining the Company in 1996, Mr. Brown served as President
of Anadarko Drilling Company, an Oklahoma general partnership and the
predecessor of the Company. From 1982 through 1992, Mr. Brown served as Chief
Financial Officer of AnSon Gas Corporation and its predecessor entities. From
1979 through 1982, Mr. Brown served as Vice President, Treasurer and Controller
of Blocker Energy Corporation. Prior thereto, Mr. Brown served as an accountant
in various positions with Arthur Andersen & Co.
Edward S. Jacob, III has served as Executive Vice President--Operations &
Marketing since April 1997 and prior thereto served as Vice President of
Operations and Marketing for the Company since its formation in 1996. From 1983
until joining the Company, Mr. Jacob was employed by Helmerich & Payne
International Drilling Co., serving as U.S. Marketing Manager from 1990 through
1996. Mr. Jacob is a Director of the International Association of Drilling
Contractors ("IADC"), serving on its Contracts and Marketing Committee, and is a
former IADC Chapter Chairman.
David E. Grose, III has served as Vice President and Chief Financial
Officer of the Company since July 1997. Prior to joining the Company, Mr. Grose
was affiliated with Alexander Energy Corporation from its inception in March
1980, serving from 1987 through 1996 as a director and Vice President, Treasurer
and Chief Financial Officer. In August 1996, National Energy Group acquired
Alexander Energy Corporation and Mr. Grose served as Vice President--Finance and
Treasurer through February 1997.
Carl B. Anderson, III has served as a director of the Company since its
formation in December 1996. Since 1994, Mr. Anderson has served as Managing
General Partner and Chief Executive Officer of APLP, a diversified energy
company and parent of Anadarko, the Company's predecessor. From 1978 through
1994, Mr. Anderson served in various capacities for APLP.
Mark Liddell has served as a director of the Company since November 1997.
Mr. Liddell has served as a director of Gulfport Energy Corporation since July
1997 and as its President since April 1998. Mr. Liddell is also a director of
Davidson Oil & Gas, Inc. From 1991 through April 1998, Mr. Liddell served in
various capacities for DLB, including Director from 1995 to April 1998,
President from October 1994 through April 1998 and Vice President from 1991 to
1994. From 1991 to May 1995, Mr. Liddell served as a director of TGX
Corporation, a publicly traded oil and gas company, and from 1989 to 1990, Mr.
Liddell served as a director of Kaneb Services, Inc., a publicly traded
industrial services and pipeline transportation company.
Merrill A. Miller, Jr. has served as a director of the Company since
October 1997. Since February 1996, Mr. Miller has served in various capacities
for National-Oilwell, Inc., a publicly traded oil field services company,
including
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<PAGE> 56
President of its Products & Technology Group since May 1997, Vice President and
General Manager of Drilling Systems since July 1996 and Vice President of
Marketing, Drilling Systems from February 1996 through July 1996. Prior thereto,
Mr. Miller served in various capacities for Anadarko, the Company's predecessor,
from January 1995 through February 1996. From May 1980 through January 1995, Mr.
Miller served in various capacities with Helmerich & Payne International
Drilling Co., including Vice President of U.S. Operations.
Sidney L. Tassin has served as a director of the Company since its
formation in 1996. Since March 1996, Mr. Tassin has been the President of Energy
Spectrum Capital LP, the general partner of Energy Spectrum, an equity fund that
invests in the energy industry. From 1980 to 1994, Mr. Tassin was associated
with MESA Inc., serving in various financial executive capacities, including
Vice President--Finance from 1986 to 1988 and President of BTC Partners Inc., a
financial and strategic consultant to MESA Inc., from 1988 to 1994.
Lew O. Ward has served as a director of the Company since May 1997.
Since 1981, Mr. Ward has served as Chairman and Chief Executive Officer of Ward
Petroleum Corporation, an independent oil and gas company founded by Mr. Ward.
Mr. Ward is a former Director and Area Vice President of the Independent
Petroleum Association of America ("IPAA") and is the immediate past Chairman of
the IPAA.
BOARD OF DIRECTORS
Board Composition. The Board is currently composed of six directors.
Directors are elected for one-year terms at each annual meeting of
stockholders. Three of the Company's current directors were elected pursuant
to the terms of the Stockholders and Voting Agreement. See "Certain
Relationships and Related Transactions-- Stockholders and Voting Agreement."
Board Committees. The Company has established two standing committees
of the Board: a Compensation Committee and an Audit Committee. The current
members of the Compensation Committee are Carl B. Anderson, III, Merrill A.
Miller, Jr. and Sidney L. Tassin. The Compensation Committee recommends to the
Board the base salaries and incentive bonuses for the officers of the Company
and is charged with administering the Employee Stock Plan and the Director
Stock Plan. The current members of the Audit Committee are Merrill A. Miller,
Jr., Sidney L. Tassin and Lew O. Ward. The Audit Committee reviews the
functions of the Company's management and independent auditors pertaining to
the Company's financial statements and performs such other related duties and
functions as are deemed appropriate by the Audit Committee or the Board. The
Board does not have a standing nominating committee or other committee
performing similar functions.
Director Compensation. Directors who are also employees of the Company
are not compensated for service on the Board or on any committee of the Board.
Non-employee directors of the Company receive an annual retainer of $10,000.
Additionally, all directors of the Company are entitled to reimbursement for
their reasonable out-of-pocket expenses in connection with their travel to and
attendance at meetings of the Board or committees thereof. In October 1997, the
Company adopted the Director Stock Plan pursuant to which each non-employee
director is entitled to receive (i) upon such director's initial election to the
Board, an option to purchase 15,000 shares of Common Stock and (ii) immediately
following each annual meeting at which such director is reelected to the Board,
an option to purchase 5,000 shares of Common Stock. Such non-employee directors
are also entitled under the Director Stock Plan to elect to receive options to
purchase Common Stock in lieu of their annual cash retainer and to receive
certain other stock option awards. Directors who are also employees of the
Company are not eligible to receive awards under the Director Stock Plan. See
"--1997 Non-Employee Directors' Stock Option Plan."
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth, for each completed
fiscal year since the Company's formation, the compensation earned by the
Company's Chief Executive Officer and its only other executive officer who
received total annual salary and bonus in excess of $100,000 for 1997.
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<PAGE> 57
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- ----------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(1) OPTIONS
<S> <C> <C> <C> <C> <C> <C>
James E. Brown..................... 1996 $ 9,167 -- $ 900 -- 200,000
President and Chief Executive 1997 111,816 $ 50,000 2,568 100,000 400,000
Officer
Edward S. Jacob, III............... 1996 -- -- -- -- --
Vice President--Operations & 1997 105,733 25,000 5,429 -- 150,000
Marketing
</TABLE>
- ------------------
(1) The dollar value of Mr. Brown's Restricted Stock Award is not set forth
as the Company's Common Stock was not publicly traded at the time of
grant, February 1997. Mr. Brown purchased such shares at a price of $2.50
per share, which shares vest at a rate of 20% per year beginning on
December 10, 1997. No dividends will be paid on such shares of Restricted
Stock.
Option Grants. On December 10, 1996, the Company granted Mr. Brown an
option (the "1996 Brown Option") to purchase 200,000 shares of Common Stock at
an exercise price of $5 per share, becoming exercisable with respect to 20% of
the underlying shares each anniversary of the grant date. The option terminates
as to any unexercised portion on December 10, 2002. If the 1996 Brown Option was
fully exercisable and exercised on December 31, 1997, on which the closing price
of a share of Common Stock on the American Stock Exchange (the "AMEX") was $16
1/4, the realized value of the option would have been $2.25 million. The Company
did not grant any options to purchase Common Stock to any other executive
officer or other employee of the Company during the fiscal year ended December
31, 1996. The Company has not granted any stock appreciation rights.
The Company adopted the Employee Stock Plan in April 1997 and made the
terms thereof applicable to the 1996 Brown Option. Through December 31, 1997 and
including the 1996 Brown Option, the Company had granted to James E. Brown,
Edward S. Jacob, III, and David E. Grose, III options to purchase 200,000,
50,000 and 50,000 shares of Common Stock, respectively, at exercise prices of
$5, $5 and $10 per share, respectively. Additionally, the Company has granted to
Messrs. Brown, Jacob and Grose, options to purchase 200,000, 100,000 and 10,000
shares of Common Stock, respectively, at an exercise price of $23 per share (the
Initial Public Offering price). Effective March 10, 1998, the Company granted
Mr. Jacob an option to purchase an additional 40,000 shares of Common Stock at
an exercise price of $14 per share. Except for options for 10,000 shares that
were exercised by Mr. Jacob in April 1998, none of such options has been
exercised, and all of such options remain outstanding, as of the date of this
Prospectus. Each of the option agreements relating to stock options granted
under the Employee Stock Plan provides for the vesting of 20% of the shares
subject to the option each year beginning on the first anniversary of the date
of grant. The option ceases to be exercisable on the earliest of (i) the sixth
anniversary of the date of grant, (ii) the date of the employee's voluntary
termination of employment with the Company or the Company's termination of the
employee's employment for Due Cause (as defined in the employee's employment
agreement) or (iii) the date that is 90 days after termination of the employee's
employment by means of retirement, disability or death. In the event of a Change
of Control (as defined in the Employee Stock Plan), the committee that is
charged with administering the Employee Stock Plan (the "Committee") may
accelerate the exercisability of the options or take certain other actions
provided in the Employee Stock Plan. See "--1997 Stock Option and Stock Award
Plan." The options are exercisable for cash, or in the Committee's discretion,
in an acceptable equivalent, by the assignment of shares of Common Stock owned
by the option holder or the surrender of another Incentive Award (as hereinafter
defined).
The Company and James E. Brown are parties to a restricted stock award
agreement (the "Restricted Stock Award Agreement") pursuant to which Mr. Brown
purchased 100,000 shares (the "Restricted Shares") of Common Stock at a price of
$2.50 per share in February 1997. The Restricted Stock Award Agreement provides
for vesting of the Restricted Shares at a rate of 20% per year beginning on
December 10, 1997. Mr. Brown is required to remain continuously employed by the
Company through each vesting date for the applicable portion of the Restricted
Shares to vest and, prior to vesting, the Restricted Shares are not
transferable. In the event of termination of Mr. Brown's employment due to a
Change of Control (as defined in the Employee Stock Plan), all Restricted Shares
will vest
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<PAGE> 58
immediately and all restrictions on transfer will terminate. If Mr. Brown's
employment with the Company terminates for any other reason, all unvested
Restricted Shares (the "Unvested Shares") will no longer be eligible for
vesting but, under certain circumstances, will be eligible for purchase by the
Company or Mr. Brown, as applicable. If Mr. Brown resigns or is terminated by
the Company for Due Cause (as defined in the Restricted Stock Award Agreement),
the Company may purchase the Unvested Shares from Mr. Brown for $2.50 per
share. If the Company elects not to purchase the Unvested Shares from Mr.
Brown, Mr. Brown will forfeit such Unvested Shares to the Company without any
payment therefor. If the Company terminates Mr. Brown's employment for any
reason other than Due Cause or if Mr. Brown's employment with the Company
terminates due to the death or disability of Mr. Brown, Mr. Brown may keep the
Unvested Shares by paying the Company an additional $5.00 per share. If Mr.
Brown elects not to make such additional payment, the Company may purchase the
Unvested Shares from Mr. Brown for $2.50 per share or allow Mr. Brown to keep
the Unvested Shares.
The following table sets forth information concerning stock options
granted to the Company's executive officers during the fiscal year ended
December 31, 1997 under the Employee Stock Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS PRESENT
SHARES GRANTED VALUE OF
UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION EACH GRANT
NAME OPTIONS GRANTED FISCAL YEAR PRICE($/SH) DATE OF OPTION(1)
<S> <C> <C> <C> <C> <C>
James E. Brown . . . . . . 200,000 12.500% $23.00 11/04/03 $2,024,000
Edward S. Jacob, III . . . 50,000 3.125% $ 5.00 01/01/03 $ 104,500
Edward S. Jacob, III . . . 100,000 6.250% $23.00 11/04/03 $1,012,000
David E. Grose, III . . . . 50,000 3.125% $10.00 06/18/03 $ 179,500
David E. Grose, III . . . . 10,000 .625% $23.00 11/04/03 $ 101,200
</TABLE>
(1) 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.
The following table sets forth certain information with respect to
exercises by the Company's executive officers of stock options during fiscal
year 1997 and the value of all unexercised employee stock options as of December
31, 1997 held by the Company's executive officers.
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(2)
ACQUIRED ------------------------------------- -----------------------------
NAME ON EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
EXERCISE(1)
<S> <C> <C> <C> <C> <C>
James E. Brown . . . . -- 40,000 360,000 $450,000 $1,800,000
Edward S. Jacob, III . -- -- 150,000 -- $562,500
David E. Grose, III . . -- -- 60,000 -- $312,500
</TABLE>
(1) None of the identified persons exercised options during the fiscal year
ended December 31, 1997.
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<PAGE> 59
(2) The value of unexercised in-the-money options is based upon the $16.25
per share closing price of the Company's Common Stock on the AMEX on
December 31, 1997.
Employment Agreements. The Company has entered into employment
agreements with James E. Brown, Edward S. Jacob, III and David E. Grose, III.
The aggregate of the annual base salaries for all three executive officers
(taken as a group) was $375,000 for the fiscal year ended December 31, 1997.
Pursuant to an employment agreement dated December 10, 1996 (the "Brown
Agreement"), James E. Brown is employed as President of the Company and, if
elected by the Board, the Chairman of the Board. The Brown Agreement provides
that Mr. Brown will receive an annual salary of not less than $120,000, subject
to annual adjustment in the sole discretion of the Board based upon the
performance and accomplishments of Mr. Brown. Currently, Mr. Brown's annual
salary is $140,000. If the Company's earnings before deducting interest, taxes
and depreciation during any full quarterly period equal or exceed the greater of
(i) $1.5 million or (ii) 5% of the sum of the Company's stockholders' equity and
long-term debt (averaged on a daily basis throughout such quarterly period),
then Mr. Brown will be eligible to receive a quarterly bonus of $12,500. The
Brown Agreement also provides for the grant of non-transferable options to
purchase 200,000 shares of Common Stock at an exercise price of $5 per share,
which options are subject to vesting and other restrictions provided in an
option agreement. Pursuant to the Brown Agreement, Mr. Brown purchased 100,000
shares of restricted Common Stock which are subject to vesting in equal amounts
annually over a five year period and other restrictions provided in the
agreement, including Mr. Brown's continued employment with the Company and Mr.
Brown's right, under certain circumstances, to purchase unvested shares for
$2.50 per share. See "--Executive Compensation." Mr. Brown is also entitled to
reimbursement of reasonable business expenses incurred by him in the performance
of his duties, as well as certain fringe benefits. The initial term of the Brown
Agreement expires on November 30, 1998 and is subject to extension for
additional one-year periods by mutual consent of Mr. Brown and the Company. In
the event Mr. Brown's employment is terminated by Mr. Brown voluntarily or by
the Company for Due Cause (as defined in the Brown Agreement), Mr. Brown has
agreed, for a period of two years thereafter, not to take certain actions in
competition with the Company in the states of Oklahoma, Texas, New Mexico,
Louisiana or any other state in which the Company then owns, leases or operates
its assets. If, in the event of a Change of Control (as defined in the Brown
Agreement), Mr. Brown is terminated without Due Cause or Mr. Brown voluntarily
elects to terminate his employment for any reason, then Mr. Brown will be
entitled to continue to receive his base salary and other employee benefits
through the remaining term of the Brown Agreement and to receive a cash payment
in an amount equal to any earned but unpaid quarterly bonus for the previous
quarter.
The Company has entered into employment agreements dated as of January 1,
1997 with Edward S. Jacob, III (the "Jacob Agreement") and July 16, 1997 with
David E. Grose, III (the "Grose Agreement" and collectively with the Jacob
Agreement, the "Executive Agreements"). Pursuant to the Executive Agreements,
Mr. Jacob is employed as Executive Vice President--Operations & Marketing and
Mr. Grose is employed as Vice President and Chief Financial Officer. The Jacob
Agreement provides that Mr. Jacob will receive an annual salary of not less than
$105,000 in 1997 and $115,000 in 1998, subject to annual adjustment in the sole
discretion of the Board based upon performance and accomplishments of Mr. Jacob.
Currently, Mr. Jacob's annual salary is $130,000. The Grose Agreement provides
that Mr. Grose will receive an annual salary of not less than $105,000, subject
to annual adjustment in the sole discretion of the Board based upon performance
and accomplishments of Mr. Grose. Currently, Mr. Grose's salary is $105,000. If
the Company's earnings before deducting interest, taxes and depreciation during
any full quarterly period equal or exceed the greater of (i) $1.5 million or
(ii) 5% of the sum of the Company's stockholders' equity and long-term debt
(averaged on a daily basis throughout such quarterly period), then each of
Messrs. Jacob and Grose will be eligible to receive a quarterly bonus of $5,000.
The Executive Agreements also provide for the grant of non-transferable options
to purchase 50,000 shares of Common Stock to each of Messrs. Jacob and Grose at
an exercise price of $5 per share, for Mr. Jacob, and $10 per share, for Mr.
Grose. Such options were granted to Mr. Jacob on January 1, 1997 and to Mr.
Grose on July 16, 1997 and are subject to vesting and other restrictions. Such
options generally become exercisable in equal annual amounts over five years.
Each of Messrs. Jacob and Grose are entitled to reimbursement of reasonable
business expenses incurred by him in the performance of his duties, as well as
certain fringe benefits. The Jacob Agreement also provided for payment to Mr.
Jacob of a relocation allowance of $50,000, which was paid by the Company in
January 1997. The initial terms of the Jacob Agreement and the Grose Agreement
expire on December
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<PAGE> 60
31, 1998 and June 30, 1999, respectively, and are subject to extension for
additional one-year periods by mutual consent. Each of the Executive Agreements
provides that if the applicable executive officer's employment is terminated by
the executive voluntarily or by the Company for Due Cause (as defined in the
Executive Agreements), for a period of two years thereafter, the executive will
not take certain actions in competition with the Company in the states of
Oklahoma, Texas, New Mexico, Louisiana or any other state in which the Company
then owns, leases or operates its assets. If, in the event of a Change of
Control (as defined in the Executive Agreement), the executive is terminated
without Due Cause or the executive voluntarily elects to terminate his
employment for any reason, then the executive will be entitled to continue to
receive his base salary and other employee benefits through the remaining term
of his Executive Agreement and to receive a cash payment in an amount equal to
any earned but unpaid quarterly bonus for the previous quarter.
1997 STOCK OPTION AND STOCK AWARD PLAN
The description set forth below represents a summary of the principal
terms and conditions of the Employee Stock Plan and does not purport to be
complete. Such description is qualified in its entirety by reference to the
Employee Stock Plan, a copy of which has been filed with the Commission as an
exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
Purpose. The Company adopted the Employee Stock Plan for the purposes of
strengthening the ability of the Company and its subsidiaries to attract,
motivate and retain employees of superior capability and encouraging valued
employees to have a proprietary interest in the Company. To accomplish these
purposes, the Employee Stock Plan provides terms upon which certain eligible
employees of the Company and its subsidiaries may be granted stock options
("Options"), stock appreciation rights ("SARs"), restricted stock, performance
units, performance shares or phantom stock rights (collectively, "Incentive
Awards").
Administration. The Employee Stock Plan is administered by a committee
(the "Committee") consisting of two or more non-employee members of the Board
elected to the Committee by a majority of the Board. Presently, the members of
the Committee are Carl B. Anderson, III and Sidney L. Tassin. Subject to the
terms of the Employee Stock Plan, the Committee has the ability to (i)
determine, among other things, which full-time employees (by individual or by
class) are eligible to receive Incentive Awards and the time or times at which
Incentive Awards are granted, (ii) determine the number of shares of Common
Stock, Options, SARs, restricted stock awards, performance units or shares or
phantom stock rights that will be subject to each Incentive Award and the terms
and provisions of each Incentive Award, (iii) interpret the Employee Stock Plan
and agreements thereunder, (iv) prescribe, amend and rescind any rules relating
to the Employee Stock Plan and (v) make all other determinations necessary for
Employee Stock Plan administration.
Shares Subject to Employee Stock Plan. As of January 1, 1998, an
aggregate of 1,818,394 shares of Common Stock (subject to certain adjustments)
may be issued, transferred or exercised pursuant to Incentive Awards under the
Employee Stock Plan. If the total number of issued and outstanding shares of
Common Stock increases, (other than any increase due to issuances of Common
Stock in connection with Incentive Awards under the Employee Stock Plan), then
the number of shares reserved under the Employee Stock Plan will be increased
one time per year, each January 1 during the existence of the plan, commencing
January 1, 1998, such that the number of shares reserved and available for
issuance under the Employee Stock Plan will equal 10% of the total number of
shares of issued and outstanding Common Stock. Notwithstanding the foregoing,
only a total of 400,000 shares of Common Stock reserved under the Employee Stock
Plan may be issued, transferred or exercised pursuant to incentive stock options
("ISOs") that comply with the requirements of Section 422 of the Internal
Revenue Code of 1986 (the "Code") under the Employee Stock Plan, and the number
of shares eligible for such treatment as ISOs shall not be subject to annual
adjustment. At the discretion of the Board or the Committee, the shares of
Common Stock delivered under the Employee Stock Plan may be made available from
(i) authorized but unissued shares, (ii) treasury shares or (iii) previously
issued but reacquired shares (or through a combination thereof).
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<PAGE> 61
Eligibility and Participation. The Employee Stock Plan authorizes the
Committee to designate, by individual or class, those persons who are eligible
to receive Incentive Awards under the Plan ("Participants"). Participants must
be employed on a full-time basis by the Company or its subsidiaries. Members of
the Board who are not officers or employees of the Company may not be
Participants.
INCENTIVE AWARDS
Except to the extent that the Committee in a written agreement evidencing
an Incentive Award (an "Incentive Award Agreement") or the Employee Stock Plan
provides otherwise, Incentive Awards vest and become exercisable in equal
amounts on the first, second, third, fourth and fifth anniversaries of their
grant. For purposes of all Incentive Awards under the Employee Stock Plan, the
term "Fair Market Value" means the closing price per share of such Common Stock
on the principal stock exchange or quotation system on which the Common Stock is
traded or listed on the date of grant or other specified measuring date, or, if
there shall have been no such price so reported or listed on that date, on the
last preceding date on which a price was so reported or listed. If Common Stock
is not publicly traded, then "Fair Market Value" shall mean the value of a share
of Common Stock, as determined by the Committee, in the Committee's sole and
absolute discretion, at least annually. The Committee may utilize the services
of an independent third party in determining the Fair Market Value of the Common
Stock for this purpose. The types of Incentive Awards that may be made under the
Employee Stock Plan are as follows:
Options. Options are rights to purchase a specified number of shares of
Common Stock at a specified price. An Option granted pursuant to the Employee
Stock Plan may consist of either an ISO or a non-qualified stock option ("NQSO")
that does not comply with the requirements of section 422 of the Code. ISOs may
not be granted to any employee who owns or would own immediately after the grant
of such ISO, directly or indirectly, stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company (unless at the time
of such grant, the incentive stock option price is at least 110% of fair market
value and such Option is not exercisable after the expiration of five years from
the date of grant). The exercise price for an ISO must be at least equal to fair
market value of the Common Stock on the date of grant and the term of such
option cannot be greater than 10 years. The exercise price for a NQSO must be
equal to at least the greater of (i) the par value of the Common Stock or (ii)
50% of the fair market value of the Common Stock on the date of grant. The
exercise price of an Option is payable in cash or an equivalent acceptable to
the Committee. At the discretion of the Committee, the exercise price for an
Option may be paid in Common Stock valued at fair market value on the exercise
date, another Incentive Award valued at fair market value, or a combination
thereof equal in value to the exercise price. Subject to the foregoing, the
exercise price and other terms and conditions relating to each Option are
determined by the Committee at the time of grant.
Stock Appreciation Rights. SARs are rights to receive a payment, in cash
or Common Stock, equal to the excess of the fair market value of a specified
number of shares of Common Stock on the date of exercise over a specified strike
price. The Committee may grant SARs in connection with an Option (either at the
time of grant or at any time during the term of the Option) or without relation
to an Option. For SARs related to Options, the applicable strike price is the
exercise price of the related Stock Option and for SARs granted without
relationship to an Option, the applicable strike price is the fair market value
of a share of Common Stock on the date of grant of the SAR. Options related to
SARs cease to be exercisable when the SAR is exercised. Subject to certain
exceptions, an SAR granted in connection with an Option is exercisable at such
time or times and only to the extent that the related Option is exercisable, and
may not be disposed by the holder except to the extent that such related Option
may be disposed. The Committee may provide at the date of grant of an SAR for a
limit on the amount payable upon exercise of the SAR. Any such limitation must
be noted in the agreement evidencing the holder's SAR.
Restricted Stock Awards. The Committee may grant shares of restricted
stock pursuant to the Employee Stock Plan. Shares of restricted stock may not be
disposed of until the restrictions are removed or expire, and the Committee may
impose other conditions on such shares as it may deem advisable. The
restrictions upon restricted stock awards lapse as determined by the Committee,
subject to certain other lapse provisions. Shares of restricted stock may remain
subject to certain restrictions as set forth in the restricted stock agreement.
Each restricted stock award may have a different restriction period, in the
discretion of the Committee. The Committee may, in its discretion, prospectively
change the restriction period applicable to a particular restricted stock award.
Subject to certain provisions, the
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Committee may, in its discretion, determine what rights, if any, a grantee of a
restricted stock award will have with respect to such stock, including the right
to vote the shares and receive all dividends and other distributions paid or
made with respect thereto.
Performance Awards. Performance units or performance shares
(collectively, "Performance Awards") may be granted under the Employee Stock
Plan subject to the attainment of one or more performance goals. Performance
goals may relate to any financial, production, sales or cost performance
objectives determined by the Committee at the beginning of a designated period.
If minimum performance is achieved or exceeded, the value of a Performance Award
will be based on the degree to which actual performance exceeds the
preestablished minimum performance standards. The Committee may, at any time,
modify the performance measures previously established for a Performance Award
as it considers appropriate and equitable. Payments with respect to Performance
Awards are made in cash or Common Stock valued at fair market value as of the
close of the applicable performance period (or a combination of both) in the
discretion of the Committee following the close of the applicable performance
period.
Phantom Stock Rights. Phantom stock rights entitle a holder, upon
conversion, to receive payment of cash or in shares of Common Stock valued at
fair market value on the date of conversion of the phantom stock right (or both)
in the discretion of the Committee. Upon conversion of a phantom stock right,
the Participant shall be entitled to receive payment of an amount determined by
multiplying (i) the fair market value of a share of Common Stock on the date of
conversion, by (ii) the number of shares of Common Stock as to which such
phantom stock right has been converted. Any payment of shares of Common Stock
upon conversion of a phantom stock right may be made in shares of restricted
stock.
ADDITIONAL PROVISIONS OF THE EMPLOYEE STOCK PLAN
Expiration of Incentive Awards and Effects of Employment Separation.
Except to the extent that the Committee provides otherwise in an Incentive Award
Agreement, Incentive Awards (whether or not vested) expire immediately or are
forfeited by the recipient upon termination of such recipient's employment with
the Company or any subsidiary employing such recipient for any reason other than
death, disability or retirement. Most, if not all, of the Incentive Award
Agreements provide that vested Incentive Awards are not forfeited if the
recipient is terminated for reasons other than Due Cause (as defined in the
Incentive Award Agreement). Upon death, retirement, or disability resulting in
the cessation of an employee's employment with the Company or its subsidiaries,
any unexercised Options or SARs or outstanding phantom stock rights terminate on
the date that is 90 days following the date of death, retirement or disability
(unless it expires by its terms on an earlier date). In the event of death,
disability or retirement, or other reasons that the Committee deems appropriate,
the Performance Awards will continue after the date of the applicable event for
such period of time as determined by the Committee, subject to the terms of the
Incentive Award Agreement or any other applicable agreement, but only to the
extent exercisable on the date of the applicable event.
If a holder of a restricted stock award ceases to be an employee because
of retirement, death, permanent and total disability, or because of other
reasons as the Committee deems appropriate, the Committee may determine that
restrictions on all or some portion of the restricted stock award subject to
restrictions at the time of such employment termination will be deemed to have
lapsed. If an eligible employee who has purchased restricted stock under the
Employee Stock Plan terminates employment with the Company for any reason, then
all shares of restricted stock that have not previously vested will be
repurchased by the Company at the cost paid by such employee. In addition, upon
an eligible employee's termination of employment with the Company and all of its
subsidiaries for any reason (including by reason of death or disability), the
Company has the right to purchase from such employee all shares of Common Stock
awarded under the Employee Stock Plan on the terms and conditions set forth in
the applicable Incentive Award.
Adjustment Provisions. The Employee Stock Plan provides that upon the
dissolution or liquidation of the Company, certain types of reorganizations,
mergers or consolidations, the sale of all or substantially all of the assets of
the Company, or a "change of control" (as defined in the Employee Stock Plan),
the Committee may determine (without stockholder approval), subject to the terms
of any applicable agreement evidencing an Incentive Award, that (i) all or some
Incentive Awards then outstanding under the Employee Stock Plan will be fully
vested and exercisable or convertible, as applicable, (ii) some or all
restrictions on restricted stock lapse immediately, or (iii) there will be a
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<PAGE> 63
substitution of new Incentive Awards by such successor employer corporation or a
parent or subsidiary company therefor, with appropriate adjustments as to the
number and kind of shares or units subject to such awards and prices. In
addition, in the event of a "change of control," the Committee may take certain
actions, without stockholder approval, including but not limited to (i)
acceleration of the exercise dates of any outstanding SARs or Options or
immediate vesting, (ii) acceleration of the restriction (lapse of forfeiture
provision) period of any restricted stock award, (iii) grants of SARs to holders
of outstanding Options, (iv) payment of cash to holders of Options in exchange
for the cancellation of their outstanding Options, (v) payment for outstanding
Performance Awards, (vi) acceleration of the conversion dates of outstanding
phantom stock rights, (vii) grants of new Incentive Awards or (viii) other
adjustments or amendments to outstanding Incentive Awards.
Transfer of Incentive Awards. No Incentive Award and no right under the
Employee Stock Plan, contingent or otherwise, may be assigned, transferred or
otherwise disposed by a recipient other than pursuant to a court order, by will
or beneficiary designation, or pursuant to the laws of descent and distribution.
Upon an employee's death, the Company has the right to purchase all or some of
the Common Stock that such employee obtained pursuant to an Incentive Award at
its fair market value within nine months of the employee's death.
Amendment and Termination of the Employee Stock Plan. Subject to
stockholder approval where expressly required by law, the Board may amend,
suspend or terminate the Employee Stock Plan at any time. No amendment, unless
approved by the holders of a majority of the outstanding shares of voting stock
of the Company may (i) change the class of persons eligible to receive Incentive
Awards, (ii) materially increase the benefits accruing to Participants, (iii)
increase by more than 10% the number of shares of Common Stock subject to the
Employee Stock Plan (except for certain adjustments required by the Employee
Stock Plan) or (iv) transfer the administration of the Employee Stock Plan to
any person who is not a non-employee director. Except as otherwise provided in
the Employee Stock Plan, the Committee may not, without the applicable
Participant's consent, modify the terms and conditions of such Participant's
Incentive Award. No amendment, suspension, or termination of the Employee Stock
Plan may, without the applicable Participant's consent, alter, terminate or
impair any right or obligation under any Incentive Award previously granted
under the Employee Stock Plan. Unless previously terminated, the Employee Stock
Plan will terminate and no more Incentive Awards may be granted after the tenth
anniversary of the adoption of the Employee Stock Plan by the Board. The
Employee Stock Plan will continue in effect with respect to Incentive Awards
granted before termination of the Employee Stock Plan and until such Incentive
Awards have been settled, terminated or forfeited.
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The description set forth below represents a summary of the principal
terms and conditions of the Director Stock Plan and does not purport to be
complete. Such description is qualified in its entirety by reference to the
Director Stock Plan, a copy of which has been filed with the Commission as an
exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
Purpose. The Company adopted the Director Stock Plan for the purposes of
strengthening the ability of the Company to attract and retain experienced and
knowledgeable independent individuals to act as non-employee directors of the
Company and encouraging such directors to have a proprietary interest in the
Company. To accomplish these purposes, the Director Stock Plan provides terms
upon which members of the Board who are not employees of the Company or any of
its subsidiaries ("non-employee directors") will be granted non-qualified
Options.
Administration. The Director Stock Plan is administered by a committee
(the "Director Plan Committee") consisting of two or more non-employee
directors elected to the Director Plan Committee by a majority of the Board.
Currently, the members of the Director Plan Committee are Carl B. Anderson,
III, Merrill A. Miller, Jr. and Sidney L. Tassin. Subject to the terms of the
Director Stock Plan, the Director Plan Committee has the ability to (i)
determine the terms and provisions of the agreements under which Options are
granted under the Director Stock Plan, (ii) to interpret the Director Stock
Plan and the agreements thereunder, (iii) to prescribe, amend and rescind any
rules relating to the Director Stock Plan and (iv) to make all other
determinations necessary for the administration of the Director Stock Plan.
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The Director Plan Committee does not have discretion or authority to disregard
or change any of the terms and conditions under which Options are granted to
non-employee directors.
Shares Subject to Director Stock Plan. As of January 1, 1998, an
aggregate of 218,207 shares of Common Stock may be issued, transferred or
exercised pursuant to Options under the Director Stock Plan (the "Authorized
Shares"). If the total number of issued and outstanding shares of Common Stock
increases after the consummation of the Initial Public Offering (other than any
increase due to issuances of Common Stock in connection with awards of Options
under the Director Stock Plan), then the number of Authorized Shares
automatically increases one time per year, commencing January 1, 1998 and
occurring each January 1 thereafter during the existence of the Director Stock
Plan, by a sufficient number of shares of Common Stock such that the number of
Authorized Shares reserved and available for issuance under the Plan shall equal
1.2% of the total number of shares of issued and outstanding Common Stock. As a
result, on January 1, 1998, the number of Authorized Shares increased to 218,207
shares. At the discretion of the Board or the Director Plan Committee, the
shares of Common Stock delivered under the Director Stock Plan may be made
available from (i) authorized but unissued shares, (ii) treasury shares or (iii)
previously issued but reacquired shares (or through a combination thereof).
Eligibility and Participation. Each non-employee director is
automatically eligible to participate in the Director Stock Plan unless he does
not retain the annual retainer to which he is entitled for service on the Board.
No non-employee director may be issued an Option to acquire more than 15,000
shares of Common Stock in any plan year.
OPTIONS
Automatic Initial and Annual Awards of Options. Upon the consummation of
the Initial Public Offering, each person who was then a non-employee director
received, and thereafter on the date at which a person first becomes a
non-employee director, such non-employee director will receive, a one-time grant
of an Option to acquire 15,000 shares of Common Stock (an "Initial Award"),
which shall be exercisable on or after November 4, 1998 except for the Initial
Award granted to Mark Liddell, which shall be exercisable on or after November
24, 1998. In each year succeeding the year in which a non-employee director
receives an Initial Award, the non-employee director, if reelected to the Board,
will be granted an additional Option to acquire 5,000 shares of Common Stock (an
"Annual Award"). Annual Awards will be made as of the date of the Company's
regular annual meeting of stockholders and will be immediately exercisable. No
Option granted as an Initial Award or Annual Award will be exercisable after the
tenth anniversary of the date of grant.
Retainer Options. Under the Director Stock Plan, a non-employee director
may elect to receive, in lieu of any or all of the annual cash retainer he would
otherwise receive in cash during the succeeding plan year (currently $10,000
annually), Options for the purchase of a number of shares equal to the amount of
the annual retainer so forgone divided by the fair market value of the Common
Stock on the date of grant.
Exercise Price. Each Option granted pursuant to the Director Stock Plan
will be exercisable at a per share price equal to the fair market value of a
share of Common Stock as of the date of grant. Such price may be paid in cash
or, in the discretion of the Director Plan Committee, by assigning to the
Company shares equal in value to the exercise price.
Termination. Except to the extent the Director Plan Committee provides
otherwise in the agreement evidencing an Option under the Director Stock Plan,
all Options granted under the Director Stock Plan that are held by a
non-employee director will expire and be forfeited upon the date of resignation
or removal from the Board of such non-employee director, unless such resignation
or removal results from the death or permanent and total disability of the
director, or resignation upon the attainment of 65 years. Upon such death,
disability or resignation at age 65, such Options will remain exercisable and
effective for six months following the date of the event causing the
non-employee director to cease membership on the Board.
Effect of Corporate Changes. In the event of certain significant
corporate changes, including (i) dissolution or liquidation of the Company,
(ii) a reorganization, merger or consolidation (other than for purposes of
reincorporation
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in a different state) in which the Company is not the survivor, (iii) the sale
of all or substantially all of the assets of the Company, or (iv) a Change of
Control (as defined in the Director Stock Plan), subject to the terms of any
applicable agreement, the Director Plan Committee may, in its discretion,
without obtaining stockholder approval, take any one or more of the following
actions: (a) determine that all or some Options then outstanding will be fully
vested and exercisable, (b) substitute new Options by a successor employer with
appropriate adjustments as to the number and kind of shares subject to such
awards and prices or (c) cancel such Options and pay the non-employee directors
or their beneficiaries the difference between the exercise price and the fair
market value of the shares subject to the Options as of the date of such
corporate change.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Carl B. Anderson, III and
Sidney L. Tassin, neither of whom are employees or current or former officers
of the Company. See "Board of Directors--Board Committees." Mr. Anderson and
Mr. Tassin each had direct or indirect interests in certain transactions
described in "Certain Relationships and Related Transactions."
INDEMNIFICATION AGREEMENTS
The Company has entered into Indemnification Agreements (the
"Indemnification Agreements") with its directors and certain of its officers
(the "Indemnitees"). Under the terms of the Indemnification Agreements, the
Company is required to indemnify the Indemnitees against certain liabilities
arising out of their services for the Company. The Indemnification Agreements
require the Company to indemnify each Indemnitee to the fullest extent permitted
by law and to advance certain expenses incurred by an Indemnitee. The
Indemnification Agreements provide limitations on the Indemnitees' rights to
indemnification in certain circumstances. To the extent that indemnification
provisions contained in the Indemnification Agreements purport to include
indemnification for liabilities arising under the Securities Act, the Company
has been informed that in the opinion of the Commission, such indemnification is
contrary to public policy and is therefore unenforceable.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of July 14, 1998 by (i) each person
known by the Company to own more than 5% of the outstanding shares of Common
Stock, (ii) each of the Company's directors, (iii) the Chief Executive Officer
of the Company and each of the two other persons who served as executive
officers of the Company during 1997, (iv) all parties to the Stockholders and
Voting Agreement as a group and (v) all executive officers and directors as a
group. All persons listed have an address in care of the Company's principal
executive offices and have sole voting and investment power with respect to
their shares unless otherwise indicated.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED(1)
---------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE(2)
<S> <C> <C>
Charles E. Davidson . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,708,231 9.4%
411 West Putnam Avenue
Greenwich, Connecticut 06830
Carl B. Anderson, III . . . . . . . . . . . . . . . . . . . . . . . . . . 1,288,000(3)(4) 7.1
c/o AnSon Partners Limited Partnership
4005 Northwest Expressway, Suite 400E
Oklahoma City, Oklahoma 73116
Energy Spectrum LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000(5) 6.0
5956 Sherry Lane, Suite 600
Dallas, Texas 75225
James E. Brown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,000(6) 1.7
Edward S. Jacob, III . . . . . . . . . . . . . . . . . . . . . . . . . . --(7) --
David E. Grose, III . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000(8) *
Mark Liddell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,515(4) 1.6
6307 Waterford Boulevard, Suite 100
Oklahoma City, Oklahoma 73118
Merrill A. Miller, Jr . . . . . . . . . . . . . . . . . . . . . . . . . . --(4) --
c/o National-Oilwell, Inc.
5555 San Felipe
Houston, Texas 77056
Sidney L. Tassin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000(4)(9) 6.0
c/o Energy Spectrum Partners LP
5956 Sherry Lane, Suite 600
Dallas, Texas 75225
Lew O. Ward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423,125(4)(10) 2.3
c/o Ward Petroleum Corporation
502 South Fillmore Road
Enid, Oklahoma 73703
All parties to the Stockholders and Voting Agreement as a
group(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,583,110 25.0
All directors and executive officers as a group (8 persons) . . . . . . . 3,415,640(12) 18.4
</TABLE>
- -------------------
* Less than one percent.
(1) The information contained in this table with respect to beneficial
ownership reflects "beneficial ownership" as defined in Rule 13d-3 under
the Exchange Act. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, shares of
Common Stock subject to options or warrants held by that person that are
exercisable on July 14, 1998 or become exercisable within 60 days
following July 14, 1998 are deemed outstanding. However, such shares
are not deemed outstanding for the purpose of
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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.
(2) Percentage of ownership is based on 18,193,945 shares of Common Stock
outstanding.
(3) Includes (i) 1,018,000 shares held of record by APLP, of which Mr.
Anderson is managing general partner, (ii) 170,000 shares held of record
by James E. Brown that are subject to voting rights retained by Mr.
Anderson pursuant to an irrevocable proxy and (iii) 100,000 shares held
of record and beneficially by Mr. Anderson.
(4) Excludes 20,000 shares of Common Stock that may be acquired upon exercise
of options granted pursuant to the Director Stock Plan. None of such
options are exercisable within the next 60 days.
(5) Represents shares of Common Stock (including 112,000 shares of Common
Stock that may be acquired within the next 60 days upon exercise of
outstanding Series B Warrants) held of record by Energy Spectrum
Partners LP, of which Energy Spectrum Capital LP is the sole general
partner. 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.
(6) Includes (i) 100,000 shares of 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
the Company at a specified price and upon certain conditions, including
termination of employment with the Company, (ii) 170,000 shares for
which an irrevocable voting proxy has been granted to Carl B. Anderson,
III and (iii) 40,000 shares subject to options granted pursuant to the
Employee Stock Plan that are currently exercisable. Excludes options to
purchase an aggregate of 360,000 shares held by Mr. Brown which were
granted pursuant to the Employee Stock Plan, subject to vesting and
other conditions contained in stock option agreements, none of which
options are exercisable within the next 60 days.
(7) Excludes options to purchase an aggregate of 180,000 shares held by Mr.
Jacob which were granted pursuant to the Employee Stock Plan, subject to
vesting and other conditions contained in stock option agreements, none
of which options are exercisable within the next 60 days.
(8) Includes 10,000 shares subject to options granted pursuant to the
Employee Stock Plan that are currently exercisable. Excludes options to
purchase an aggregate of 50,000 shares held by Mr. Grose which were
granted pursuant to the Employee Stock Plan, subject to vesting and other
conditions contained in stock option agreements, none of which options
are exercisable within the next 60 days.
(9) Represents shares held of record by Energy Spectrum Partners LP and
beneficially by Energy Spectrum LLC. Mr. Tassin, a director of the
Company, 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 (5) above.
(10) Includes (i) 253,725 shares held of record by Will-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 (ii) 169,400 shares that may be
acquired within the next 60 days upon the exercise of outstanding
warrants held by Will-Cas Investments, L.P.
(11) The parties to the Stockholders and Voting Agreement are Energy
Spectrum, APLP, Carl B. Anderson, III, Mike Liddell, Mark Liddell and
Charles E. Davidson. See "Certain Relationships and Related
Transactions--Stockholders and Voting Agreement."
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(12) Includes (i) 112,000 shares that may be acquired by Energy Spectrum
Partners LP within the next 60 days upon the exercise of outstanding
Series B Warrants, (ii) 170,000 shares subject to voting rights retained
by Mr. Anderson, (iii) 100,000 shares of restricted stock held by Mr.
Brown, (iv) 40,000 shares subject to options granted to Mr. Brown
pursuant to the Employee Stock Plan that are currently exercisable and
(v) 169,400 shares that may be acquired by Will-Cas Investments, L.P.
within the next 60 days upon the exercise of outstanding warrants.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discussion identifies certain of the Company's
relationships and related transactions since January 1, 1997 in which any
director or executive officer of the Company, any person known to the Company to
own of record or beneficially over 5% of the Common Stock, or any member of the
immediate family of any such persons had, or has, a direct or indirect material
interest. Transactions involving any former directors of the Company that have
occurred since the formation of the Company in December 1996 are also included.
Charles E. Davidson, Energy Spectrum and APLP are each record or beneficial
owners of over 5% of the Common Stock. Prior to the Initial Public Offering,
Chesapeake and the Oliver Companies were record or beneficial owners of over 5%
of the Common Stock. Prior to April 28, 1998, DLB was the record and beneficial
owner of over 5% of the Common Stock. Three of the Company's former directors,
Aubrey K. McClendon, Tom L. Ward and Marcus C. Rowland, are stockholders,
executive officers and/or directors of Chesapeake. One of the Company's
directors, Sidney L. Tassin, and one of the Company's former directors, James W.
Spann, are executive officers and partners of the ultimate general partner of
Energy Spectrum. Roy T. Oliver, a former director of the Company, is a director,
executive officer and significant stockholder of certain of the Oliver
Companies. Mike Mullen is a director, executive officer and significant
stockholder of certain of the Oliver Companies. Prior to the Ward Acquisition,
Lew O. Ward, a director of the Company, was a director, executive officer and
significant stockholder of Ward. Carl B. Anderson, III, a director of the
Company, and Robert E. Bell, a former director of the Company, are directors,
executive officers and holders of substantial ownership interests in APLP (of
which Anadarko was a subsidiary). James E. Brown is a director and executive
officer of the Company and, prior to the formation of the Company, was a
director and executive officer of Anadarko. Edward S. Jacob, III and David E.
Grose, III are each executive officers of the Company. Each of such persons and
entities has or had a direct or indirect material interest in one or more of the
arrangements and transactions described below.
REGISTRATION RIGHTS AGREEMENTS
The Company and certain of its investors, including certain directors,
officers and significant stockholders, are party to a Registration Rights
Agreement (the "Registration Rights Agreement") covering shares of Common Stock,
including the shares of Common Stock issuable upon the exercise of options,
warrants and other Company securities (collectively, "Common Stock
Equivalents"), owned by such investors (the "Registrable Securities"). The
Registration Rights Agreement applies to Registrable Securities owned by Energy
Spectrum, APLP, the Oliver Companies and certain of their affiliates, Ward and
certain of its transferees, Carl B. Anderson, III, James E. Brown, Edward S.
Jacob, III, David E. Grose, III and certain other persons. As of July 14, 1998,
up to 3,664,725 outstanding shares of Common Stock and 1,057,000 Common Stock
Equivalents (610,000 of which remain subject to further vesting pursuant to the
Employee Stock Plan and the Director Stock Plan) were subject to the
Registration Rights Agreement.
The Registration Rights Agreement provides, among other things, that
(subject to customary "black-out" periods) certain holders of Registrable
Securities with a minimum aggregate share value of at least $20 million may
require the Company to effect the registration under the Securities Act of the
Registrable Securities owned by such holders, subject to certain limitations.
The Registration Rights Agreement also provides certain "piggyback" registration
rights to the holders of Registrable Securities whenever the Company proposes to
register an offering of any of its capital stock under the Securities Act,
subject to certain exceptions, including pro rata reduction if, in the
reasonable opinion of the managing underwriter of the offering, such a reduction
is necessary to prevent an adverse effect on the marketability or offering price
of all the securities proposed to be offered in such offering.
The Registration Rights Agreement contains customary provisions regarding
the payment of expenses by the Company and regarding mutual indemnification
agreements between the Company and the holders of Registrable Securities for
certain securities law violations.
In connection with the Bonray Acquisition, the Company entered into a
registration rights agreement (the "DLB Registration Rights Agreement") for the
benefit of DLB and Donaldson, Lufkin & Jenrette Securities Corporation, its
financial advisor with respect to such transaction. The DLB Registration Rights
Agreement covers 3,015,000 shares of Common Stock issued in the Bonray
Acquisition. Pursuant to the DLB Registration Rights Agreement, on December 31,
1997, the Company filed with the Commission a Registration Statement on Form S-1
(Registration No. 333-43535)
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relating to the registration of the distribution (the "DLB Distribution") by DLB
of 2,955,000 shares of Common Stock to the shareholders of DLB. On March 30,
1998, such Registration Statement was declared effective by the Commission and
on April 28, 1998, the merger effecting the DLB Distribution was consummated and
2,955,000 shares of Common Stock formerly held by DLB were distributed to the
former stockholders of DLB.
The DLB Registration Rights Agreement requires the Company to pay
expenses associated with the DLB Distribution. In addition, the DLB Registration
Rights Agreement contains customary provisions regarding mutual indemnification
agreements between the Company and the holders of registrable securities for
certain securities law violations.
The foregoing summary of the principal provisions of the Company's
registration rights agreements does not purport to be complete and is subject
to, and qualified in its entirety by reference to, all of the provisions of the
Registration Rights Agreement and the DLB Registration Rights Agreement, copies
of which have been filed with the Commission as exhibits to the Registration
Statement of which this Prospectus is a part.
STOCKHOLDERS AND VOTING AGREEMENT
The Company is party to the Stockholders and Voting Agreement among
Energy Spectrum, APLP, Carl B. Anderson, III, Charles E. Davidson, Mark Liddell
and Mike Liddell that provides for certain agreements regarding the corporate
governance of the Company, transfer restrictions on shares of Common Stock and
Common Stock Equivalents (as defined in the Stockholders and Voting Agreement),
and other customary terms and conditions. DLB, which was formerly a party to the
Stockholders and Voting Agreement, ceased to be a party to that agreement upon
the consummation of the DLB Distribution. At that time, Messrs. Liddell and Mr.
Davidson (the "DLB Group") were added as parties to the Stockholders and Voting
Agreement. As of July 14, 1998, the current parties to the Stockholders and
Voting Agreement beneficially owned approximately 4,583,110 shares of Common
Stock, representing approximately 25.0% of the outstanding shares of Common
Stock. The Stockholders and Voting Agreement will terminate on November 4, 2007.
Board Representation. The Stockholders and Voting Agreement provides that
the Board shall not consist of more than ten members. In addition, the
Stockholders and Voting Agreement provides that, certain stockholders who are
party thereto have the right to designate a specified number of persons to be
nominated for election as directors. Each of Energy Spectrum and APLP have the
right to designate one nominee for director as follows: (i) Energy Spectrum has
the right to designate one nominee for director as long as it owns at least (a)
5% of the outstanding Common Stock of the Company, (b) 50% in principal amount
of the Subordinated Notes purchased by it in the May Financing or (c) 600,000
shares of Common Stock and (ii) APLP has the right to designate one nominee for
director as long as it owns at least (a) 5% of the outstanding Common Stock of
the Company or (b) 600,000 shares of Common Stock. The DLB Group, which formerly
had the right to designate one nominee for director as long as the DLB Group
owned at least 5% of the outstanding Common Stock of the Company, irrevocably
waived such right effective June 2, 1998. The parties to the Stockholders and
Voting Agreement (the "Bound Stockholders") are obligated to vote all of their
voting securities (including certain Common Stock Equivalents) of the Company
for these designees.
Certain Transfer Restrictions. In accordance with the Stockholders and
Voting Agreement. The Bound Stockholders have agreed that any such Bound
Stockholder holding 5% or more of the Common Stock (on a fully diluted basis)
shall not, subject to certain exceptions, transfer 5% or more of the Common
Stock (on a fully diluted basis) unless such Bound Stockholder has received the
prior written consent of the Board, with any member of the Board designated by
such Bound Stockholder abstaining.
The foregoing summary of the material provisions of the Stockholders and
Voting Agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of such
agreement, a copy of which has been filed with the Commission as an exhibit to
the Registration Statement of which this Prospectus is a part.
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CERTAIN ARRANGEMENTS RELATED TO THE CONSOLIDATION TRANSACTIONS
THE FORMATION TRANSACTIONS
The Company was formed in December 1996 through a series of affiliated
entity transactions in which the Company became the successor to Anadarko, the
contract drilling subsidiary of privately held APLP. In connection with the
Formation Transactions (i) APLP contributed ten drilling rigs, including two
rigs requiring refurbishment, for 2,000,000 shares of Common Stock, (ii) the
Oliver Companies exchanged six drilling rigs requiring refurbishment for
1,600,000 shares of Common Stock, (iii) Energy Spectrum acquired 2,000,000
shares of Common Stock for $10 million and (iv) Chesapeake entered into drilling
contracts with two-year terms for six of the Company's rigs in consideration for
the Chesapeake Option. See "Business-- Formation and Other Transactions." In
connection with the Formation Transactions, the ten rigs acquired from APLP were
valued at an aggregate of $10.8 million, the six rigs acquired from the Oliver
Companies were valued at an aggregate of $9.5 million and the six Chesapeake
Drilling Agreements were valued at an aggregate of $1.1 million. The valuations
of the rigs acquired in the Formation Transactions from APLP and the Oliver
Companies, the values placed upon the Chesapeake Drilling Agreements and the
consideration to be received by each such founder were determined and
established through negotiations among representatives of APLP and Anadarko
(including Carl B. Anderson, III), Energy Spectrum (including Sidney L. Tassin),
the Oliver Companies (including Roy T. Oliver and Mike Mullen) and Chesapeake
(including Aubrey McClendon), taking into account the then existing market
values of available rigs, the anticipated costs to complete the necessary
refurbishment of the contributed rigs and the expected values of revenues to be
received by the Company from the Chesapeake Drilling Agreements.
Three of the rigs acquired by the Company from APLP were acquired by APLP
within the two years prior to their contribution to the Company. APLP acquired
one rig in each of August, September and October 1996 for $1.3 million, $922,000
and $450,000, respectively. At the time of their contribution to the Company,
such rigs were valued on the books of the Company at $2.7 million. Four of the
rigs acquired by the Company from the Oliver Companies were acquired by the
contributing party within the two years prior to their contribution to the
Company at an aggregate cost of $2.6 million. At the time of their contribution
to the Company, such rigs were valued on the books of the Company at $4.4
million.
Chesapeake Option. Upon issuance by the Company, the Chesapeake Option
provided Chesapeake with the right to purchase up to 2,000,000 shares of Common
Stock from the Company at an exercise price of $6 per share. The Chesapeake
Option would have expired (i) as to 668,000 shares, on December 5, 2000 and (ii)
as to 1,332,000 shares, on December 5, 1998, subject to extension to December 5,
2000 if Chesapeake extended four of the Chesapeake Drilling Agreements for
additional two-year terms. In August 1997, Chesapeake relinquished the
Chesapeake Option in connection with the Chesapeake Transactions. See
"--Chesapeake Transactions."
Chesapeake Drilling Agreements. In December 1996 in connection with the
Formation Transactions, Chesapeake and its operating subsidiary (collectively
referred to in this discussion as "Chesapeake") entered into drilling contracts
(the "Chesapeake Drilling Agreements") with the Company pursuant to which
Chesapeake agreed to engage six of the Company's rigs for two-year terms.
Through December 31, 1997, the Company had recognized aggregate revenues of
$11.3 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 the areas of operation, less $100
per day. The Company and Chesapeake were required to consider such adjustment
each November during the term of the applicable Chesapeake Drilling Agreement
and if no agreement could be timely reached as to the appropriate rate
adjustment, the Company had the option to terminate the contract for such rig at
the conclusion of operations at the well then being drilled. In December 1997,
the Company and Chesapeake were unable to agree on an appropriate rate
adjustment, so the Company exercised its option to terminate the Chesapeake
Drilling Agreements. At June 15, 1998, three of the Company's six rigs formerly
covered by the Chesapeake Drilling Agreements remained under contract with
Chesapeake on a well-to-well basis.
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In addition to the Chesapeake Drilling Agreements, during the year ended
December 31, 1997, Chesapeake engaged five of the Company's rigs under short
term drilling contracts on standard daywork terms. The Company recognized
aggregate revenues of $7.1 million from such contracts over that period. The
Company recognized aggregate revenues of $18 million over that period from all
drilling contracts with Chesapeake.
Oliver Companies' Put Rights. Also in connection with the Formation
Transactions, the Company granted the Oliver Companies a right, exercisable at
any time between June 2, 1998 and July 2, 1998 if the Company had not previously
completed an initial public offering, to require the Company to either (at the
Company's option) (i) repurchase all 1,600,000 of the shares of Common Stock
held by the Oliver Companies for an aggregate purchase price of $12 million
($7.50 per share) in cash or (ii) issue to the Oliver Companies an aggregate of
400,000 additional shares of Common Stock. This right terminated upon
consummation of the Initial Public Offering.
Fees Paid to Energy Spectrum. In January 1997, the Company paid Energy
Spectrum Capital LP ("ESC"), the general partner of Energy Spectrum, a fee in
the amount of $300,000 in consideration for assistance provided by Energy
Spectrum in the structuring of the Formation Transactions and arrangement and
negotiation of external financing. The Company also reimbursed ESC for expenses
incurred in connection with the rendering of such services.
THE WARD ACQUISITION
On May 31, 1997, the Company completed the Ward Acquisition involving the
acquisition by the Company of all of the issued and outstanding common units of
a subsidiary of Ward that held six drilling rigs in consideration for $8 million
in cash, 400,000 shares of Common Stock and a warrant (the "Ward Warrant") to
purchase up to 200,000 shares of Common Stock at an exercise price of $10 per
share. The Ward Warrant is exercisable at any time on or before the later of (i)
May 30, 2000 or (ii) one year after the completion of an initial public offering
of the Common Stock (which was satisfied by the Initial Public Offering), but no
later than June 1, 2003.
In connection with the Ward Acquisition, the Company entered into an
agreement (the "Ward Transportation Agreement") with Geronimo Trucking Company
("Geronimo"), a company owned and controlled by Lew O. Ward, a director of the
Company. The Ward Transportation Agreement provides that the Company will have a
preferential right to engage Geronimo's trucking services for covered
transportation needs and that Geronimo will make its trucking services available
to the Company at rates that are competitive in the area. The Ward
Transportation Agreement also provides Geronimo with the preferential right to
perform trucking services contracted for by the Company for the movement of the
rigs acquired by the Company in the Ward Acquisition. The Company is obligated
to allow Geronimo to bid on any covered rig movement required by the Company and
to allow Geronimo the opportunity to match or better any bid received from a
third party. Unless earlier terminated by the parties, the Ward Transportation
Agreement is effective through May 2000. The Company paid an aggregate of
$338,000 under the Ward Transportation Agreement for the year ended December 31,
1997 and approximately $509,000 from January 1, 1998 through June 15, 1998.
THE BONRAY ACQUISITION
In October 1997, the Company acquired all of the issued and outstanding
capital stock of Bonray from DLB in consideration for the issuance of 3,015,000
shares of Common Stock. In connection with the Bonray Acquisition, DLB obtained
certain rights to require the Company to effect the registration under the
Securities Act of the shares of Common Stock acquired by DLB in the Bonray
Acquisition. See "-- Registration Rights Agreements." Additionally, prior to the
DLB Distribution, DLB was a party to the Stockholders and Voting Agreement and
was entitled to designate one Board nominee as long as it owned at least 5% of
the Common Stock of the Company. As a result of the DLB Distribution, the
members of the DLB Group became parties to the Stockholders and Voting Agreement
and are entitled to designate one Board nominee as long as the DLB Group owns at
least 5% of the Common Stock of the Company. See "-- Stockholders and Voting
Agreement."
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INDIVIDUAL RIG ACQUISITIONS
In May 1997, the Company purchased from R.T. Oliver Drilling, Inc. two
drilling rigs for an aggregate purchase price consisting of $3.3 million in cash
and warrants (the "Oliver Warrants") for the purchase of an aggregate of 100,000
shares of Common Stock at an exercise price of $8 per share. One of the Oliver
Warrants was issued to RR&T, Inc., an affiliate of Roy T. Oliver, and the other
was issued to Mike Mullen. Each of the Oliver Warrants expires on May 1, 2000
and is separately exercisable for 50,000 shares of Common Stock.
CERTAIN FINANCING ARRANGEMENTS
On May 1, 1997, the Company completed the May Financing in which the
Company issued shares of Common Stock, subordinated notes and warrants to
purchase Common Stock to certain significant stockholders in exchange for an
aggregate of $28.5 million in cash, as described below. The following summary of
terms of the May Financing does not purport to be complete and is qualified in
its entirety by reference to the Securities Purchase Agreement, dated as of
April 30, 1997 (the "May Securities Purchase Agreement"), the Subordinated
Notes, Series A Warrants and Series B Warrants, copies or forms of which are
filed with the Commission as exhibits to the Registration Statement relating to
the Initial Public Offering.
Common Stock and Subordinated Notes. In the May Financing, the Company
issued 1,000,000 shares of Common Stock to Chesapeake in consideration for $7
million in cash and 140,000 shares of Common Stock to Energy Spectrum in
consideration for $980,000 in cash. Additionally, the Company issued the
Subordinated Notes due May 1, 2003 in the original principal amounts of $18
million and $2.52 million to Chesapeake and Energy Spectrum, respectively. The
Subordinated Notes bore interest at the Company's option 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 was payable quarterly in arrears.
On each quarterly interest payment date, the Company was entitled to make an
election as to the interest rate to be applied for the previous quarter. The
Subordinated Notes were redeemable, solely at the option of the Company, in
whole or in part, at any time at varying redemption prices. The Company was
obligated to 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 were 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 were general unsecured subordinated obligations of the Company that were
subordinated in right 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. Upon consummation of the Initial
Public Offering, the Company redeemed in full the $18 million principal amount
of Subordinated Notes issued to Chesapeake in consideration for the payment by
the Company to Chesapeake of $18.2 million in cash, based on the price to public
in the Initial Public Offering. See "--Chesapeake Transactions." In April 1998,
the Company redeemed in full the remaining $2.52 million principal amount of
Subordinated Notes, together with accrued interest of $47,740. In connection
therewith, Energy Spectrum waived its right to require the Company to redeem the
Subordinated Notes at 110% of par value. In May 1997, the Company paid
Chesapeake a commitment fee of $250,000 in connection with the funding of the
Common Stock and Subordinated Notes in the May Financing.
Warrants. In the May Financing, the Company also issued two series of
detachable warrants (the "Warrants") for the purchase of shares of Common Stock,
designated as "Series A Warrants" and "Series B Warrants." The Warrants are
exercisable on or prior to May 1, 2003 at a price of $0.01 per share in the case
of the Series A Warrants and $7.50 per share in the case of the Series B
Warrants. In the May Financing, Chesapeake was issued Series A Warrants and
Series B Warrants representing the right to purchase 700,000 shares and 800,000
shares of Common Stock, respectively, and Energy Spectrum was issued Series A
Warrants and Series B Warrants representing the right to purchase 98,000 shares
and 112,000 shares of Common Stock, respectively. The Warrants expire on May 1,
2003 and are exercisable (i) at any time with a cash payment or (ii) pursuant to
a cashless exercise at any time after the completion of a "Qualified IPO" (as
defined in the Warrants), which includes certain underwritten public offerings
(including the Initial Public
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Offering), mergers, consolidations and other business combination transactions.
The exercise prices, as well as the number and kind of shares issuable under the
Warrants, are subject to adjustment upon the happening of certain events
described in the Warrants, including, the payment of in-kind dividends or
distributions and the subdivision, reclassification or recapitalization of the
Common Stock, whether in connection with a consolidation or merger or otherwise.
On July 31, 1997, Energy Spectrum exercised in full its Series A Warrants. On
the date hereof, Energy Spectrum holds all of the Series B Warrants issued to it
in the May Financing. In August 1997, Chesapeake relinquished its Series A
Warrants and Series B Warrants as part of the Chesapeake Transactions. See
"--Chesapeake Transactions."
CHESAPEAKE TRANSACTIONS
In August 1997, Chesapeake and the Company agreed to complete a series of
transactions (the "Chesapeake Transactions") pursuant to which the Company
issued 3,194,000 shares of Common Stock to Chesapeake in consideration for (i)
$9 million in cash, (ii) the relinquishment and cancellation of the Chesapeake
Option and the Warrants issued to Chesapeake in connection with the May
Financing and (iii) the redemption in full of the $18 million principal amount
of Subordinated Notes held by Chesapeake at a cash redemption price of $18.2
million which was paid from the proceeds of the Initial Public Offering. Also in
connection with the Chesapeake Transactions, the Company waived its right under
the May Securities Purchase Agreement to require Chesapeake to purchase
additional Common Stock, Warrants and Subordinated Notes for $3 million.
OTHER RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
Weatherford Storage Yard. In connection with the Formation Transactions,
Anadarko granted the Company a transferrable 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 five acres of land also in Weatherford, Oklahoma, in consideration
for the relinquishment of the Company's option to acquire or lease the
Weatherford Storage Yard.
Fees Paid to Energy Spectrum. In May 1997, the Company paid ESC a fee in
the amount of $220,000 for financial advisory and other services rendered to the
Company in connection with the evaluation, negotiation and closing of the Trend
Acquisition, for assistance in the arrangement of alternative financing sources,
and for structuring, negotiating and closing the amended financing arrangements
with CIT and Fleet. The Company also reimbursed ESC for expenses incurred in
connection with the rendering of such services.
Fees Paid to Energy Spectrum Advisors. The Company has engaged Energy
Spectrum Advisors Inc. ("ESA") to provide financial advisory and investment
banking services to the Company in connection with a possible restructuring or
refinancing of the Company's existing funded debt. As compensation for such
services, the Company has agreed to pay ESA an initial fee of $50,000 and an
additional fee of $25,000 per month through the term of the engagement. The
engagement letter expires on June 30, 1998. Through June 15, 1998, the Company
has paid $150,000 in fees to ESA in connection with this arrangement. ESA is an
affiliate of Energy Spectrum, which is the beneficial owner of approximately 6%
of the Common Stock. Sidney L. Tassin, a director of the Company designated to
serve on the Board by Energy Spectrum pursuant to the Stockholders and Voting
Agreement, has a right under certain circumstances to acquire, and as a result
may be deemed to beneficially own, a minority equity interest in ESA.
Transactions with Affiliates of Roy T. Oliver. The Company has in the
past purchased drilling rig equipment from U.S. Rig & Equipment, Inc., an
affiliate of Roy T. Oliver, a former director of the Company and control person
of certain of the Oliver Companies. From December 1996 through December 31,
1997, the Company paid U.S. Rig & Equipment, Inc. an aggregate of $5 million in
connection with such purchases. Additionally, in August 1997, the Company sold
to an affiliate of Mr. Oliver one rig acquired in the Trend Acquisition that did
not meet the Company's operational and technical standards. The Company believes
that the $500,000 price received by the Company in that sale is equivalent to
the price that would have been received from an unaffiliated third party.
Furthermore, in the Oliver Acquisition, which was completed in January 1998, the
Company acquired six rigs and related drilling equipment from
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R.T. Oliver Drilling, Inc. for $14 million. Such rigs will require additional
refurbishment prior to placement into service.
APLP Trucking Services. The Company has engaged affiliates of APLP for
the provision of trucking services related to the movement of the Company's rigs
on numerous occasions. For the year ended December 31, 1997 and three months
ended March 31, 1998, the Company paid such affiliates of APLP an aggregate of
approximately $1.7 million in consideration for such trucking services.
APLP Administrative Services. 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 reimbursed APLP an aggregate of
approximately $236,000.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on June 26, 1998 to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes to qualified institutional buyers in reliance
on Rule 144A under the Securities Act and pursuant to offers and sales that
occurred outside the United States within the meaning of Regulation S under the
Securities Act. As a condition to the completion of the Old Notes Offering, the
Company entered into the Exchange Offer Registration Rights Agreement with the
Initial Purchasers pursuant to which the Company agreed to file with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to an offer to exchange the Old Notes for
Exchange Notes. The Exchange Notes will be substantially identical to the Old
Notes, except that the Exchange Notes will bear a Series B designation and will
have been registered under the Securities Act and, therefore will not contain
terms with respect to transfer restrictions (other than those that might be
imposed by state securities laws).
Under existing interpretations of the staff of the Commission, the
Exchange Notes would, in general, be freely transferable after the Exchange
Offer without further registration under the Securities Act. However, any
purchaser of Old Notes who is an "affiliate" of the Company or intends to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (i) will not be able to rely on the interpretations of the staff of the
Commission, (ii) will not be able to tender its Old Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Old Notes,
unless such sale or transfer is made pursuant to an exemption from such
requirements.
Each holder who wishes to exchange such Old Notes for Exchange Notes in
the Exchange Offer will be required to make certain representations, including
representations that (i) it is not an affiliate of the Company, (ii) it is not
engaged in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in, a distribution of the Exchange
Notes and (iii) it is acquiring the Exchange Notes in its ordinary course of
business. In addition, broker-dealers receiving Exchange Notes in the Exchange
Offer will have a prospectus delivery requirement with respect to resales of
Exchange Notes. The Commission has taken the position that such broker-dealers
may fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of Old
Notes) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Rights Agreement, the Company is required to
allow such broker-dealers to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of such Exchange Notes for
a period of 180 days after the Exchange Offer Registration Statement is declared
effective.
The Exchange Offer Registration Rights Agreement provides that, to the
extent not prohibited by any applicable law or applicable interpretation of the
staff of the Commission, the Company and the Guarantors will file the Exchange
Offer Registration Statement with the Commission within 60 days after the Issue
Date, and use their respective reasonable best efforts to have it declared
effective at the earliest possible time but in no event later than 180 days
after the Issue Date. The Company and the Guarantors have also agreed to use
their reasonable best efforts to cause the Exchange Offer Registration Statement
to be effective continuously, to keep the Exchange Offer open for a period of
not less than 20 business days and to cause the Exchange Offer to be consummated
no later than the 30th business day after the Exchange Offer Registration
Statement is declared effective by the Commission (subject to extension to the
40th business day with the consent of the Initial Purchasers).
If (i) the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any Holder of Notes which are Transfer Restricted
Securities (as hereinafter defined) notifies the Company on or prior to the 20th
business day following the consummation of the Exchange Offer that (a) it is
prohibited by law or Commission policy from participating in the Exchange Offer,
(b) it may not resell the Exchange Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus, and this Prospectus is not
appropriate or available for such resales by it, or (c) it is a broker-dealer
and holds Old Notes acquired directly from the Company or any of the Company's
affiliates, the Company and the Guarantors will file with the Commission the
Shelf Registration Statement to register for public
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resale the Transfer Restricted Securities held by any such Holder who provides
the Company with certain information for inclusion in the Shelf Registration
Statement.
During any consecutive 365 day period, the Company may suspend the
effectiveness of the Shelf Registration Statement on up to two occasions for a
period of not more than 45 consecutive days, whereafter a Registration Default
(as hereinafter defined) shall occur, if there is a possible acquisition or
business combination transaction, business development or event involving the
Company that may require disclosure in the Shelf Registration Statement and the
Board determines in the exercise of its reasonable judgment that such disclosure
is not in the best interests of the Company and its stockholders, or obtaining
any financial statements relating to a possible acquisition or business
combination required to be included in the Shelf Registration Statement would be
impractical. In such a case, the Company shall promptly notify the holders of
the suspension of the Shelf Registration Statement's effectiveness, provided
that such notice shall not require the Company to disclose the business purpose
for such suspension if the Board determines in good faith that such acquisition
or business combination or other transaction, business development or event
should remain confidential. The relevant period during which the Shelf
Registration Statement is required to remain effective will be extended by the
number of days the use of the Shelf Registration Statement is suspended.
As used in this Prospectus and in the Exchange Offer Registration Rights
Agreement, "Transfer Restricted Securities" means the following securities: (i)
each Old Note, until the earliest to occur of (a) the date on which such Old
Note is exchanged in the Exchange Offer for an Exchange Note which is entitled
to be resold to the public by the Holder thereof without complying with the
prospectus delivery requirements of the Securities Act, (b) the date on which
such Old Note has been disposed of in accordance with a Shelf Registration
Statement (and the purchasers thereof have been issued Exchange Notes), (c) the
date on which such Old Note is distributed to the public pursuant to Rule 144
under the Securities Act (and the purchasers thereof have been issued Exchange
Notes) or (d) the date on which such Old Note is eligible for distribution to
the public pursuant to paragraph (k) of Rule 144 under the Securities Act and
(ii) each Exchange Note issued to a broker-dealer in the Exchange Offer until
the date on which such Exchange Note is disposed of by a broker-dealer pursuant
to the "Plan of Distribution" contemplated by the Exchange Offer Registration
Statement (including delivery of the prospectus contained therein).
The Exchange Offer Registration Rights Agreement also provides that (i)
if the Company or the Guarantors fail to file an Exchange Offer Registration
Statement with the Commission on or prior to the 60th day after the Issue Date,
(ii) if the Exchange Offer Registration Statement is not declared effective by
the Commission on or prior to the 180th day after the Issue Date, (iii) if the
Exchange Offer is not consummated on or before the 30th business day (or, if
extended with the Initial Purchasers' consent, the 40th business day) after the
Exchange Offer Registration Statement is declared effective, (iv) if obligated
to file the Shelf Registration Statement and the Company and the Guarantors fail
to file the Shelf Registration Statement with the Commission on or prior to the
45th day after such filing obligation arises, (v) if obligated to file a Shelf
Registration Statement and the Shelf Registration Statement is not declared
effective on or prior to the 180th day after the obligation to file a Shelf
Registration Statement arises, or (vi) if the Exchange Offer Registration
Statement or the Shelf Registration Statement, as the case may be, is declared
effective but thereafter ceases to be effective or useable in connection with
resales of the Transfer Restricted Securities without being succeeded within
five days by an appropriate post-effective amendment, for such time of non-
effectiveness or non-usability (each, a "Registration Default"), the Company and
the Guarantors agree to pay to each Holder of Transfer Restricted Securities
affected thereby liquidated damages ("Liquidated Damages") in an amount equal to
$0.05 per week per $1,000 in principal amount of Transfer Restricted Securities
held by such Holder for each week or portion thereof that the Registration
Default continues for the first 90-day period immediately following the
occurrence of such Registration Default, increasing by an additional $0.05 per
week per $1,000 in principal amount of Transfer Restricted Securities with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum amount of Liquidated Damages of $0.20 per week per
$1,000 in principal amount of Transfer Restricted Securities. The Company and
the Guarantors shall not be required to pay Liquidated Damages for more than one
Registration Default at any given time. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease. All accrued Liquidated
Damages shall be paid by the Company or the Guarantors to Holders entitled
thereto in the manner provided for the payment of interest in the Indenture on
each interest payment date.
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The summary herein of certain provisions of the Exchange Offer
Registration Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by, all the provisions of the Exchange Offer
Registration Rights Agreement, a copy of which is filed as an exhibit to the
Exchange Offer Registration Statement of which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Old Notes will not have any further registration rights and such
Old Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York time, on the
Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and
terms of the Old Notes except that (i) the Exchange Notes bear a Series B
designation and a different CUSIP Number from the Old Notes, (ii) the Exchange
Notes have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (iii) the holders of the Exchange
Notes will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for Liquidated Damages in certain
circumstances relating to the timing of the Exchange Offer, all of which rights
generally will terminate when the Exchange Offer is terminated. The Exchange
Notes will evidence the same debt as the Old Notes and will be entitled to the
benefits of the Indenture.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered. As of the date of this Prospectus, $100 million aggregate
principal amount of Old Notes are outstanding.
Holders of Old Notes do not have any appraisal or dissenters rights under
the DGCL or the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York time, on
August 28, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange offer is extended.
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In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
time, on the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer (except that extension
beyond the 30th business day after the effectiveness of the Exchange Offer
Registration Statement requires consent of the Initial Purchasers) or to
terminate the Exchange Offer if any of the conditions set forth below under " --
Conditions" shall not have been satisfied, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent or (ii) to amend the
terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from the most recent date to which
interest has been paid or duly provided for on the Old Note surrendered in
exchange for such Exchange Note or, if no interest has been paid or duly
provided for on such Old Note, from June 26, 1998. Interest on the Exchange
Notes is payable semi-annually on each June 30 and December 31, commencing on
December 31, 1998.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last date to which interest has been paid or duly provided for on the Old Notes
prior to the original issue date of the Exchange Notes or, if no such interest
has been paid or duly provided for will not receive any accrued interest on such
Old Notes, and will be deemed to have waived, the right to receive any interest
on such Old Notes accrued from and after June 26, 1998.
PROCEDURES FOR TENDERING
For a holder of Old Notes to tender Old Notes validly pursuant to the
Exchange Offer, a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantee, or (in the case of a
book-entry transfer), an Agent's Message in lieu of the Letter of Transmittal,
and any other required documents, must be received by the Exchange Agent at the
address set forth in the Letter of Transmittal prior to 5:00 p.m., New York
time, on the Expiration Date. In addition, prior to 5:00 p.m., New York time, on
the Expiration Date, either (i) certificates for tendered Old Notes must be
received by the Exchange Agent at such address or (ii) such Old Notes must be
transferred pursuant to the procedures for book-entry transfer described below
(and a confirmation of such tender received by the Exchange Agent, including an
Agent's Message if the tendering holder has not delivered a Letter of
Transmittal).
The term "Agent's Message" means a message transmitted by the Depository,
received by the Exchange Agent and forming part of the confirmation of a
book-entry transfer, which states that the Depository has received an express
acknowledgment from the participant in the Depository tendering Old Notes which
are the subject of such book-entry confirmation that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such participant. In the
case of an Agent's Message relating to guaranteed delivery, the term means a
message transmitted by the Depository and received by the Exchange Agent, which
states that the Depository has received an express acknowledgment from the
participant in the Depository tendering Old Notes that such participant has
received and agrees to be bound by the Notice of Guaranteed Delivery.
By tendering Old Notes pursuant to the procedures set forth above, each
holder will make to the Company the representations set forth above in the third
paragraph under the heading " -- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
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THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. see "Instruction
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as hereinafter)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the book-entry transfer facility, The Depository Trust Company
("DTC" or the "Book-Entry Transfer Facility"), for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee, or, in the case of a
book-entry transfer, an Agent's Message in lieu of the Letter of Transmittal and
all other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth in the Letter of
Transmittal on or prior to the Expiration Date, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures. Delivery of documents to the Book-Entry Transfer Facility
does not constitute delivery to the Exchange Agent.
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange Offer
by causing DTC to transfer Old Notes to the Exchange Agent in accordance with
DTC's ATOP procedures for transfer. DTC will then send an Agent's Message to the
Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
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will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, none of the
Company, the Exchange Agent or any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available, (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent or (iii)
who cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice
of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate
number(s) of such Old Notes and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes (or a
confirmation of book-entry transfer of such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility), and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificates representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received by
the Exchange Agent at its address set forth in the Letter of Transmittal prior
to 5:00 p.m., New York time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number(s) and principal amount of such Old
Notes, or, in the case of Old Notes transferred by book-entry transfer, the name
and number of the account at the Book-Entry Transfer Facility to be credited),
(iii) be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to
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have the Trustee with respect to the Old Notes register the transfer of such Old
Notes into the name of the person withdrawing the tender and (iv) specify the
name in which any such Old Notes are to be registered, if different from that of
the Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
" -- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept any Old Notes for exchange, and may terminate or amend
the Exchange Offer as provided herein before the acceptance of such Old Notes,
if:
(a) any action or proceeding is instituted or threatened in any
court or by or before any governmental agency with respect to the
Exchange Offer which, in the Company's reasonable discretion, might
materially impair the ability of the Company to proceed with the Exchange
Offer or any material adverse development has occurred in any existing
action or proceeding with respect to the Company or any of its
subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the
staff of the Commission is proposed, adopted or enacted, which, in the
Company's reasonable discretion, might materially impair the ability of
the Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which
approval the Company shall, in the Company's reasonable discretion, deem
necessary for the consummation of the Exchange Offer as contemplated
hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such Old
Notes (see "-- Withdrawal of Tenders"), or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
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EXCHANGE AGENT
U.S. Trust Company of Texas, N.A. has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Registered or
By Overnight Courier: By Hand: Certified Mail:
U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A.
770 Broadway 111 Broadway P.O. Box 841
13th Floor- Corporate Trust Operations Lower Level Cooper Station
New York, New York 10003-9598 New York, New York 10006-1906 New York, New York 10276-0841
Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services
</TABLE>
By Facsimile:
(212) 420-6504
The Exchange Agent also serves as Trustee under the Indenture.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, among
others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, which is face value, as reflected in the Company's accounting records on
the date of exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company. The expenses of the Exchange Offer will be
expensed over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary and holders of Old Notes
should carefully consider whether to accept. Holders of Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A, to
a person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities
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Act in a transaction meeting the requirements of Rule 144A, in accordance with
Rule 144 under the Securities Act, (iii) pursuant to another exemption from the
registration requirements of the Securities Act, (iv) outside the United States
to a foreign person in a transaction meeting the requirements of Rule 904 under
the Securities Act, or (v) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by
the staff of the Commission set forth in no-action letters issued to third
parties (for example, the letters of the commission to (i) Exxon Capital
Holdings Corporation, available May 13, 1988, (ii) Morgan Stanley & Co., Inc.,
available June 5, 1991, and (iii) Shearson & Sterling, available July 2, 1993),
the Company believes that a holder or other person (other than a person that is
an affiliate of the Company within the meaning of Rule 405 under the Securities
Act) who receives Exchange Notes in exchange for Old Notes in the ordinary
course of business and who is not participating, does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker- Dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange
Notes in the Exchange Offer will be required to represent that (i) it is not an
affiliate of the Company, (ii) it is not engaged in, and does not intend to
engage in, and has no arrangement or understanding with any person to
participate in, a distribution of the Exchange Notes and (iii) it is acquiring
the Exchange Notes in its ordinary course of business. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for its own account as the result of
market-making activities or other trading activities and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. Based on the position taken by the staff of the Division of
Corporation Finance of the Commission in the interpretive letters referred to
above, the Company believes that Participating Broker-Dealers who acquired Old
Notes for their own accounts as a result of market-making activities or other
trading activities may fulfill their prospectus delivery requirements with
respect to the Exchange Notes received upon exchange of such Old Notes (other
than Old Notes which represent an unsold allotment from the original sale of the
Old Notes) with a prospectus meeting the requirements of the Securities Act,
which may be the prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with respect to the resale of
such Exchange Notes. Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer
during the period referred to below in connection with resales of Exchange Notes
received in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
such other trading activities. Subject to certain provisions set forth in the
Exchange Offer Registration Rights Agreement, the Company has agreed that this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of such Exchange
Notes for a period ending 180 days after the date on which the Exchange Offer
Registration Statement is declared effective. However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of Exchange Notes received in exchange for Old Notes pursuant to the Exchange
Offer must notify the Company, or cause the Company to be notified, on or prior
to the Expiration Date, that it is a Participating Broker-Dealer. Such notice
may be given in the space provided for that purpose in the Letter of Transmittal
or may be delivered to the Exchange Agent at one of the addresses set forth in
the Letter of Transmittal.
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See "Plan of Distribution." Any Participating Broker-Dealer who is an
"affiliate" of the Company may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
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DESCRIPTION OF EXCHANGE NOTES
The Old Notes were issued and the Exchange Notes are to be issued
pursuant to an Indenture dated as of June 26, 1998 among the Company, the
Guarantors and U.S. Trust Company of Texas, N.A., as trustee ("Trustee"). A copy
of the Indenture is available upon request from the Company as set forth under
"Available Information." The Indenture is by its terms subject to and governed
by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Indenture is by its terms subject to and governed by the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The following summaries of certain
provisions of the Notes and the Indenture do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, the Notes and
the Indenture, including the definitions therein of certain capitalized terms
used but not defined herein. For purposes of this section of this Prospectus,
references to the "Company" mean Bayard Drilling Technologies, Inc., excluding
its subsidiaries. The Old Notes and the Exchange Notes are collectively referred
to herein as the "Notes". Certain other terms used herein are defined below
under "-- Certain Definitions."
GENERAL
The Old Notes are, and the Exchange Notes will be, general unsecured
senior obligations of the Company, limited in aggregate principal amount at
Stated Maturity to $100 million. The Indebtedness evidenced by the Notes will
rank pari passu in right of payment with all existing and future senior
indebtedness and other obligations of the Company and senior in right of payment
to all future subordinated indebtedness of the Company. The Company is a holding
company that conducts substantially all of its operations through its
subsidiaries. As of June 15, 1998, on a pro forma basis after giving effect to
the TransTexas Acquisition and the Old Notes Offering, the Company had
approximately $121.1 million of outstanding senior indebtedness, of which $21.1
million is secured by certain assets of the Subsidiaries. At such date, the
Company would have had no Indebtedness subordinated to the Notes.
The Indenture provides that each of the Company's wholly owned domestic
Subsidiaries (and any other Subsidiaries that guarantee any Indebtedness of the
Company) shall be a Guarantor. The Guarantees will be senior unsecured
obligations of each respective Guarantor and will 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.
The holders of secured indebtedness of the Company and the Guarantors (including
Indebtedness under the Loan Agreements, which is secured by first priority liens
on certain of the assets of the Company's domestic Subsidiaries), will have
claims with respect to the assets constituting collateral for such Indebtedness
that are prior to claims of holders of the Notes and the Trustee. In the event
of a default on the Notes or the Guarantees, or a bankruptcy, liquidation or
reorganization of the Company or any Guarantors, such assets will be available
to satisfy obligations with respect to the Loan Agreements or other secured
Indebtedness before any payment therefrom could be made on the Notes. To the
extent that the value of such collateral is not sufficient to satisfy the
indebtedness secured thereby, amounts remaining outstanding on such Indebtedness
would be entitled to share with the holders of the Notes and the Trustee and
their claims with respect to any other assets of the Company and the Guarantors.
The Old Notes are, and the Exchange Notes will be, effectively
subordinated to claims of creditors (other than the Company) of the Company's
Subsidiaries other than the Guarantors. Claims of creditors (other than the
Company) of such Subsidiaries, including trade creditors, tort claimants,
secured creditors, taxing authorities and creditors holding guarantees, will
generally have priority as to assets of such Subsidiaries over the claims and
equity interest of the Company and, thereby indirectly, the holders of the
indebtedness of the Company, including the Notes and the Guarantees. In
addition, the Indenture permits under limited circumstances the creation of, or
the designation of existing Subsidiaries as, Unrestricted Subsidiaries. At the
Issue Date, none of the Company's subsidiaries will be an Unrestricted
Subsidiary. Unrestricted Subsidiaries will not be generally subject to the
covenants applicable to the Company and the Subsidiaries under the Indenture.
The Notes will be effectively subordinated to claims of creditors (other than
the Company) of the Unrestricted Subsidiaries. See "-- Certain Covenants --
Unrestricted Subsidiaries."
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The form and terms of the Exchange Notes are the same as the form and
terms of the Old Notes (which they are intended to replace) except that (i) the
Exchange Notes bear a Series B designation, (ii) the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. Additionally, the holders of Exchange Notes
will not be entitled to certain rights under the Exchange Offer Registration
Rights Agreement, including the provisions providing for Liquidated Damages in
certain circumstances, which rights will terminate when the Exchange Offer is
consummated. The Exchange Notes will be issued solely in exchange for an equal
principal amount of Old Notes. As of the date hereof, $100 million aggregate
principal amount of Old Notes is outstanding. See "The Exchange Offer."
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on June 30, 2005, and will bear interest at the
rate per annum stated on the cover page hereof from the date of issuance or from
the most recent interest payment date to which interest has been paid or
provided for. Interest on the Notes will be payable semi-annually in arrears on
June 30 and December 31 of each year, commencing December 31, 1998, to the
Persons in whose names such Notes are registered at the close of business on
June 15 or December 15, immediately preceding such interest payment date.
Interest will be calculated on the basis of a 360-day year consisting of twelve
30-day months.
The Notes may be presented or surrendered for payment of principal,
premium, if any, and interest and for registration of transfer or exchange at
the office or agency of the Company within the City and State of New York
maintained for such purpose. In addition, in the event the Notes do not remain
in book-entry form, interest may be paid, at the option of the Company, by check
mailed to the registered holders of the Notes at the respective addresses as set
forth on the Note Register. The Notes will be issued only in fully registered
form, without coupons, in denominations of $1,000 and integral multiples
thereof. No service charge will be made for any registration of transfer or
exchange or redemption of Notes, but the Company or Trustee may require in
certain circumstances payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
GUARANTEES OF NOTES
Each Guarantor will unconditionally guarantee, jointly and severally, to
each holder and the Trustee, the full and prompt performance of the Company's
Obligations under the Indenture and the Notes, including the payment of
principal of, premium, if any, and interest on the Notes pursuant to its
Guarantee. If any Subsidiary of the Company that is not an initial Guarantor
guarantees any Indebtedness of the Company at any time in the future, then the
Company will cause the Notes to be equally and ratably guaranteed by such
Subsidiary. In addition, the Company will cause each wholly owned domestic
subsidiary that is or becomes a Subsidiary to execute and deliver a supplement
to the Indenture pursuant to which such Subsidiary will guarantee the payment of
the Notes on the same terms and conditions as the Guarantees by the initial
Guarantors.
The Obligations of each Guarantor will be limited to the maximum amount
as will, after giving effect to all other contingent and fixed liabilities of
such Guarantor and after giving effect to any collections from or payments made
by or on behalf of any other Guarantor in respect of the Obligations of such
other Guarantor under its Guarantee or pursuant to its contribution obligations
under the Indenture, result in the Obligations of such Guarantor under its
Guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal or state law or otherwise not being void, voidable or unenforceable
under any bankruptcy, reorganization, receivership, insolvency, liquidation or
other similar legislation or legal principles under any applicable foreign law.
Each Guarantor that makes a payment or distribution under a Guarantee shall be
entitled to a contribution from each other Guarantor in a pro rata amount based
on the Adjusted Net Assets of each Guarantor.
Each Guarantor may consolidate with or merge into or sell or otherwise
dispose of all or substantially all of its Property and assets to the Company or
another Guarantor without limitation, except to the extent any such transaction
is subject to the "Consolidation, Merger, Conveyance, Lease or Transfer"
covenant of the Indenture. Each Guarantor may consolidate with or merge into or
sell all or substantially all of its Property and assets to a Person other than
the Company or another Guarantor (whether or not Affiliated with the Guarantor),
provided that (a) if the surviving Person
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is not the Guarantor, the surviving Person agrees to assume such Guarantor's
Guarantee and all its Obligations pursuant to the Indenture (except to the
extent the following paragraph would result in the release of such Guarantee)
and (b) such transaction does not result in a Default or Event of Default
existing or continuing immediately thereafter.
Upon the sale or other disposition (by merger or otherwise) of a
Guarantor (or all or substantially all of its Property and assets) to a Person
other than the Company or another Guarantor and pursuant to a transaction that
is otherwise in compliance with the Indenture (including as described in clause
(b) of the foregoing paragraph and as described below in the covenant described
"-- Certain Covenants -- Limitation on Asset Sales"), such Guarantor (unless it
otherwise remains a Subsidiary) shall be deemed released from its Guarantee and
the related Obligations set forth in the Indenture; provided that any such
termination shall occur only to the extent that all Obligations of such
Guarantor under all of its guarantees of and under all of its pledges of assets
or other security interests which secure, other Indebtedness of the Company
shall also terminate or be released upon such sale or other disposition. Each
Guarantor that is designated as an Unrestricted Subsidiary in accordance with
the Indenture shall be released from its Guarantee and the related Obligations
set forth in the Indenture so long as it remains an Unrestricted Subsidiary.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Notes will not be
redeemable at the option of the Company prior to June 30, 2003. On or after such
date, the Notes will be redeemable at the option of the Company, in whole at any
time or in part from time to time, at the following prices (expressed in
percentages of the principal amount), if redeemed during the 12 months beginning
June 30 of the years indicated below, in each case together with interest
accrued to the redemption date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.500%
2004 and thereafter . . . . . . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or before June 30, 2001,
the Company may, at its option, redeem up to a maximum of 35% of the aggregate
principal amount of the Notes with the net cash proceeds of one or more
Qualified Equity Offerings at a redemption price equal to 111% of the principal
amount thereof, plus accrued and unpaid interest thereon to the redemption date;
provided that at least $65 million of the aggregate principal amount of Notes
shall remain outstanding immediately after the occurrence of any such
redemption; and provided, further, that each such redemption shall occur within
90 days of the closing of such Qualified Equity Offering.
If fewer than all the Notes are redeemed, selection for redemption will
be made by the Trustee in accordance with the principal stock exchange, if any,
on which the Notes are listed, or, if the Notes are not so listed, on a pro rata
basis, by lot or by any other means which the Trustee determines to be fair and
appropriate; provided that no Notes of $1,000 or less shall be redeemed in part.
Notices of redemption shall be mailed by first class mail at least 30 but no
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest ceases to accrue on Notes or portions thereof called for
redemption.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the
right to require the Company to repurchase all of such holder's Notes in whole
or in part (the "Change of Control Offer") at a purchase price (the "Change of
Control Purchase Price") in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the Change of
Control Payment Date (as defined below) on the terms described below.
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Within 30 days following any Change of Control, the Company or the
Trustee (at the expense of the Company) will mail a notice to each holder and to
the Trustee stating, among other things, (i) that a Change of Control has
occurred and a Change of Control Offer is being made as provided for in the
Indenture, and that, although holders are not required to tender their Notes,
all Notes that are timely tendered will be accepted for payment; (ii) the Change
of Control Purchase Price and the repurchase date, which will be no earlier than
30 days and no later than 60 days after the date such notice is mailed (the
"Change of Control Payment Date"); (iii) that any Note accepted for payment
pursuant to the Change of Control Offer (and duly paid for on the Change of
Control Payment Date) will cease to accrue interest after the Change of Control
Payment Date; and (iv) the instructions and any other information necessary to
enable holders to tender their Notes and have such Notes purchased pursuant to
the Change of Control Offer. The Company will comply with any applicable tender
offer rules (including, without limitation, any applicable requirements of Rule
14e-1 under the Exchange Act) in the event that the Change of Control Offer is
triggered under the circumstances described herein.
The existence of the holders' rights to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control may deter a
third party from acquiring the Company in a transaction that constitutes a
Change of Control. The source of funds for the repurchase of Notes upon a Change
of Control will be the Company's cash or cash generated from operations or other
sources, including borrowings or sales of assets. Further, a "Change of Control"
(as defined under any Loan Agreement) may constitute an event of default
thereunder and allow the lenders to accelerate the Indebtedness outstanding
hereunder and prevent the Company from borrowing thereunder. There can be no
assurance that sufficient funds will be available at the time of any Change of
Control to repay all amounts owing under such other Indebtedness or to make the
required payments of the Notes. In the event that a Change of Control Offer
occurs at a time when the Company does not have sufficient available funds to
pay the Change of Control Purchase Price for all Notes timely tendered pursuant
to such offer or at a time when the Company is prohibited from purchasing the
Notes (and the Company is unable either to obtain the consent of the holders of
the relevant Indebtedness or to repay such Indebtedness), an Event of Default
would occur under the Indenture. In addition, one of the events that constitutes
a Change of Control under the Indenture is a sale, conveyance, transfer or lease
of all or substantially all of the assets of the Company or the Company and the
Subsidiaries, taken as a whole. The Indenture will be governed by New York law,
and there is no established quantitative definition under New York law of
"substantially all" of the assets of a corporation. Accordingly, if the Company
or its Subsidiaries were to engage in a transaction in which it or they disposed
of less than all of the assets of the Company or the Company and its
Subsidiaries taken as a whole, as applicable, a question or interpretation could
arise as to whether such disposition was of "substantially all" of its assets
and whether the Company was required to make a Change of Control Offer.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
repurchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders to require the
Company to repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring. The provisions of the Indenture may
not afford holders protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction affecting the
Company that may adversely affect holders because (i) such transactions may not
involve a shift in voting power or beneficial ownership or, even if they do, may
not involve a shift of the magnitude required under the definition of Change of
Control to require the Company to make a Change of Control Offer or (ii) such
transactions may include an actual shift in voting power or beneficial ownership
to a Permitted Holder which is excluded under the definition of Change of
Control from the amount of shares involved in determining whether or not the
transaction involves a shift of the magnitude required to trigger the
provisions. A transaction involving the management of the Company or its
Affiliates, or a transaction involving a recapitalization of the Company, will
result in a Change of Control only if it is the type of transaction specified in
such definition.
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CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Transactions with Affiliates. Subsequent to the Issue Date, the Company
will not, and will not permit any Subsidiary to, directly or indirectly, enter
into or permit to exist any transaction or series of related transactions
(including, but not limited to, the purchase, sale or exchange of Property, the
making of any Investment, the giving of any guarantee to, or the rendering of
any service with, any Affiliate of the Company, other than transactions among
the Company and any Guarantor or any Wholly Owned Subsidiaries) unless (i) such
transaction or series of related transactions is on terms no less favorable to
the Company or such Subsidiary than those that could be obtained in a comparable
arm's length transaction with a Person that is not such an Affiliate of the
Company and (ii) (a) with respect to a transaction or series of related
transactions that has a Fair Market Value in excess of $5 million but less than
$10 million, the Company delivers an Officers' Certificate to the Trustee
certifying that such transaction or series of related transactions complies with
clause (i) above; or (b) with respect to a transaction or series of related
transactions that has a Fair Market Value equal to or in excess of $10 million,
the transaction or series of related transactions is approved by a majority of
the Board of Directors of the Company (including a majority of the disinterested
directors), which approval is set forth in a Board Resolution certifying that
such transaction or series of transactions complies with clause (i) above. The
foregoing provisions shall not be applicable to (i) reasonable and customary
compensation, indemnification and other benefits paid or made available to an
officer, director or employee of the Company or a Subsidiary for services
rendered in such person's capacity as an officer, director or employee
(including reimbursement or advancement of reasonable out-of-pocket expenses and
provisions of directors' and officers' liability insurance as well as stock
option agreements, restricted stock agreements and consulting or similar
agreements), (ii) the making of any Restricted Payment otherwise permitted by
the Indenture, (iii) any existing employment agreement, stock option agreement,
restricted stock agreement, consulting agreement or similar agreement, (iv) any
agreement in effect on the Issue Date or any amendment thereto (so long as such
amendment is, taken as a whole, no less favorable to the holders of the Notes
than the original agreement as in effect on the Issue Date) and any transactions
contemplated thereby, or (v) any transaction described in "Certain Relationships
and Related Transactions."
Limitation on Restricted Payments. The Company will not, and will not
permit any Subsidiary to, make any Restricted Payment, unless at the time of and
after giving effect to the proposed Restricted Payment, (a) no Default shall
have occurred and be continuing (or would immediately result therefrom), (b) the
Company could incur at least $1.00 of additional Indebtedness under the tests
described in the first sentence under the caption "-- Certain Covenants --
Limitation on Indebtedness" and (c) the aggregate amount of all Restricted
Payments declared or made on or after the Issue Date by the Company or any
Subsidiary shall not exceed the sum of (i) 50% (or if such Consolidated Net
Income shall be a deficit, minus 100% of such deficit) of the aggregate
Consolidated Net Income accrued during the period beginning on the first day of
the fiscal quarter in which the Issue Date falls and ending on the last day of
the fiscal quarter for which internal financial statements are available ending
immediately prior to the date of such proposed Restricted Payment, minus 100% of
the amount of any writedowns, write-offs and other negative extraordinary
charges not otherwise reflected in Consolidated Net Income during such period,
plus (ii) an amount equal to the aggregate net cash proceeds received by the
Company, subsequent to the Issue Date, from the issuance or sale (other than to
a Subsidiary) of shares of its Capital Stock (excluding Redeemable Stock, but
including Capital Stock issued upon the exercise of options, warrants or rights
to purchase Capital Stock (other than Redeemable Stock) of the Company) and the
liability (expressed as a positive number) as expressed on the face of a balance
sheet in accordance with GAAP in respect of any Indebtedness of the Company or
any of its Subsidiaries, or the carrying value of Redeemable Stock, which has
been converted into, exchanged for or satisfied by the issuance of shares of
Capital Stock (other than Redeemable Stock) of the Company, subsequent to the
Issue Date, plus (iii) 100% of the net reduction in Restricted Investments,
subsequent to the Issue Date, in any Person, resulting from payments of interest
on Indebtedness, dividends, repayments of loans or advances, or other transfers
of Property (but only to the extent such interest, dividends, repayments or
other transfers of Property are not included in the calculation of Consolidated
Net Income), in each case to the Company or any Subsidiary from any Person
(including, without limitation, from Unrestricted Subsidiaries) or from
redesignations of Unrestricted Subsidiaries as Subsidiaries (valued in each case
as provided in the definition of "Investments"), not to exceed in the case of
any Person the amount of Restricted Investments previously
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made by the Company or any Subsidiary in such Person and in each such case which
was treated as a Restricted Payment, plus (iv) $10 million.
The foregoing provisions will not prevent (A) the payment of any dividend
on Capital Stock of any class within 60 days after the date of its declaration
if at the date of declaration such payment would be permitted by the Indenture;
(B) any repurchase or redemption of Capital Stock or Subordinated Indebtedness
of the Company or a Subsidiary made by exchange for Capital Stock of the Company
(other than Redeemable Stock), or out of the net cash proceeds from the
substantially concurrent issuance or sale (other than to a Subsidiary) of
Capital Stock of the Company (other than Redeemable Stock), provided that the
net cash proceeds from such sale are excluded from computations under clause (c)
(ii) above to the extent that such proceeds are applied to purchase or redeem
such Capital Stock or Subordinated Indebtedness; (C) so long as no Default shall
have occurred and be continuing or should occur as a consequence thereof, any
repurchase or redemption of Subordinated Indebtedness of the Company or a
Subsidiary solely in exchange for, or out of the net cash proceeds from the
substantially concurrent sale of, new Subordinated Indebtedness of the Company
or a Subsidiary, so long as such Subordinated Indebtedness is permitted under
the covenant described under "-- Limitation on Indebtedness" and (x) is
subordinated to the Notes at least to the same extent as the Subordinated
Indebtedness so exchanged, purchased or redeemed, (y) has a stated maturity
later than the stated maturity of the Subordinated Indebtedness so exchanged,
purchased or redeemed and (z) has an Average Life at the time incurred that is
greater than the remaining Average Life of the Subordinated Indebtedness so
exchanged, purchased or redeemed; (D) Investments in any Joint Ventures and
foreign Subsidiaries not constituting Guarantors in an aggregate amount not to
exceed $5 million; (E) the payment of any dividend or distribution by a
Subsidiary of the Company or any of its Wholly Owned Subsidiaries; (F) so long
as no Default or Event of Default shall have occurred and be continuing or
should occur as a consequence thereof, the repurchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company held by
any employee of the Company or any of its Subsidiaries, provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Capital Stock pursuant to the terms of an employee benefit plan or employment or
similar agreement shall not exceed $500,000 in any calendar year; and (G) the
acquisition of Capital Stock by the Company in connection with the exercise of
stock options or stock appreciation rights by way of cashless exercise or in
connection with the satisfaction of withholding tax obligations. Notwithstanding
the foregoing, the amount available for Investments in Joint Ventures and
foreign Subsidiaries pursuant to clause (D) of the preceding sentence may be
increased by the aggregate amount received by the Company and its Subsidiaries
from a Joint Venture or a foreign Subsidiary on or before such date resulting
from payments of interest on Indebtedness, dividends, repayments of loans or
advances or other transfers of Property made to such Joint Venture or foreign
Subsidiary (but only to the extent such interest, dividends, repayments or other
transfers of Property are not included in the calculation of Consolidated Net
Income). Restricted Payments permitted to be made as described in the first
sentence of this paragraph will be excluded in calculating the amount of
Restricted Payments thereafter, except that any such Restricted Payments
permitted to be made pursuant to clauses (A), (D), (E) (but only to the extent
paid to someone other than the Company or any of its Wholly Owned Subsidiaries)
and (F) will be included in calculating the amount of Restricted Payments
thereafter.
For purposes of this covenant, if a particular Restricted Payment
involves a non-cash payment, including a distribution of assets, then such
Restricted Payment shall be deemed to be an amount equal to the cash portion of
such Restricted Payment, if any, plus an amount equal to the Fair Market Value
of the non-cash portion of such Restricted Payment.
Limitation on Indebtedness. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, incur any Indebtedness (including
Acquired Indebtedness), unless after giving pro forma effect to the incurrence
of such Indebtedness, the Consolidated Interest Coverage Ratio for the
Determination Period preceding the Transaction Date is at least 2.5 to 1.0.
Notwithstanding the foregoing, the Company or any Subsidiary (subject to the
following paragraph) may incur Permitted Indebtedness. Any Indebtedness of a
Person existing at time at which such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Subsidiary at the time at which it becomes a Subsidiary.
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Limitation on Subsidiary Indebtedness and Preferred Stock. Subject to the
covenant captioned "Limitation on Indebtedness," the Company will not permit any
Subsidiary to, directly or indirectly, incur any Indebtedness or issue any
Preferred Stock except:
(a) Indebtedness or Preferred Stock issued to and held by the
Company, a Guarantor or a Wholly Owned Subsidiary, so long as any
transfer of such Indebtedness or Preferred Stock to a Person other than
the Company, Guarantor or a Wholly Owned Subsidiary will be deemed to
constitute an incurrence of such Indebtedness or Preferred Stock by the
issuer thereof as of the date of such transfer;
(b) Acquired Indebtedness or Preferred Stock of a Subsidiary
issued and outstanding prior to the date on which such Subsidiary was
acquired by the Company (other than Indebtedness or Preferred Stock
issued in connection with or in anticipation of such acquisition);
(c) Indebtedness or Preferred Stock outstanding on the Issue Date
and listed in a schedule attached to the Indenture;
(d) Indebtedness described in clauses (b), (c), (d), (e), (f),
(g), (h), (k) and (n) under the definition of "Permitted Indebtedness";
(e) Permitted Subsidiary Refinancing Indebtedness of such
Subsidiary;
(f) Indebtedness or Preferred Stock issued in exchange for, or the
proceeds of which are used to refinance, repurchase or redeem,
Indebtedness or Preferred Stock described in clauses (a) and (c) of this
paragraph (the "Retired Indebtedness or Stock"), provided that the
Indebtedness or the Preferred Stock so issued has (i) a principal amount
or liquidation value, as the case may be, not in excess of the principal
amount or liquidation value of the Retired Indebtedness or Stock plus
related expenses for redemption and issuance, (ii) a final redemption
date later than the stated maturity or final redemption date (if any) of
the Retired Indebtedness or Stock and (iii) an Average Life at the time
of issuance of such Indebtedness or Preferred Stock that is greater than
the Average Life of the Retired Indebtedness or Stock;
(g) Indebtedness of a Subsidiary which represents the assumption
by such Subsidiary of Indebtedness of another Subsidiary in connection
with a merger of such Subsidiaries, provided that no Subsidiary or any
successor (by way of merger) thereto existing on the Issue Date shall
assume or otherwise become responsible for any Indebtedness of an entity
which is not a Subsidiary on the Issue Date, except to the extent that a
Subsidiary would be permitted to incur such Indebtedness under this
paragraph;
(h) Non-Recourse Indebtedness incurred by a foreign Subsidiary
not constituting a Guarantor; and
(i) Indebtedness incurred to finance all or a part of the purchase
price or construction, repair or improvement cost of Property acquired,
constructed, repaired or improved after the Issue Date.
Limitations on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any Subsidiary, directly
or indirectly, to create, enter into any agreement with any Person or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction of any kind which by its terms restricts the ability of any
Subsidiary to (a) pay dividends, in cash or otherwise, or make any other
distributions on its Capital Stock to the Company or any Subsidiary, (b) pay any
Indebtedness owed to the Company or any Subsidiary, (c) make loans or advances
to the Company or any Subsidiary or (d) transfer any of its Property or assets
to the Company or any Subsidiary except any encumbrance or restriction contained
in any agreement or instrument:
(i) existing on the Issue Date;
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(ii) relating to any Property or assets acquired after the Issue
Date, so long as such encumbrance or restriction relates only to the
Property or assets so acquired and is not and are not created in
anticipation of such acquisition;
(iii) relating to any Acquired Indebtedness of any Subsidiary at
the date on which such Subsidiary was acquired by the Company or any
Subsidiary (other than Indebtedness incurred in anticipation of such
acquisition);
(iv) effecting a refinancing of Indebtedness incurred pursuant to
an agreement referred to in the foregoing clauses (i) through (iii), so
long as the encumbrances and restrictions contained in any such
refinancing agreement are no more restrictive than the encumbrances and
restrictions contained in such agreements;
(v) constituting customary provisions restricting subletting or
assignment of any lease of the Company or any Subsidiary or provisions in
license agreements or similar agreements that restrict the assignment of
such agreement or any rights thereunder;
(vi) constituting restrictions on the sale or other disposition of
any Property securing Indebtedness as a result of a Permitted Lien on
such Property;
(vii) constituting any temporary encumbrance or restriction with
respect to a Subsidiary pursuant to an agreement that has been entered
into for the sale or disposition of all or substantially all of the
Capital Stock of, or Property and assets of, such Subsidiary;
(viii) existing under or by reason of applicable law, rules or
regulations, or any order or ruling by any governmental authority;
(ix) constituting customary restrictions on cash or other deposits
imposed by customers under contracts entered into in the ordinary course
of business;
(x) constituting restrictions with respect to a Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all
or substantially all of the capital stock or assets of such Subsidiary
pending the closing of such sale or disposition; or
(xi) constituting provisions contained in agreements or
instruments relating to Indebtedness which prohibit the transfer of all
or substantially all of the assets of the obligor thereunder unless the
transferee shall assume the obligations of the obligor under such
agreement or instrument.
Limitation on Asset Sales. The Company will not engage in, and will not
permit any Subsidiary to engage in, any Asset Sale unless (a) except in the case
of an Asset Sale resulting from the requisition of title to, seizure or
forfeiture of any Property or assets or any actual or constructive total loss or
an agreed or compromised total loss the Company or such Subsidiary, as the case
may be, receives consideration at the time of such Asset Sale at least equal to
the Fair Market Value of the Property; and (b) at least 75% of such
consideration consists of Cash Proceeds (or the assumption of Indebtedness of
the Company or such Subsidiary relating to the Capital Stock or Property or
asset that was the subject of such Asset Sale and the unconditional release of
the Company or such Subsidiary from such Indebtedness); and (c) the Company
delivers to the Trustee an Officers' Certificate certifying that such Asset Sale
complies with clauses (a) and (b); provided, however that any Asset Sale
pursuant to a condemnation, appropriation or other similar taking, including by
deed in lieu of condemnation, or pursuant to the foreclosure or other
enforcement of a Permitted Lien or exercise by the related lienholder of rights
with respect thereto, including by deed or assignment in lieu of foreclosure
shall not be required to satisfy the conditions set forth in clauses (a) and (b)
of this sentence. The Company or such Subsidiary, as the case may be, may apply
the Net Available Proceeds from each Asset Sale (x) to the acquisition of one or
more Replacement Assets, or (y) to repurchase or repay Senior Debt (with a
permanent reduction of availability in the case of revolving credit borrowings);
provided that such acquisition or such repurchase or repayment shall be made
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within 365 days after the consummation of the relevant Asset Sale; provided,
further, however, that the amount of (A) any liabilities (as shown on the
Company's or such Subsidiary's most recent balance sheet or in the notes
thereto) of the Company or any Subsidiary that are assumed by the transferee of
any such assets and (B) any notes or other obligations received by the Company
or any such Subsidiary from such transferee that are converted by the Company or
such Subsidiary into cash (to the extent of the case received) within 90 days of
such Asset Sale, shall be deemed to be cash for purposes of this provision.
Any Net Available Proceeds from any Asset Sale that are not used to so
acquire Replacement Assets or to repurchase or repay Senior Debt within 365 days
after consummation of the relevant Asset Sale constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $10 million, the Company shall
within 30 days thereafter be required to make an offer to all Holders of Notes
and other Indebtedness that ranks by its terms pari passu in right of payment
with the Notes and the terms of which contain substantially similar requirements
with respect to the application of net proceeds from asset sales as are
contained in the Indenture (an "Asset Sale Offer") to purchase on a pro rata
basis the maximum principal amount of the Notes, that is an integral multiple of
$1,000, that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture. If the aggregate principal amount of
Notes surrendered by holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset to zero and the Company may use any remaining amount for general corporate
purposes. Pending the final application of any such Net Available Proceeds, the
Company may temporarily reduce Indebtedness under any Credit Facility or
otherwise invest such Net Available Proceeds in any manner that is not
prohibited by the Indenture.
The Company will comply with any applicable tender offer rules
(including, without limitation, any applicable requirements of Rule 14e-1 under
the Exchange Act) in the event that an Asset Sale Offer is required under the
circumstances described herein.
Limitation on Sale and Lease-Back Transactions. The Company will not, and
will not permit any Subsidiary to, directly or indirectly, enter into, assume,
guarantee or otherwise become liable with respect to any Sale and Lease-Back
Transaction unless (i) the proceeds from such Sale and Lease-Back Transaction
are at least equal to the Fair Market Value of such Property being transferred
and (ii) the Company or such Subsidiary would have been permitted to enter into
such transaction under the covenants described in "-- Certain Covenants --
Limitation on Indebtedness" and "-- Certain Covenants -- Limitation on Liens,"
and "-- Certain Covenants -- Limitation on Subsidiary Indebtedness and Preferred
Stock."
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, affirm, incur, assume or suffer
to exist any Liens of any kind other than Permitted Liens on or with respect to
any Property of the Company or such Subsidiary or any interest therein or any
income or profits therefrom, whether owned at the Issue Date or thereafter
acquired, without effectively providing that the Notes shall be secured equally
and ratably with (or prior to) the Indebtedness so secured for so long as such
obligations are so secured.
Limitation on Guarantees by Guarantors. The Company will not permit any
Guarantor to guarantee the payment of any Subordinated Indebtedness of the
Company unless such guarantee shall be subordinated to such Guarantor's
Guarantee at least to the same extent as such Subordinated Indebtedness is
subordinated to the Notes; provided that this covenant will not be applicable to
any guarantee of any Guarantor that (i) existed at the time at which such Person
became a Subsidiary of the Company and (ii) was not incurred in connection with,
or in contemplation of, such Person becoming a Subsidiary of the Company.
Unrestricted Subsidiaries. The Indenture provides that the Company may
designate a subsidiary (including a newly formed or newly acquired subsidiary)
of the Company or any of its Subsidiaries as an Unrestricted Subsidiary;
provided that (i) immediately after giving effect to the transaction, the
Company could incur $1.00 of additional Indebtedness pursuant to the first
sentence of "-- Certain Covenants -- Limitation on Indebtedness" and (ii) such
designation is at the time permitted under "-- Certain Covenants -- Limitation
on Restricted Payments."
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Notwithstanding any provisions of this covenant all subsidiaries of an
Unrestricted Subsidiary will be Unrestricted Subsidiaries.
The Indenture further provides that the Company will not, and will not
permit any of its Subsidiaries to, take any action or enter into any transaction
or series of transactions that would result in a Person (other than a subsidiary
having no outstanding Indebtedness (other than Indebtedness to the Company or a
Subsidiary) at the date of determination) becoming a Subsidiary (whether through
an acquisition, the redesignation of an Unrestricted Subsidiary or otherwise)
unless, after giving effect to such action, transaction or series of
transactions on a pro forma basis, (i) the Company could incur at least $1.00 of
additional Indebtedness pursuant to the first sentence of "-- Certain Covenants
- -- Limitation on Indebtedness" and (ii) no Default or Event of Default would
occur.
Subject to the preceding paragraphs, an Unrestricted Subsidiary may be
redesignated as a Subsidiary. The designation of a subsidiary as an Unrestricted
Subsidiary or the designation of an Unrestricted Subsidiary as a Subsidiary in
compliance with the preceding paragraphs shall be made by the Board of Directors
pursuant to a Board Resolution delivered to the Trustee and shall be effective
as of the date specified in such Board Resolution, which shall not be prior to
the date such Board Resolution is delivered to the Trustee. Any Unrestricted
Subsidiary shall become a Subsidiary if it incurs any Indebtedness other than
Non-Recourse Indebtedness. If at any time Indebtedness of an Unrestricted
Subsidiary which was Non-Recourse Indebtedness no longer so qualifies, such
Indebtedness shall be deemed to have been incurred when such Non-Recourse
Indebtedness becomes Indebtedness.
Limitations on Line of Business. The Indenture provides that neither the
Company nor any of its Subsidiaries will directly or indirectly engage to any
substantial extent in any line or lines of business activity other than a
Related Business.
Reports. The Indenture provides that, whether or not the Company is
subject to Section 13(a) or 15(d) of the Exchange Act, or any successor
provision thereto, the Company shall file with the Commission the annual
reports, quarterly reports and other documents which the Company would have been
required to file with the Commission pursuant to such Section 13(a) or 15(d) or
any successor provision thereto if the Company were subject thereto, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Company would have been required to
file them. The Company shall also (whether or not it is required to file reports
with the Commission), within 30 days of each Required Filing Date, (i) transmit
by mail to all holders of Notes, as their names and addresses appear in the
applicable Security Register, without cost to such holders or Persons, and (ii)
file with the Trustee, copies of the annual reports, quarterly reports and other
documents (without exhibits) which the Company has filed or would have filed
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act, any
successor provisions thereto or this covenant. The Company shall not be required
to file any report with the Commission if the Commission does not permit such
filing.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of transactions,
consolidate with or merge into any other Person (other than a merger of a
Subsidiary into the Company in which the Company is the continuing Person), or
continue in a new jurisdiction or sell, convey, assign, transfer, lease or
otherwise dispose of all or substantially all of the Property and assets of the
Company and the Subsidiaries, taken as a whole, to any Person, unless
(i) either (a) the Company shall be the continuing Person or (b)
the Person (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and the
Subsidiaries, taken as a whole (such Person, the "Surviving Entity"),
shall be a Person organized and validly existing under the laws of the
United States of America, any political subdivision thereof or any state
thereof or the District of Columbia, and shall expressly assume, by a
supplemental indenture, the due and punctual payment of the principal of
(and premium, if any) and interest on all the Notes and the performance
of the Company's covenants and obligations under the Indenture;
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(ii) immediately after giving effect to such transaction or series
of transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Event of
Default or Default shall have occurred and be continuing or would result
therefrom;
(iii) immediately after giving effect to such transaction or
series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of
transactions), the Company (or the Surviving Entity if the Company is not
continuing) shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of the Company immediately prior to such
transactions; and
(iv) immediately after giving effect to any such transaction or
series of transactions on a pro forma basis as if such transaction or
series of transactions had occurred on the first day of the Determination
Period, the Company (or the Surviving Entity if the Company is not
continuing) would be permitted to incur $1.00 of additional Indebtedness
pursuant to the test described in the first sentence under the caption
"-- Certain Covenants -- Limitation on Indebtedness."
The provision of clause (iv) shall not apply to any merger or
consolidation into or with, or any such transfer of all or substantially all of
the Property and assets of the Company and the Subsidiaries taken as a whole
into, the Company or a Wholly Owned Subsidiary.
In connection with any consolidation, merger, transfer of assets or other
transactions contemplated by this provision, the Company shall deliver, or cause
to be delivered, to the Trustee, in form and substance reasonably satisfactory
to the Trustee, an Officers' Certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, conveyance or transfer and
the supplemental indenture in respect thereto comply with the provisions of the
Indenture and that all conditions precedent in the Indenture relating to such
transactions have been complied with.
Upon any transaction or series of transactions that are of the type
described in, and are effected in accordance with, the foregoing paragraphs, the
Surviving Entity shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture and the Notes with the
same effect as if such Surviving Entity had been named as the Company in the
Indenture; and when a Surviving Person duly assumes all of the obligations and
covenants of the Company pursuant to the Indenture and the Notes, except in the
case of a lease, the predecessor Person shall be relieved of all such
obligations.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the Indenture:
(a) default in the payment of interest on any Note issued pursuant
to the Indenture when the same becomes due and payable, and the
continuance of such default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if
any, on) any Note issued pursuant to the Indenture at its Maturity,
whether upon optional redemption, required repurchase (including pursuant
to a Change of Control Offer or an Asset Sale Offer) or otherwise or the
failure to make an offer to purchase any such Note as required;
(c) the Company fails to comply with any of its covenants or
agreements contained in "-- Change of Control," "-- Certain Covenants --
Limitation on Restricted Payments," "-- Certain Covenants -- Limitation
on Asset Sales," "-- Certain Covenants -- Limitation on Indebtedness,"
"-- Certain Covenants -- Limitations on Subsidiary Indebtedness and
Preferred Stock," "-- Certain Covenants -- Limitation on Sale and Lease-
back Transactions" or "-- Consolidation, Merger, Conveyance, Lease or
Transfer";
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(d) default in the performance, or breach, of any covenant or
warranty of the Company in the Indenture (other than a covenant or
warranty addressed in clause (a), (b) or (c) above) and continuance of
such Default or breach for a period of 60 days after written notice
thereof has been given to the Company by the Trustee or to the Company
and the Trustee by holders of at least 25% of the aggregate principal
amount at Stated Maturity of the outstanding Notes;
(e) Indebtedness of the Company or any Subsidiary (other than
Non-Recourse Indebtedness) is not paid when due within the applicable
grace period, if any, or is accelerated by the holders thereof and, in
either case, the principal amount of such unpaid or accelerated
Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more
final judgments against the Company or any Subsidiary in an uninsured or
unindemnified aggregate amount in excess of $10 million which is not
discharged, waived, appealed, stayed, bonded or satisfied for a period of
60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of
(i) a decree or order for relief in respect of the Company or any
Significant Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency, or other similar law
or (ii) a decree or order adjudging the Company or any Significant
Subsidiary a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company or any Significant Subsidiary under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency, or similar law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Subsidiary or of any substantial part of the Property or assets of the
Company or any Significant Subsidiary, or ordering the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary,
and the continuance of any such decree or order for relief or any such
other decree or order unstayed and in effect for a period of 60
consecutive days;
(h) (i) the commencement by the Company or any Significant
Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws,
as now or hereafter constituted, or any other applicable Federal, state
or foreign bankruptcy, insolvency or other similar law or of any other
case or proceeding to be adjudicated a bankrupt or insolvent; or (ii) the
consent by the Company or any Significant Subsidiary to the entry of a
decree or order for relief in respect of the Company or any Significant
Subsidiary in an involuntary case or proceeding under U.S. bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state, or foreign bankruptcy, insolvency or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against
the Company or any Significant Subsidiary; or (iii) the filing by the
Company or any Significant Subsidiary of a petition or answer or consent
seeking reorganization or relief under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other similar law; or (iv) the consent by the
Company or any Significant Subsidiary to the filing of such petition or
to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar official of the
Company or any Significant Subsidiary or of any substantial part of the
Property or assets of the Company or any Significant Subsidiary or of any
substantial part of the Property or assets of the Company or any
Significant Subsidiary, or the making by the Company or any Significant
Subsidiary of an assignment for the benefit of creditors; or (v) the
admission by the Company or any Significant Subsidiary in writing of its
inability to pay its debts generally as they become due; or (vi) the
taking of corporate action by the Company or any Significant Subsidiary
in furtherance of any such action; or
(i) any Guarantee shall for any reason cease to be, or be asserted
by the Company or any Guarantor, as applicable, not to be, in full force
and effect (except pursuant to the release of any such Guarantee in
accordance with the Indenture).
If any Event of Default (other than an Event of Default specified in
clause (g) or (h) above) occurs and is continuing, then and in every such case
the Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount at Stated Maturity of the Notes, may declare the principal
amount at Stated Maturity, premium, if any,
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and any accrued and unpaid interest on all such Notes then outstanding to be
immediately due and payable by a notice in writing to the Company (and to the
Trustee if given by holders of such Notes), and upon any such declaration all
amounts payable in respect of the Notes will become and be immediately due and
payable. If any Event of Default specified in clause (g) or (h) above occurs,
the principal amount at Stated Maturity, premium, if any, and any accrued and
unpaid interest on the Notes then outstanding shall become immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder of such Notes. In the event of a declaration of acceleration because an
Event of Default set forth in clause (e) above has occurred and is continuing,
such declaration of acceleration shall be automatically rescinded and annulled
if the event of default triggering such Event of Default pursuant to clause (e)
shall be remedied, or cured or waived by the holders of the relevant
Indebtedness within 30 days after such event of default; provided that no
judgment or decree for the payment of the money due on the Notes has been
obtained by the Trustee as provided in the Indenture. Under certain
circumstances, the holders of a majority in principal amount at Stated Maturity
of the outstanding Notes by notice to the Company and the Trustee may rescind an
acceleration and its consequences.
The holders of a majority in principal amount at Stated Maturity of the
Notes then outstanding by notice to the Trustee may waive an existing Default
and its consequences under the Indenture except (a) a Default in the payment of
interest on, or the principal of, such Notes or (b) a Default in respect of a
provision that under the "Defeasance and Discharge" section of the Indenture
cannot be amended without the consent of each holder of Notes affected. Subject
to the provisions of the Indenture relating to the duties of the Trustee, the
Trustee is under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the holders, unless such
holders have offered to such Trustee reasonable security or indemnity. Subject
to the provisions of the Indenture and applicable law, the holders of a majority
in aggregate principal amount at Stated Maturity of the Notes at the time
outstanding have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred upon the Trustee.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required within five
Business Days after becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement describing such Default or Event of Default,
its status and what action the Company is taking or proposes to take with
respect thereto.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, the Subsidiaries or the Unrestricted Subsidiaries, as such, shall have
any liability for any obligations of the Company under the Notes, the Guarantees
or the Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Securities and Exchange Commission that such a waiver is against public policy.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company, the Guarantors and the Trustee may, at any time and from
time to time, without notice to or consent of any holder, enter into one or more
indentures supplemental to the Indenture (a) to evidence the succession of
another Person to the Company and the Guarantors and the assumption by such
successor of the covenants and Obligations of the Company under the Indenture
and contained in the Notes and the Guarantors contained in the Indenture and the
Guarantees, (b) to add to the covenants of the Company, for the benefit of the
holders, or to surrender any right or power conferred upon the Company or the
Guarantors by the Indenture, (c) to add any additional Events of Default, (d) to
provide for uncertificated Notes in addition to or in place of certificated
Notes, (e) to evidence and provide for the acceptance of appointment under the
Indenture by the successor Trustee, (f) to secure the Notes and/or the
Guarantees, (g) to cure any ambiguity, to correct or supplement any provision in
the Indenture which may be inconsistent with any other provision therein or to
add any other provisions with respect to matters or questions arising under the
Indenture, provided that such actions will not adversely affect the interests of
the holders in any material respect or (h) to add or release any Guarantor
pursuant to the terms of the Indenture.
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With the consent of the holders of not less than a majority in principal
amount at Stated Maturity of the outstanding Notes (including consents obtained
in connection with a tender offer or exchange offer for the Notes), the Company,
the Guarantors and the Trustee may enter into one or more indentures
supplemental to the Indenture for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Indenture or
of modifying in any manner the rights of the holders; provided, however, that no
such supplemental indenture will, without the consent of the holder of each
outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, or reduce the
principal amount thereof (or premium, if any), or the interest thereon that
would be due and payable upon Maturity thereof, or change the place of payment
where, or the coin or currency in which, any Note or any premium or interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof, (b) reduce the
percentage in principal amount at Stated Maturity of the Outstanding Notes, the
consent of whose Holders is necessary for any such supplemental indenture or
required for any waiver of compliance with certain provisions of the Indenture,
or certain Defaults thereunder, (c) modify the Obligations of the Company to
make offers to purchase Notes upon a Change of Control or from the proceeds of
Asset Sales, (d) subordinate in right of payment, or otherwise subordinate, the
Notes or the Guarantees to any other Indebtedness, (e) amend, supplement or
otherwise modify the provisions of the Indenture relating to Guarantees or (f)
modify any of the provisions of this paragraph (except to increase any
percentage set forth herein or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holders of
each outstanding Note affected thereby).
The holders of not less than a majority in principal amount at Stated
Maturity of the outstanding Notes may, by notice to the Trustee, waive an
existing Default under the Indenture and its consequences, except a Default or
Event of Default (a) in the payment of the principal of or interest on any Note
or (b) in respect of a covenant or provision hereof which under the proviso to
the prior paragraph cannot be modified or amended without the consent of the
holder of each outstanding Note affected.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Company may terminate its obligations and the obligations of the
Guarantors under the Notes, the Indenture, and the Guarantees when (i) either
(A) all outstanding Notes have been delivered to the Trustee for cancellation or
(B) all such Notes not therefore delivered to the Trustee for cancellation have
become due and payable, will become due and payable within one year or are to be
called for redemption within one year under irrevocable arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name and at the expense of the Company, and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of
(premium, if any, on) and interest to the date of deposit or Maturity or date of
redemption; (ii) the Company has paid or caused to be paid all sums then due and
payable by the Company under the Indenture; and (iii) the Company has delivered
an Officers' Certificate and an opinion of counsel relating to compliance with
the conditions set forth in the Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Notes and the Indenture and Guarantees shall cease to
be of further effect as to all outstanding Notes (except as to (i) rights of
registration of transfer, substitution and exchange of Notes, (ii) the Company's
right of optional redemption, (iii) rights of holders to receive payments of
principal of, premium, if any, and interest on the Notes (but not the Change of
Control Purchase Price or the Asset Sale Offer Purchase Price) and any rights of
the holders with respect to such amounts, (iv) the rights, obligations and
immunities of the Trustee under the Indenture, and (v) certain other specified
provisions in the Indenture) or (b) cease to be under any obligation to comply
with certain restrictive covenants that are described in the Indenture, after
the irrevocable deposit by the Company with the Trustee, in trust for the
benefit of the holders, at any time prior to the Stated Maturity of the Notes,
of (A) money in an amount, (B) U.S. Government Obligations which through the
payment of interest and principal will provide, not later than one day before
the due date of payment in respect of such Notes, money in an amount, or (C) a
combination thereof sufficient to pay and discharge the principal of, premium,
if any on, and interest on, such Notes then outstanding on the dates on which
any such payments are due in accordance with the terms of the Indenture and of
such Notes. Such defeasance or covenant defeasance shall be deemed to occur only
if certain conditions are satisfied, including, among other things, delivery by
the Company to the
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Trustee of an opinion of outside counsel acceptable to the Trustee to the effect
that (i) such deposit, defeasance and discharge will not be deemed, or result
in, a taxable event for federal income tax purposes with respect to the holders;
and (ii) the Company's deposit will not result in the trust or such Trustee
being subject to regulation under the Investment Company Act of 1940.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no definition
is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (a)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a subsidiary
of such specified Person, and (b) Indebtedness existing and secured by an asset
acquired by such specified Person but not incurred in contemplation of such
acquisition.
"Adjusted Net Assets" of a Guarantor at any date shall mean the amount by
which the fair value of the properties and assets of such Guarantor exceeds the
total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities
incurred or assumed on such date), but excluding liabilities under its
Guarantee, of such Guarantor at such date.
"Affiliate" of any specified Person means another Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that beneficial ownership of 10% or more of the Voting Stock of a Person shall
be deemed to be control.
"Asset Sale" means any direct or indirect sale, conveyance, transfer,
lease or other disposition (including, without limitation, by way of merger or
consolidation or by means of a Sale and Lease-Back Transaction) by the Company
or any Subsidiary to any Person other than the Company, a Guarantor or a
Subsidiary, in one transaction, or a series of related transactions, of (i) any
Capital Stock of any Subsidiary (except for directors' qualifying shares or
minority interests sold to other Persons solely due to local law requirements
that there be more than one stockholder, but which are not in excess of what is
required for such purpose), or (ii) any other Property or assets of the Company
or any Subsidiary, other than (A) sales of drill-string components and obsolete
or worn out equipment in the ordinary course of business or other assets that,
in the Company's reasonable judgment, are no longer used or useful in the
conduct of the business of the Company and its Subsidiaries), (B) any drilling
contract, charter or other lease of Property or other assets entered into by the
Company or any Subsidiary in the ordinary course of business, (C) a Restricted
Payment or Restricted Investment permitted under "-- Certain Covenants --
Limitation on Restricted Payments," (D) a Change of Control, (E) a sale, lease,
consolidation, merger, continuance or the disposition of all or substantially
all of the assets of the Company and the Subsidiaries, taken as a whole in
compliance with the provision of the Indenture described in "-- Consolidation,
Merger, Conveyance, Lease or Transfer," (F) any trade or exchange by the Company
or any Subsidiary of one or more drilling rigs for one or more other drilling
rigs of like kind owned or held by another Person, provided that (x) the Fair
Value of the rig or rigs traded or exchanged by the Company or such Subsidiary
(including cash or cash equivalents to be delivered by the Company or such
Subsidiary) is reasonably equivalent to the Fair Value of the drilling rig or
rigs (together with cash or cash equivalents to be received by the Company or
such Subsidiary) or other assets having a Fair Market Value in excess of $10
million as determined by written appraisal by a nationally (or industry)
recognized investment banking firm or appraisal firm and (y) such exchange is
approved by a majority of the disinterested directors of the Company and (G) any
transfer of assets pursuant
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to a Permitted Investment. An Asset Sale shall include the requisition of title
to, seizure of or forfeiture of any Property or assets, or any actual or
constructive total loss or an agreed or compromised total loss of any Property
or assets.
"Attributable Indebtedness" in respect of a Sale and Lease-Back
Transaction means, at any date of determination, the present value (discounted
at the interest rate borne by the Notes, compounded annually) of the total
obligations of the lessee for rental payments (other than amounts required to be
paid on account of property taxes, maintenance, repairs, insurance, assessments,
utilities, operating and labor costs and other items which do not constitute
payments for property rights) during the remaining term of the lease (or to the
first date on which the lessee is permitted to terminate such lease without the
payment of a penalty) included in such Sale and Lease-Back Transaction
(including any period for which such lease has been extended).
"Average Life" means, as of any date, with respect to any debt security,
the quotient obtained by dividing (i) the sum of the products of (x) the number
of years from such date to the date of each scheduled principal payment
(including any sinking fund or mandatory redemption payment requirements) of
such debt security multiplied in each case by (y) the amount of such principal
payment by (ii) the sum of all such principal payments.
"Capital Lease Obligation" means, at any time as to any Person with
respect to any Property leased by such Person as lessee, the amount of the
liability with respect to such lease that would be required at such time to be
capitalized and accounted for as a capital lease on the balance sheet of such
Person prepared in accordance with GAAP.
"Capital Stock" in any Person means any and all shares, interests,
membership interests, partnership interests, participations or other equivalents
in the equity interest (however designated) in such Person and any rights (other
than debt securities convertible into an equity interest), warrants or options
to acquire any equity interest in such Person.
"Cash Proceeds" means, with respect to any Asset Sale by any Person, the
aggregate consideration received for such Asset Sale by such Person in the form
of cash or cash equivalents (including any amounts of insurance or other
proceeds received in connection with an Asset Sale of the type described in the
last sentence of the definition thereof), including payments in respect of
deferred payment obligations when received in the form of cash or cash
equivalents (except to the extent that such obligations are financed or sold
with recourse to such Person or any subsidiary thereof).
"Change of Control" means (i) a determination by the Company that any
Person or group (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act)
has become the direct or beneficial owner (as defined in Rule 13d-3 under the
Exchange Act) of more than 50% of the Voting Stock of the Company other than
Permitted Holders; (ii) the Company is merged with or into or consolidated with
another corporation and, immediately after giving effect to the merger or
consolidation, less than 50% of the outstanding voting securities entitled to
vote generally in the election of directors or persons who serve similar
functions of the surviving or resulting entity are then beneficially owned
(within the meaning of Rule 13d-3 of the Exchange Act) in the aggregate by (x)
the stockholders of the Company immediately prior to such merger or
consolidation, or (y) if the record date has been set to determine the
stockholders of the Company entitled to vote on such merger or consolidation,
the stockholders of the Company as of such a record date; (iii) the Company,
either individually or in conjunction with one or more Subsidiaries, sells,
conveys, transfers or leases, or the Subsidiaries sell, convey, transfer or
lease, all or substantially all of the assets of the Company or the Company and
the Subsidiaries, taken as a whole (either in one transaction or a series of
related transactions), including Capital Stock of the Subsidiaries, to any
Person (other than a Wholly Owned Subsidiary); (iv) the liquidation or
dissolution of the Company; or (v) the first day on which a majority of the
individuals who constitute the Board of Directors of the Company are not
Continuing Directors.
"Consolidated Interest Coverage Ratio" means as of the date of the
transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio (the "Transaction Date"), the ratio of (i) the lesser of the
aggregate amount of EBITDA of the Company and its consolidated Subsidiaries for
either (a) the four fiscal quarters immediately prior to the applicable
Transaction Date for which financial information in respect thereof is available
or (b) the immediately preceding fiscal quarter for which financial information
in respect thereof is available multiplied by four (the period yielding such
lesser amount shall be the "Determination Period"), to (ii) the aggregate
Consolidated Interest Expense of the Company and its consolidated Subsidiaries
that is anticipated to accrue during a period consisting of the
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fiscal quarter in which the Transaction Date occurs and the three fiscal
quarters immediately subsequent thereto (based upon the pro forma amount and
maturity of, and interest payments in respect of, Indebtedness of the Company
and its consolidated Subsidiaries expected by the Company to be outstanding on
the Transaction Date), assuming for the purposes of this measurement the
continuation of market interest rates prevailing on the Transaction Date and
base interest rates in respect of floating interest rate obligations equal to
the base interest rates on such obligations in effect as of the Transaction
Date, provided that if the Company or any of its consolidated Subsidiaries is a
party to any Interest Swap Obligation that would have the effect of changing the
interest rate on any Indebtedness of the Company or any of its consolidated
Subsidiaries for such four-quarter period (or portion thereof), the resulting
rate shall be used for such four-quarter period (or portion thereof); provided,
further, that any Consolidated Interest Expense of the Company with respect to
Indebtedness incurred or retired by the Company or any of its Subsidiaries
during the fiscal quarter in which the Transaction Date occurs shall be
calculated as if such debt was incurred or retired on the first day of the
fiscal quarter in which the Transaction Date occurs; provided, further, that if
the transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio would have the effect of increasing or decreasing EBITDA in the
future and if such increase or decrease is readily quantifiable and is
attributable to such transaction, EBITDA shall be calculated on a pro forma
basis as if such transaction had occurred on the first day of the Determination
Period referred to in clause (i) of this definition, and if, during the same
Determination Period, (x) the Company or any of its consolidated Subsidiaries
shall have engaged in any Asset Sale, EBITDA for such period shall be reduced by
an amount equal to the EBITDA (if positive), or increased by an amount equal to
the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale for such period calculated on a pro forma basis as if
such Asset Sale and any related retirement of Indebtedness had occurred on the
first day of such period or (y) after the Issue Date, the Company or any of its
consolidated Subsidiaries shall have acquired any material assets other than in
the ordinary course of business, EBITDA and Consolidated Interest Expense shall
be calculated on a pro forma basis as if such acquisition had occurred on the
first day of such period.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication (A) the sum of (i) the aggregate amount of cash and
noncash interest expense (including capitalized interest) of such Person and its
subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP in respect of Indebtedness (including, without limitation, (v) any
amortization of debt discount, (w) net costs associated with Interest Swap
Obligations (including any amortization of discounts), (x) the interest portion
of any deferred payment obligation calculated in accordance with the effective
interest method, (y) all accrued interest and (z) all commissions, discounts and
other fees and charges owed with respect to letters of credit, bankers
acceptances or similar facilities) paid or accrued, or scheduled to be paid or
accrued, during such period; (ii) dividends on Preferred Stock or Redeemable
Stock of such Person (and Preferred Stock or Redeemable Stock of its
subsidiaries if paid to a Person other than such Person or its subsidiaries)
declared and payable in cash; (iii) the portion of any rental obligation of such
Person or its subsidiaries in respect of any Capital Lease Obligation allocable
to interest expense in accordance with GAAP; (iv) the portion of any rental
obligation of such Person or its subsidiaries in respect of any Sale and
Lease-Back Transaction allocable to interest expense (determined as if such were
treated as a Capital Lease Obligation); and (v) to the extent any debt of any
other Person is guaranteed by such Person or any of its subsidiaries, the
aggregate amount of interest paid, accrued or scheduled to be paid or accrued,
by such other Person during such period attributable to any such debt, less (B)
to the extent included in (A) above, amortization or write-off of deferred
financing costs of such Person and its subsidiaries during such period and any
charge related or any premium or penalty paid in connection with redeeming or
retiring any Indebtedness of such Person and its subsidiaries prior to its
stated maturity; in the case of both (A) and (B) above, after elimination of
intercompany accounts among such Person and its subsidiaries and as determined
in accordance with GAAP. For purposes of clause (ii) above, dividend
requirements attributable to any Preferred Stock or Redeemable Stock shall be
deemed to be an amount equal to the amount of dividend requirements on such
Preferred Stock or Redeemable Stock times a fraction, the numerator of which is
one, and the denominator of which is one minus the applicable combined federal,
state, local and foreign income tax rate of the Company and its Subsidiaries
(expressed as a decimal), on a consolidated basis, for the fiscal year
immediately preceding the date of the transaction giving rise to the need to
calculate Consolidated Interest Expense.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss, as the case may be) of such Person and its
subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP, provided that there shall be excluded therefrom, without duplication,
(i) any net income of any Unrestricted
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Subsidiary, except that the Company's or any Subsidiary's interest in the net
income of such Unrestricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash or cash equivalents
actually distributed by such Unrestricted Subsidiary during such period to the
Company or a Subsidiary as a dividend or other distribution, (ii) gains and
losses, net of taxes, from Asset Sales or reserves relating thereto, (iii) the
net income of any Person that is not a subsidiary or that is accounted for by
the equity method of accounting which shall be included only to the extent of
the amount of dividends or distributions paid to such Person or its
subsidiaries, (iv) items (but not loss items) classified as extraordinary,
unusual or nonrecurring (other than the tax benefit, if any, of the utilization
of net operating loss carryforwards or alternative minimum tax credits), (v) the
net income (but not net loss) of any Person acquired by such specified Person or
any of its subsidiaries in a pooling-of-interests transaction for any period
prior to the date of such acquisition, (vi) any gain or loss, net of taxes,
realized on the termination of any employee pension benefit plan, (vii) the net
income (but not net loss) of any subsidiary of such specified Person to the
extent that the transfer to that Person of that income is not at the time
permitted, directly or indirectly, by any means (including by dividend,
distribution, advance or loan or otherwise), by operation of the terms of its
charter or any agreement with a Person other than with such specified Person,
instrument held by a Person other than by such specified Person, judgment,
decree, order, statute, law, rule or governmental regulations applicable to such
subsidiary or its stockholders, except for any dividends or distributions
actually paid by such subsidiary to such Person, (viii) with regard to a
non-Wholly Owned Subsidiary, any aggregate net income (or loss) in excess of
such Person's or such subsidiary's pro rata share of such non-Wholly Owned
Subsidiary's net income (or loss) and (ix) the cumulative effect of any changes
in accounting principles.
"Consolidated Net Worth" of any Person means, as of any date, the sum of
the Capital Stock and additional paid-in capital plus retained earnings (or
minus accumulated deficit) on a consolidated basis at such date, less amounts
attributable to Redeemable Stock of such Person or any of its subsidiaries with
each item determined in accordance with GAAP.
"Continuing Director" means an individual who (i) is a member of the
Board of Directors of the Company and (ii) either (A) was a member of the Board
of Directors of the Company on the Issue Date or (B) whose nomination for
election or election to the Board of Directors of the Company was approved by
vote of at least a majority of the directors then still in office who were
either directors on the Issue Date or whose election or nomination for election
was previously so approved.
"Currency Hedge Obligations" means, at any time as to any Person, the
obligations of such Person at such time which were incurred in the ordinary
course of business pursuant to any foreign currency exchange agreement, option
or future contract or other similar agreement or arrangement designed to protect
against or manage such Person's or any of its subsidiaries exposure to
fluctuations in foreign currency exchange rates.
"Default" means any event, act or condition the occurrence of which is,
or after notice or the passage time or both would be, an Event of Default.
"Determination Period" has the meaning specified under clause (i) of the
definition of "Consolidated Interest Coverage Ratio."
"EBITDA" means, with respect to any Person for any period, the sum of,
without duplication, the amounts for such period, taken as a single accounting
period, of the Consolidated Net Income of such Person for such period, plus to
the extent reflected in the income statement of such Person for such period from
which Consolidated Net Income is determined, without duplication, (i)
Consolidated Interest Expense, (ii) income tax expense, (iii) depreciation
expense, (iv) amortization expense, (v) any charge related to any premium or
penalty paid in connection with redeeming or retiring any Indebtedness prior to
its stated maturity and (vi) any other non-cash charges and minus, to the extent
reflected in such income statement, any non-cash credits that had the effect of
increasing Consolidated Net Income of such Person for such period.
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"Fair Market Value" means, with respect to consideration or other amount
received or to be received pursuant to any transaction by any Person, the fair
market value of such consideration or other amount as determined in good faith
by the Board of Directors of the Company.
"Fair Value" means, with respect to any asset or Property, the price
which could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction.
"GAAP" means, at any date, United States generally accepted accounting
principles, consistently applied, as set forth in the opinions of the Accounting
Principles Board of the American Institute of Certified Public Accountants
("AICPA") and statements of the Financial Accounting Standards Board, or in such
other statements by such other entity as may be designated by the AICPA, that
are applicable to the circumstances as of the date of determination; provided,
however, that all calculations made for purposes of determining compliance with
the provisions set forth in the Indenture shall utilize GAAP in effect at the
Issue Date.
"Guarantee" means any guarantee of the Notes by any Guarantor in
accordance with the provisions described under "-- Guarantees of Notes."
"Guarantor" means each Subsidiary of the Company that is required to
guarantee the Company's Obligations under the Notes and the Indenture as
described in "-- Guarantees of Notes" and any other Subsidiary of the Company
that executes a supplemental indenture in which such Subsidiary agrees to
guarantee the Company's Obligations under the Notes and the Indenture.
"incur" means, with respect to any Indebtedness or other obligation of
any Person, to create, issue, suffer to exist, incur (by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP,
of any such Indebtedness or obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurrable" and "incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness. Indebtedness otherwise
incurred by a Person before it becomes a Subsidiary shall be deemed to have been
incurred at the time at which it becomes a Subsidiary.
"Indebtedness" as applied to any Person means, at any time, without
duplication, whether recourse is to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligation of such Person for
borrowed money; (ii) any obligation of such Person evidenced by bonds,
debentures, notes or other similar instruments, excluding accounts payable and
accrued liabilities arising in the ordinary course of business; (iii) any
obligation of such Person for all or any part of the purchase price of Property
or for the cost of Property constructed or of improvements thereto (including
any obligation under or in connection with any letter of credit related
thereto), other than accounts payable incurred and accrued liabilities arising
in respect of Property and services purchased in the ordinary course of
business; (iv) any obligation of such Person upon which interest charges are
customarily paid (other than accounts payable incurred in the ordinary course of
business); (v) any obligation of such Person under conditional sale or other
title retention agreements relating to purchased Property; (vi) any obligation
of such Person issued or assumed as the deferred purchase price of Property
(other than accounts payable incurred in the ordinary course of business; (vii)
any Capital Lease Obligation or Attributable Indebtedness pursuant to any Sale
and Lease-Back Transaction of such Person; (viii) any obligation of any other
Person secured by (or for which the obligee thereof has an existing right,
contingent or otherwise, to be secured by) any Lien on Property owned or
acquired, whether or not any obligation secured thereby has been assumed, by
such Person; (ix) any obligation of such Person in respect of any letter of
credit supporting any obligation of any other Person described in clauses (i)
through (viii); (x) the maximum fixed repurchase price of any Redeemable Stock
of such Person (or if such Person is a Subsidiary, any Preferred Stock of such
Person); (xi) the notional amount of any Interest Swap Obligation or Currency
Hedge Obligation of such Person at the time of determination; and (xii) any
obligation under a bond, note, payment guarantee or similar instrument which is
in economic effect a guarantee, regardless of its characterization (other than
an endorsement in the ordinary course of business), with respect to any
Indebtedness of another Person, to the extent guaranteed. For purposes of the
preceding
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sentence, the maximum fixed repurchase price of any Redeemable Stock or
subsidiary Preferred Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Stock or subsidiary
Preferred Stock as if such Redeemable Stock or subsidiary Preferred Stock were
repurchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture Supplement; provided, however, that if such Redeemable
Stock or subsidiary Preferred Stock is not then permitted to be repurchased, the
repurchase price shall be the book value of such Redeemable Stock or subsidiary
Preferred Stock. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and the maximum liability of any guarantees at such date;
provided that for purposes of calculating the amount of any non-interest bearing
or other discount security, such Indebtedness shall be deemed to be the
principal amount thereof that would be shown on the balance sheet of the issuer
dated such date prepared in accordance with GAAP but that such security shall be
deemed to have been incurred only on the date of the original issuance thereof.
"Interest Swap Obligation" means, with respect to any Person, the
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its subsidiaries
exposure to fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct, indirect
investment in another Person, whether by means of a share purchase, capital
contribution, loan, advance (other than advances to employees for moving and
travel expenses, drawing accounts and similar expenditures in the ordinary
course of business) or similar credit extension constituting Indebtedness of
such other Person, and any guarantee of Indebtedness of any other Person;
provided that the term "Investment" shall not include any transaction involving
the purchase or other acquisition (including by way of merger) of Property
(including Capital Stock) by the Company or any Subsidiary in exchange for
Capital Stock (other than Redeemable Stock) of the Company. The amount of any
Person's Investment shall be the original cost of such Investment to such
Person, plus the cost of all additions thereto paid by such Person, and minus
the amount of any portion of such Investment repaid or loaned to such Person as
a repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write- ups,
writedowns, or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property or assets other
than cash, such Property or assets shall be valued at its Fair Value at the time
of such transfer as determined in good faith by the board of directors (or
comparable body) of the Person making such transfer. The Company shall be deemed
to make an "Investment" in the amount of the Fair Value of the Assets of a
Subsidiary at the time such Subsidiary is designated an Unrestricted Subsidiary.
"Issue Date" means the date on which the Notes are first authenticated
and delivered under the Indenture.
"Joint Venture" means any Person (other than a Guarantor) designated as
such by a resolution of the Board of Directors of the Company and as to which
(i) the Company, any Guarantor or any Joint Venture owns less than 50% of the
Capital Stock of such Person; (ii) no more than ten unaffiliated Persons own of
record any Capital Stock of such Person; (iii) at all times, each such Person
owns the same proportion of each class of Capital Stock of such Person
outstanding at such time; (iv) no Indebtedness of such Person is or becomes
outstanding other than Non-Recourse Indebtedness; (v) there exist no consensual
encumbrances or restrictions on the ability of such Person to (x) pay, directly
or indirectly, dividends or make any other distributions in respect of its
Capital Stock to the holders of its Capital Stock or (y) pay any Indebtedness or
other obligation owed to the holders of its Capital Stock or (z) make any
Investment in the holders of its Capital Stock, in each case other than the
types of consensual encumbrances or restrictions that would be permitted by the
"Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries"
covenant if such Person were a Subsidiary; and (vi) the business engaged in by
such Person is a Related Business.
"Lien" means any mortgage, pledge, hypothecation, charge, assignment,
deposit arrangement, encumbrance, security interest, lien (statutory or other),
or preference, priority or other security or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
agreement to give or grant a Lien or any lease, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).
"Loan Agreements" means the Term Loan, the Revolving Loan and the Top
Drive Notes.
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"Maturity" means the date on which the principal of a Note becomes due
and payable as provided therein or in the Indenture, whether at the Stated
Maturity or the Change of Control Payment Date or purchase date established
pursuant to the terms of the Indenture for an Asset Sale Offer or by declaration
of acceleration, call for redemption or otherwise.
"Net Available Proceeds" means, as to any Asset Sale, the Cash Proceeds
therefrom, net of all legal and title expenses, commissions and other fees and
expenses incurred (including, without limitation, fees and expenses of legal
counsel and accountants and fees, expenses, discounts or commissions of
underwriters, placement agents and investment bankers), and all Federal, state,
foreign, recording and local taxes payable or provided for as a consequence of
such Asset Sale, net of all payments made to any Person other than the Company
or a Subsidiary on any Indebtedness which is secured by such assets, in
accordance with the terms of any Lien upon or with respect to such assets, or
which must by its terms, or in order to obtain a necessary consent to such Asset
Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale
and, as for any Asset Sale by a Subsidiary, net of the equity interest in such
Cash Proceeds of any holder of Capital Stock of such Subsidiary (other than the
Company, any other Subsidiary or any Affiliate of the Company or any such other
Subsidiary) and net of appropriate amounts to be provided by the Company or any
Subsidiary of the Company, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale and
retained by the Company or any Subsidiary of the Company, as the case may be,
after such Asset Sale including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of an Unrestricted Subsidiary or a foreign Subsidiary not
constituting a Guarantor as to which (a) neither the Company nor any other
Subsidiary (other than an Unrestricted Subsidiary or a Subsidiary of such
foreign Subsidiary) (i) provides credit support constituting Indebtedness or
(ii) is directly or indirectly liable for such Indebtedness and (b) no default
with respect to such Indebtedness (including any rights which the holders
thereof may have to take enforcement action against an Unrestricted Subsidiary
or such foreign Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of the Company or its other Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Obligations" means, with respect to any Indebtedness, any obligation
thereunder, including, without limitation, principal, premium and interest
(including post petition interest thereon), penalties, fees, costs, expenses,
indemnifications, reimbursements, damages and other liabilities.
"Obligors" means the Company and the Guarantors, collectively; "Obligor"
means the Company or any Guarantor.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President, the Chief Executive Officer,
the Chief Operating Officer or a Vice President, and by the Chief Financial
Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company or a Subsidiary and
delivered to the Trustee, which shall comply with the Indenture.
"Permitted Holders" means the parties to the Stockholders and Voting
Agreement.
"Permitted Indebtedness" means (a) Indebtedness of the Company under the
Notes; (b) Indebtedness under the Loan Agreements; (c) Indebtedness (and any
guarantee thereof) under one or more credit or revolving Loan Agreements with a
bank or syndicate of banks or financial institutions or other lenders, as such
may be amended, modified, revised, extended, replaced, or refunded from time to
time, provided that at the date such Indebtedness is incurred and after giving
effect to the incurrence of such Indebtedness, the aggregate amount of all
Indebtedness outstanding at such time under this clause (c) shall not exceed $50
million, less any amounts derived from Asset Sales and applied to the required
permanent reduction of Senior Debt (and a permanent reduction of the related
commitment to lend or amount available to be reborrowed in the case of a
revolving Loan Agreement) under such Loan Agreements as contemplated by the
"Limitation on Asset Sales" covenant; (d) Indebtedness of the Company or any
Subsidiary under
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Interest Swap Obligations, provided that (i) such Interest Swap Obligations are
related to payment obligations on Indebtedness otherwise permitted under the
covenants described in "-- Certain Covenants -- Limitation on Indebtedness" and
(ii) the notional principal amount of such Interest Swap Obligations does not
exceed the principal amount of the Indebtedness to which such Interest Swap
Obligations relate; (e) Indebtedness of the Company or any Subsidiary under
Currency Hedge Obligations, provided that (i) such Currency Hedge Obligations
are related to payment obligations on Indebtedness otherwise permitted under the
covenants described in "-- Certain Covenants -- Limitation on Indebtedness" or
to the foreign currency cash flows reasonably expected to be generated by the
Company and the Subsidiaries and (ii) the notional principal amount of such
Currency Hedge Obligations does not exceed the principal amount of the
Indebtedness and the amount of the foreign currency cash flows to which such
Currency Hedge Obligations relate; (f) Indebtedness of the Company or any
Subsidiary outstanding on the Issue Date; (g) the Guarantees of the Notes (and
any assumption of the Obligations guaranteed thereby); (h) Indebtedness of the
Company or any Subsidiary in respect of bid performance bonds, surety bonds,
appeal bonds and letters of credit or similar arrangements issued for the
account of the Company or any Subsidiary, in each case in the ordinary course of
business and other than for an obligation for money borrowed; (i) Indebtedness
of the Company to a Guarantor or other Wholly Owned Subsidiary and Indebtedness
of a Guarantor or other Wholly Owned Subsidiary to the Company or another
Guarantor or other Wholly Owned Subsidiary; provided that upon any subsequent
issuance or transfer of any Capital Stock or any other event which results in
any such Guarantor ceasing to be a Guarantor or such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary, as the case may be, or any other
subsequent transfer of any such Indebtedness (except to the Company or a
Guarantor or other Wholly Owned Subsidiary), such Indebtedness shall be deemed,
in each case, to be incurred and shall be treated as an incurrence for purposes
of the "Limitation on Indebtedness" covenants at the time the Guarantor in
question ceased to be a Guarantor or the Wholly Owned Subsidiary in question
ceased to be a Wholly Owned Subsidiary; (j) Subordinated Indebtedness of the
Company to an Unrestricted Subsidiary; (k) Indebtedness of the Company and its
Subsidiaries in connection with a purchase of the Notes pursuant to a Change of
Control Offer, provided that the aggregate principal amount of such Indebtedness
does not exceed 101% of the aggregate principal amount at Stated Maturity of the
Notes purchased pursuant to such Change of Control Offer; provided, further,
that such Indebtedness (A) has an Average Life equal to or greater than the
remaining Average Life of the Notes and (B) does not mature prior to one year
following the Stated Maturity of the Notes; (l) Permitted Refinancing
Indebtedness; (m) Permitted Subsidiary Refinancing Indebtedness; and (n)
additional Indebtedness in an aggregate principal amount not in excess of $5.0
million at any one time outstanding. So as to avoid duplication in determining
the amount of Permitted Indebtedness under any clause of this definition,
guarantees permitted to be incurred pursuant to the Indenture of, or obligations
permitted to be incurred pursuant to the Indenture in respect of letters of
credit supporting, Indebtedness otherwise included in the determination of such
amount shall not also be included. For purposes of determining compliance with
the covenant captioned "-- Limitation on Indebtedness," in the event that an
item of Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness or is entitled to be incurred pursuant to the first
paragraph of such covenant, the Company shall, in its sole discretion, classify
such item of Indebtedness in any manner that complies with this covenant and
such item of Indebtedness will be treated as having been incurred pursuant to
only one of such clauses or pursuant to the first paragraph of such covenant.
"Permitted Investments" means (a) certificates of deposit, bankers
acceptances, time deposits, Eurocurrency deposits and similar types of
Investments routinely offered by commercial banks organized in the United States
with final maturities of one year or less issued by commercial banks organized
in the United States having capital and surplus in excess of $300 million; (b)
commercial paper issued by any corporation, if such commercial paper has credit
ratings of at least "A-1" or its equivalent by S&P or at least "P-I" or its
equivalent by Moody's; (c) U.S. Government Obligations with a maturity of four
years or less; (d) repurchase obligations for instruments of the type described
in clause (c) with any bank meeting the qualifications specified in clause (a)
above; (e) shares of money market mutual or similar funds having assets in
excess of $100 million; (f) payroll advances in the ordinary course of business;
(g) other advances and loans to officers and employees of the Company or any
Subsidiary, so long as the aggregate principal amount of such advances and loans
does not exceed $500,000 at any one time outstanding; (h) Investments
represented by that portion of the proceeds from Asset Sales that is not
required to be Cash Proceeds by the covenant described in "-- Certain Covenants
- -- Limitation on Asset Sales"; (i) Investments made by the Company in Guarantors
or in its other Wholly Owned Subsidiaries (or any Person that will be a Wholly
Owned Subsidiary as a result of such Investment) or by a Subsidiary in the
Company or in one or more Guarantors or other Wholly Owned Subsidiaries (or any
Person that will
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be a Wholly Owned Subsidiary as a result of such Investment); (j) Investments in
stock, obligations or securities received in settlement of debts owing to the
Company or any Subsidiary as a result of bankruptcy or insolvency proceedings or
upon the foreclosure, perfection or enforcement of any Lien in favor of the
Company or any Subsidiary, in each case as to debt owing to the Company or any
Subsidiary that arose in the ordinary course of business of the Company or any
such Subsidiary or otherwise in the Company's reasonable credit judgment; (k)
certificates of deposit, bankers acceptances, time deposits, Eurocurrency
deposits and similar types of Investments routinely offered by commercial banks
organized in the United States with final maturities of one year or less and in
an aggregate amount not to exceed $5 million at any one time outstanding with a
commercial bank organized in the United States having capital and surplus in
excess of $75 million; (l) Interest Swap Obligations with respect to any
floating rate Indebtedness that is permitted by the terms of the Indenture to be
outstanding; (m) Currency Hedge Obligations, provided that such Currency Hedge
Obligations constitute Permitted Indebtedness permitted by clause (d) of the
definition thereof, (n) Investments in prepaid expenses, negotiable instruments
held for collection and lease, utility, worker's compensation and performance
and other similar deposits in the ordinary course of business; and (o)
Investments pursuant to any agreement or obligation of the Company or any
Subsidiary in effect on the Issue Date and listed on a schedule attached to the
Indenture.
"Permitted Liens" means (a) Liens in existence on the Issue Date; (b)
Liens created for the benefit of the Notes and/or the Guarantees; (c) Liens on
Property of a Person existing at the time such Person is merged or consolidated
with or into the Company or a Subsidiary (and not incurred as a result of, or in
anticipation of, such transaction), provided that any such Lien relates solely
to such Property; (d) Liens on Property existing at the time of the acquisition
thereof (and not incurred as a result of, or in anticipation of such
transaction), provided that any such Lien relates solely to such Property; (e)
Liens incurred or pledges and deposits made in connection with worker's
compensation, unemployment insurance and other social security benefits,
statutory obligations, bid, surety or appeal bonds, performance or tender bonds
or leases or other obligations of a like nature incurred in the ordinary course
of business; (f) Liens imposed by law or arising by operation of law, including,
without limitation, landlords', mechanics', carriers', warehousemen's,
materialmen's, suppliers' and vendors' Liens and Liens for master's and crew's
wages and other similar maritime Liens, and incurred in the ordinary course of
business for sums not delinquent or being contested in good faith, if such
reserves or other appropriate provisions, if any, as shall be required by GAAP
shall have been made with respect thereof; (g) zoning restrictions, easements,
licenses, covenants, reservations, restrictions on the use of real property and
defects, irregularities and deficiencies in title to real property that do not,
individually or in the aggregate, materially affect the ability of the Company
or any Subsidiary to conduct its business presently conducted; (h) Liens for
taxes or assessments or other governmental charges or levies not yet due and
payable, or the validity of which is being contested by the Company or a
Subsidiary in good faith and by appropriate proceedings upon stay of execution
or the enforcement thereof and for which adequate reserves in accordance with
GAAP or other appropriate provision has been made; (i) Liens to secure
Indebtedness incurred for the purpose of financing all or a part of the purchase
price or construction cost of Property acquired or constructed after the Issue
Date, provided that (1) the principal amount of Indebtedness secured by such
Liens shall not exceed 100% of the lesser of cost or Fair Market Value of the
Property so acquired or constructed plus transaction costs related thereto, (2)
such Liens shall not encumber any other assets or Property of the Company or any
Subsidiary (other than the proceeds thereof and accessions and upgrades thereto)
and (3) such Liens shall attach to such Property within 180 days of the date of
the completion of the construction or acquisition of such Property; (j) Liens
securing Capital Lease Obligations, provided, further, that such Liens secure
Capital Lease Obligations which, when combined with (1) the outstanding secured
Indebtedness of the Company and its Subsidiaries (other than Indebtedness
secured by Liens described under clauses (b) and (i) hereof) and (2) the
aggregate principal amount of all other Capital Lease Obligations of the Company
and Subsidiaries, does not exceed $5 million at any one time outstanding; (k)
Liens to secure any extension, renewal, refinancing or refunding (or successive
extensions, renewals, refinancings or refundings), in whole or in part, of any
Indebtedness secured by Liens referred to in the foregoing clauses (a), (c) and
(d), provided, further, that such Lien does not extend to any other Property of
the Company or any Subsidiary and the principal amount of the Indebtedness
secured by such Lien is not increased; (1) any charter or lease; (m) leases or
subleases of real property to other Persons; (n) Liens securing Permitted
Indebtedness described in clause (c) of the definition thereof, (o) judgment
liens not giving rise to an Event of Default so long as any appropriate legal
proceedings which may have been initiated for the review of such judgment shall
not have been finally terminated or the period within which such proceeding may
be initiated shall not have expired; (p) rights of off-set of banks and other
Persons; (q) liens in favor of the Company; (r) other deposits made to secure
liability to insurance
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carriers under insurance or self insurance arrangements; (s) Liens securing
reimbursement obligations under letters of credit, provided in each case that
such Liens cover only the title documents and related goods (and any proceeds
thereof) covered by the related letter of credit and (t) Liens or equitable
encumbrances deemed to exist by reason of a negative pledge or other agreements
to refrain from permitting Liens.
"Permitted Refinancing Indebtedness" means Indebtedness of the Company,
incurred in exchange for, or the net proceeds of which are used to renew,
extend, refinance, refund or repurchase, outstanding Indebtedness of the Company
which outstanding Indebtedness was incurred in accordance with, or is otherwise
permitted by, the terms of clauses (a) and (e) of the definition of "Permitted
Indebtedness," provided that (i) if the Indebtedness being renewed, extended,
refinanced, refunded or repurchased is pari passu with or subordinated in right
of payment (without regard to its being secured) to the Notes, then such new
Indebtedness is pari passu with or subordinated in right of payment (without
regard to its being secured) to, as the case may be, the Notes at least to the
same extent as the Indebtedness being renewed, extended, refinanced, refunded or
repurchased, (ii) such new Indebtedness is scheduled to mature later than the
Indebtedness being renewed, extended, refinanced, refunded or repurchased, (iii)
such new Indebtedness has an Average Life at the time such Indebtedness is
incurred that is greater than the Average Life of the Indebtedness being
renewed, extended, refinanced, refunded or repurchased, and (iv) such new
Indebtedness is in aggregate principal amount (or, if such Indebtedness is
issued at a price less than the principal amount thereof, the aggregate amount
of gross proceeds therefrom is) not in excess of the aggregate principal amount
then outstanding of the Indebtedness being renewed, extended, refinanced,
refunded or repurchased (or if the Indebtedness being renewed, extended,
refinanced, refunded or repurchased was issued at a price less than the
principal amount thereof, then not in excess of the amount of liability in
respect thereof determined in accordance with GAAP) plus the amount of
reasonable fees, expenses, and premium, if any, incurred by the Company or such
Subsidiary in connection therewith.
"Permitted Subsidiary Refinancing Indebtedness" means Indebtedness of any
Subsidiary, incurred in exchange for, or the net proceeds of which are used to
renew, extend, refinance, refund or repurchase, outstanding Indebtedness of such
Subsidiary which outstanding Indebtedness was incurred in accordance with, or is
otherwise permitted by, the terms of clauses (e) and (f) of the definition of
Permitted Indebtedness, provided that (i) if the Indebtedness being renewed,
extended, refinanced, refunded or repurchased is pari passu with or subordinated
in right of payment (without regard to its being secured) to the Guarantee of
such Subsidiary, then such new Indebtedness is pari passu with or subordinated
in right of payment (without regard to its being secured) to, as the case may
be, the Guarantee of such Subsidiary at least to the same extent as the
Indebtedness being renewed, extended, refinanced, refunded or repurchased, (ii)
such new Indebtedness is scheduled to mature later than the Indebtedness being
renewed, extended, refinanced, refunded or repurchased, (iii) such new
Indebtedness has an Average Life at the time such Indebtedness is incurred that
is greater than the Average Life of the Indebtedness being renewed, extended,
refinanced, refunded or repurchased, and (iv) such new Indebtedness is in an
aggregate principal amount (or, if such Indebtedness is issued at a price less
than the principal amount thereof, the aggregate amount of gross proceeds
therefrom is) not in excess of the aggregate principal amount then outstanding
of the Indebtedness being renewed, extended, refinanced, refunded or repurchased
(or if the Indebtedness being renewed, extended, refinanced, refunded or
repurchased was issued at a price less than the principal amount thereof, then
not in excess of the amount of liability in respect thereof determined in
accordance with GAAP) plus the amount of reasonable fees, expenses, and premium,
if any, incurred by the Company or such Subsidiary in connection therewith.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, incorporated or unincorporated association, joint
stock company, trust, unincorporated organization or government or other agency
or political subdivision thereof or other entity of any kind.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends and/or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares of
Capital Stock of at least one other class of such Person.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
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"Qualified Equity Offering" means an offering of Capital Stock (other
than Redeemable Stock) of the Company for cash, whether pursuant to an effective
registration statement under the Securities Act (other than on Form S-8) or any
private placement of Capital Stock (other than Redeemable Stock) of the Company
which offering or placement is consummated after the Issue Date.
"Redeemable Stock" means, with respect to any Person, any equity security
that by its terms or otherwise is required to be redeemed, or is redeemable at
the option of the holder thereof, at any time prior to one year following the
Stated Maturity of the Notes or is exchangeable into Indebtedness of such Person
or any of its subsidiaries.
"Related Business" means the contract drilling business and activities
incidental thereto and any business related, complimentary or ancillary thereto.
"Replacement Asset" means a Property or asset that, as determined by the
Board of Directors of the Company as evidenced by a Board Resolution, is used or
is useful in a Related Business.
"Restricted Investment" means any Investment in any Person, including an
Unrestricted Subsidiary or the designation of a Subsidiary as an Unrestricted
Subsidiary, other than a Permitted Investment.
"Restricted Payment" means to (i) declare or pay any dividend on, or make
any distribution in respect of, or purchase, redeem, retire or otherwise acquire
for value, any Capital Stock of the Company or any Affiliate of the Company, or
warrants, rights or options to acquire such Capital Stock, other than (x)
dividends payable solely in the Capital Stock (other than Redeemable Stock) of
the Company or such Affiliate, as the case may be, or in warrants, rights or
options to acquire such Capital Stock and (y) dividends or distributions by a
Subsidiary to the Company or to a Wholly Owned Subsidiary; (ii) make any
principal payment on, or redeem, repurchase, defease (including an in-substance
or legal defeasance) or otherwise acquire or retire for value (including
pursuant to mandatory repurchase covenants), prior to any scheduled principal
payment, scheduled sinking fund payment or other stated maturity, Indebtedness
of the Company or any Subsidiary which is subordinated (whether pursuant to its
terms or by operation of law) in right of payment to the Notes or the
Guarantees, as applicable; or (iii) make any Restricted Investment in any
Person.
"Sale and Lease-Back Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a subsidiary of such Person and is thereafter leased back from
the purchaser or transferee thereof by such Person or one of its subsidiaries.
"Senior Debt" means any Indebtedness incurred by the Company, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is subordinated in right of payment to the Notes, provided that Senior Debt will
not include (a) any liability for federal, state, local or other taxes owed or
owing, (b) any Indebtedness owing to any Subsidiaries of the Company, (c) any
trade payables or (d) any Indebtedness that is incurred in violation of the
Indenture.
"Significant Subsidiary" means a Subsidiary that is a "significant
subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities
Act and the Exchange Act.
"Stated Maturity" when used with respect to a Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Subordinated Indebtedness" means any Indebtedness of the Company or any
Guarantor that is subordinated in right of payment to the Notes or the
Guarantees, as the case may be, and does not mature prior to the Stated Maturity
of the Notes.
"subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding Voting Stock of which is owned, directly or
indirectly, by such Person, or by one or more other subsidiaries of such Person,
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or by such Person and one or more other subsidiaries of such Person, (ii) any
general partnership, limited liability company, joint venture or similar entity,
more than 50% of the outstanding partnership, membership or similar interest of
which is owned, directly or indirectly, by such Person, or by one or more other
subsidiaries of such Person, or by such Person and one or more other
subsidiaries of such Person and (iii) any limited partnership of which such
Person or any subsidiary of such Person is a general partner. For purposes of
this definition, any directors' qualifying shares or investments by foreign
nationals mandated by applicable law shall be disregarded in determining the
ownership of a Subsidiary.
"Subsidiary" means a subsidiary of the Company other than an
Unrestricted Subsidiary.
"Transaction Date" has the meaning specified within the definition of
Consolidated Interest Coverage Ratio.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged; (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case under
clauses (i) or (ii) above, are not callable or redeemable at the option of the
issuers thereof; or (iii) depository receipts issued by a bank or trust company
as custodian with respect to any such U.S. Government Obligations or a specific
payment of interest on or principal of any such U.S. Government Obligation held
by such custodian for the account of the holder of a Depository receipt,
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such Depository
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation evidenced by such Depository receipt.
"Unrestricted Subsidiary" means any subsidiary of the Company that the
Company has classified as an Unrestricted Subsidiary and that has not been
reclassified as a Subsidiary pursuant to the terms of the Indenture.
"Voting Stock" means with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holder thereof (whether
at all times or at the times that such class of Capital Stock has voting power
by reason of the happening of any contingency) to vote in the election of
members of the board of directors or comparable body of such Person.
"Wholly Owned Subsidiary" means any Subsidiary to the extent (i) all of
the Capital Stock or other ownership interests in such Subsidiary, other than
any directors' qualifying shares mandated by applicable law, is owned directly
or indirectly by the Company or (ii) such Subsidiary is organized in a foreign
jurisdiction and is required by the applicable laws and regulations of such
foreign jurisdiction to be partially owned by the government of such foreign
jurisdiction or individual or corporate citizens of such foreign jurisdiction in
order for such Subsidiary to transact business in such foreign jurisdiction,
provided that the Company, directly or indirectly, owns the remaining Capital
Stock or ownership interest in such Subsidiary and, by contract or otherwise,
controls the management and business of such Subsidiary and derives the economic
benefits of ownership of such Subsidiary to substantially the same extent as if
such Subsidiary were a wholly owned Subsidiary.
BOOK-ENTRY, DELIVERY AND FORM
The Exchange Notes will initially be issued in the form of one or more
Global Notes (the "Global Notes"). The Global Notes will be deposited on the
date of the closing of the sale of the Notes offered hereby (the "Closing Date")
with, or on behalf of, DTC and registered in the name of Cede & Co., as nominee
for DTC. Transfer of beneficial interests in any Global Notes will be subject to
the applicable rules and procedures of DTC and its Direct or Indirect
Participants (including, if applicable, those of Euroclear and Cedel), which may
change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See "--
Transfer of Interests in Global Notes for Certificated Notes."
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Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and Cedel. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect, custodial relationship with
a Direct Participant (collectively, the "Indirect Participants").
DTC has advised the Company that, pursuant to DTC's procedures, (i) upon
deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes allocated by the Initial Purchasers to such Direct
Participants, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. For certain other
restrictions on the transferability of the Notes see "-- Transfers of Interests
in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "-- TRANSFER OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company, the Guarantors and the
Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, if any, and interest on Global
Notes registered in the name of DTC or its nominee will be payable by the
Trustee to DTC or its nominee as the registered holder under the Indenture.
Consequently, neither the Company, the Trustee nor any agent of the Company, or
the Trustee has or will leave any responsibility or liability for (i) any aspect
of DTC's records or any Direct Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in the
Global Notes or for maintaining, supervising or reviewing any of DTC's records
or any Direct Participant's or Indirect Participant's records relating to the
beneficial ownership interests in any Global Note or (ii) any other matter
relating to the actions and practices of DTC or any of its Direct Participants
or Indirect Participants.
DTC has advised the Company that its current payment practice (for
payments of principal, interest and the like) with respect to securities such as
the Notes is to credit the accounts of the relevant Direct Participants with
such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be
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the responsibility of DTC, the Trustee, the Company or the Guarantors. Neither
the Company, the Guarantors nor the Trustee will be liable for any delay by DTC
or its Direct Participants or Indirect Participants in identifying the
beneficial owners of the Notes and the Company and the Trustee may conclusively
rely on and will be protected in relying on instructions from DTC or its nominee
as the registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System
and, therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Notes through Euroclear or Cedel) who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interest in the Notes through Euroclear and Cedel will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose accounts interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
as to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See "--
Transfers of Interests in Global Notes for Certificated Notes."
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in
registered, certificated form without interest coupons ("Certificated Notes") if
(i) DTC (x) notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes and the Company thereupon fails to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Certificated Notes or
(iii) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes. In any such case, the Company will notify the
Trustee in writing that, upon surrender by the Direct and Indirect Participants
of their interest in such Global Note, Certificated Notes will be issued to each
person that such Direct and Indirect Participants and the DTC identify as being
the beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct and Indirect Participants (in accordance with DTC's
customary procedures).
None of the Company, the Guarantors or the Trustee will be liable for any
delay by the holder of the Notes or the DTC in identifying the beneficial owners
of Notes, and the Company, the Guarantors and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the holder of the
Global Note or the DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented
by the Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
same day funds to the accounts specified by the holder of interests in such
Global Note. With respect to Certificated Notes, the Company will make all
payments of principal, premium, if any, interest and Liquidated Damages, if any,
by
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wire transfer of immediately available same day funds to the accounts specified
by the holders thereof or, if no such account is specified, by mailing a check
to each such holder's registered address. The Company expects that secondary
trading in the Certificated Notes will also be settled in immediately available
funds.
CERTAIN U.S. FEDERAL TAX CONSEQUENCES TO U.S. HOLDERS
The following summary describes all material United States federal income
tax consequences for holders of the Exchange Notes who are subject to U.S. net
income tax with respect to the Exchange Notes ("U.S. persons") and who will hold
the Exchange Notes as capital assets. There can be no assurance that the U.S.
Internal Revenue Service (the "IRS") will take a similar view of the purchase,
ownership or disposition of the Exchange Notes. This summary is based upon the
Internal Revenue Code of 1986, as amended, and regulations, rulings and judicial
decisions now in effect, all of which are subject to change. It does not include
any discussion of the tax laws of any state, local or foreign governments or any
estate or gift tax considerations that may be applicable to the Exchange Notes
or holders thereof; nor does it discuss all aspects of U.S. federal income
taxation that may be relevant to a particular investor under his particular
circumstances or to investors subject to special treatment under the U.S.
federal income tax laws (for example, dealers in securities or currencies, S
corporations, life insurance companies, tax-exempt organizations, taxpayers
subject to the alternative minimum tax and non-U.S. persons) and also does not
discuss Exchange Notes held as a hedge against currency risks or as part of a
straddle with other investments or as part of a "synthetic security" or other
integrated investment (including a "conversion transaction") comprising an
Exchange Note and one or more other investments, or situations in which the
functional currency of the holders is not the U.S.
dollar.
Holders of Old Notes contemplating acceptance of the Exchange Offer
should consult their tax advisors with respect to their particular circumstances
and with respect to the effects of state, local or foreign tax laws to which
they may be subject.
EXCHANGE OF NOTES
The exchange of Old Notes for Exchange Notes should not be a taxable
event to holders for federal income tax purposes. The exchange of Old Notes for
the Exchange Notes pursuant to the Exchange Offer should not be treated as an
"exchange" for federal income tax purposes, because the Exchange Notes should
not be considered to differ materially in kind or extent from the Old Notes.
Accordingly, the Exchange Notes should have the same issue price as the Old
Notes, and a holder should have the same adjusted basis and holding period in
the Exchange Notes as it had in the Old Notes immediately before the exchange.
INTEREST ON EXCHANGE NOTES
For U.S. federal income tax purposes, a holder of an Exchange Note will
be required to report as ordinary income any interest earned on the Exchange
Note in accordance with the holder's method of tax accounting.
DISPOSITION OF EXCHANGE NOTES
A holder's tax basis in an Exchange Note generally will be the holder's
purchase price for the Old Note. Upon the sale, exchange, redemption, retirement
or other disposition of an Exchange Note, a holder will recognize gain or loss
equal to the difference (if any) between the amount realized and the holder's
tax basis in the Exchange Note. Such gain or loss will be long-term capital gain
or loss if the Exchange Note has been held for more than one year and otherwise
will be short-term capital gain or loss (with certain exceptions to the
characterization as capital gain if the Exchange Note was acquired at a market
discount).
BACKUP WITHHOLDING
A holder of an Exchange Note may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Exchange Note and proceeds from
the sale, exchange, redemption or retirement of the Exchange Note,
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unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates that fact or (b) provides a correct
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of an Exchange Note who does not provide the Company
with his correct taxpayer identification number may be subject to penalties
imposed by the IRS.
A holder of an Exchange Note who is not a U.S. person generally will be
exempt from backup withholding and information reporting requirements, but may
be required to comply with certification and identification procedures in order
to obtain an exemption from backup withholding and information reporting.
Any amount paid as backup withholding is not additional tax, but instead
will be creditable against the holder's U.S. federal income tax liability.
CERTAIN U.S. FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS
The following summary describes certain United States federal income and
estate tax consequences of the ownership of Notes as of the date hereof. It
deals only with Notes held as capital assets by Non-United States Holders. As
used herein, the term "Non-United States Holder" means any person or entity that
is, as to the United States, a foreign corporation, a nonresident alien
individual, a nonresident fiduciary of a foreign estate or trust or a foreign
partnership one or more of the members of which is, as to the United States, a
foreign corporation, a nonresident alien individual or a nonresident fiduciary
of a foreign estate or trust.
THE DISCUSSION SET FORTH BELOW IS BASED UPON THE PROVISIONS OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), AND REGULATIONS, RULINGS
AND JUDICIAL DECISIONS THEREUNDER AS OF THE DATE HEREOF. SUCH AUTHORITIES MAY BE
REPEALED, REVOKED OR MODIFIED SO AS TO RESULT IN FEDERAL INCOME TAX CONSEQUENCES
DIFFERENT FROM THOSE DISCUSSED BELOW. FURTHERMORE, THIS SUMMARY DOES NOT DISCUSS
ANY ASPECT OF STATE, LOCAL OR FOREIGN TAXATION. PERSONS CONSIDERING THE
PURCHASE, OWNERSHIP OR DISPOSITION OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR
PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION.
INTEREST INCOME
Under present United States federal income tax law, and subject to the
discussion below concerning backup withholding, under the "portfolio interest"
exception no withholding of United States federal income tax will be required
with respect to the payment by the Company or any paying agent of principal or
interest on a Note owned by a Non-United States Holder, provided (i) that the
beneficial owner does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, (ii) the beneficial owner is not a controlled foreign corporation that is
related to the Company through stock ownership, (iii) the beneficial owner is
not a bank whose receipt of interest on a Note is described in section 881(c)
(3) (A) of the Code and (iv) the beneficial owner satisfies the statement
requirement (described generally below) set forth in section 871(h) and section
881(c) of the Code and the regulations thereunder.
To satisfy the requirement referred to in (iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner is
not a United States person. Currently, these requirements will be met if (1) the
beneficial owner provides his name and address, and certifies, under penalties
of perjury, that he is not a United States person (which certification may be
made on an Internal Revenue Service ("IRS") Form W-8 (or successor form)) or (2)
a financial institution holding the Note on behalf of the beneficial owner
certifies, under penalties of perjury, that such statement has been received by
it and furnishes a paying agent with a copy thereof. Under recently finalized
Treasury regulations (the "Final Regulations"), the statement requirement
referred to in (iv) above may also be satisfied with other documentary evidence
for interest paid after December 31, 2000, with respect to an offshore account
or through certain foreign intermediaries.
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If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described above, payments of interest made to
such Non-United States Holder will be subject to a 30% withholding tax (or such
lower rate as may be provided by an applicable income tax treaty between the
United States and a foreign country) unless the beneficial owner of the Note
provides the Company or its paying agent, as the case may be, with a properly
executed (1) IRS Form 1001 (or successor form) claiming an exemption from
withholding under the benefit of a tax treaty or (2) IRS Form 4224 (or successor
form) stating that interest paid on the Note is not subject to withholding tax
because it is effectively connected with the beneficial owner's conduct of a
trade or business in the United States. Under the Final Regulations, which are
to be effective after December 31, 2000, Non-United States Holders will
generally be required to provide IRS Form W-8 in lieu of IRS Form 1001 and IRS
Form 4224, although alternative documentation may be applicable in certain
situations.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest on the Note is effectively connected with the conduct
of such trade or business, the Non-United States Holder, although exempt from
the withholding tax discussed above (provided the Non-United States Holder files
the appropriate certification with the Company or its agent), will be subject to
United States federal income tax on such interest on a net income basis in the
same manner as if it were a United States person. In addition, if such holder is
a foreign corporation, it may be subject to a branch profits tax equal to 30% of
its effectively connected earnings and profits for the taxable year, subject to
adjustments. For this purpose, such premium, if any, and interest on a Note will
be included in such foreign corporation's earnings and profits.
DISPOSITION OF EXCHANGE NOTES
Non-U.S. Holders generally will not be subject to U.S. federal income
taxation on gain recognized on a disposition of Exchange Notes so long as (i)
the gain is not effectively connected with the conduct by the Non-U.S. Holder of
a trade or business within the United States and (ii) in the case of a Non- U.S.
Holder who is an individual, either such holder is not present in the United
States for 183 days or more in the taxable year of disposition or such holder
does not (a) have a "tax home" (within the meaning of section 911(d)(3) of the
Code) in the United States or (b) maintain an office or fixed place of business
in the United States to which the gain is attributable.
FEDERAL ESTATE TAXES
An Exchange Note held by an individual who, at the time of death, is not
a citizen or resident of the United States will not be includible in the
individual's gross estate for purposes of the U.S. federal estate tax as a
result of such individual's death if the individual does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote and if, at the time of the individual's
death, payments with respect to such Exchange Note would not have been
effectively connected with the conduct by such individual of a trade or business
in the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
No information reporting or backup withholding tax (which is imposed at
the rate of 31% on certain payments to persons who fail to furnish the
information required under United States information reporting requirements)
will be required with respect to payments made by the Company or any paying
agent to Non-United States Holders if the statement described in (iv) under
"Interest Income" has been received and the payor does not have actual knowledge
that the beneficial owner is a United States person.
In addition, backup withholding and information reporting generally will
not apply if payments of the principal or interest on an Exchange Note are paid
or collected by a foreign office of a custodian, nominee or other foreign agent
on behalf of the beneficial owner of such Exchange Note, or if a foreign office
of a broker (as defined in applicable Treasury regulations) pays the proceeds of
the sale of an Exchange Note to the owner thereof. If, however, such nominee,
custodian, agent or broker is, for United States federal income tax purposes, a
United States person, or a foreign person with certain specified relationships
to the United States, such payments will not be subject to backup withholding
but will be subject to information reporting, unless (1) such custodian,
nominee, agent or broker has documentary evidence
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in its records that the beneficial owner is not a United States person and
certain other conditions are met or (2) the beneficial owner otherwise
establishes an exemption.
Payments of principal or interest on an Exchange Note paid to the
beneficial owner of a Note by a United States office of a custodian, nominee or
agent, or the payment of the United States office of a broker of the proceeds of
sale of an Exchange Note, will be subject to both backup withholding and
information reporting unless the beneficial owner provides the statement
referred to in (iv) above and the payor does not have actual knowledge that the
beneficial owner is a United States person or otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules will be allowed
as a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
DESCRIPTION OF CERTAIN INDEBTEDNESS
TERM LOAN
Bayard and its wholly owned subsidiary Trend, as co-borrowers, had
outstanding at March 31, 1998 $25.5 million of long term debt under the Term
Loan which was issued pursuant to a term loan agreement (the "Term Loan
Agreement") with CIT and Fleet (the "Term Loan Lenders"). 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 reorganization of its corporate 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 substantially all of its assets, subject to such
liens, and (ii) Bayard Drilling and Bayard LLC 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. At June 15, 1998, $18.2
million of the Term Loan was outstanding. In connection with the issuance of
the Old Notes, the Company and the Term Loan Lenders further amended the Term
Loan and added 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 (10.00% at March 31, 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.
REVOLVING LOAN
The Revolving Loan Agreement provides revolving credit loans, subject to
a borrowing base comprised of a portion of the co-borrowers' 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. The Company believes that
it has adequate liquidity for its needs in the near term. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Liquidity."
Any borrowings under the Revolving Loan Agreement would bear interest at
Fleet National Bank's prime rate plus 1.5% per annum (approximately 10.5% at
March 31, 1998). The Company pays certain fees under the Revolving
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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 secured by certain assets of Bayard and
Trend that were transferred to Bayard Drilling pursuant to the Company's
corporate reorganization, including accounts receivable, certain equipment and
inventory, the Company's El Reno, Oklahoma yard and the same 12 drilling rigs
that secure 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
secured by all drilling rigs of Bayard and Trend, upon which date Fleet released
all but such 12 rigs and related assets. Trend, Bonray, Bayard Drilling and
Bayard LLC 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.
OTHER INDEBTEDNESS
The Company also has issued the Top Drive Notes which consist of three
amortizing term notes totaling approximately $2.9 million outstanding at June
15, 1998. This debt bears interest of 9.5% per annum and is secured by certain
equipment (top drives) of the Company 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.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000
shares of common stock, par value $0.01 per share, and 20,000,000 shares of
preferred stock, par value $0.01 per share ("Preferred Stock"). As of May 28,
1998, 18,193,945 shares of Common Stock and no shares of Preferred Stock were
outstanding. The following summary is qualified in its entirety by reference to
the Restated Certificate of Incorporation of the Company (the "Certificate")and
the Amended and Restated Bylaws of the Company (the "Bylaws"), copies of which
are filed with the Commission as exhibits to the Registration Statement relating
to the Initial Public Offering.
COMMON STOCK
All outstanding shares of Common Stock are fully paid and nonassessable.
As of July 14, 1998, there were 18,193,945 shares of Common Stock outstanding
held of record by approximately 88 stockholders. The holders of Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of
common stockholders of the Company. The Common Stock does not have cumulative
voting rights in the election of directors. Shares of Common Stock have no
preemptive rights, conversion rights, redemption rights or sinking fund
provisions. The Common Stock is not subject to redemption by the Company.
Subject to the rights of the holders of any class of capital stock of the
Company having any preference or priority over the Common Stock, the holders of
Common Stock are entitled to dividends in such amounts as may be declared by the
Board from time to time out of funds legally available for such payments and, in
the event of liquidation, to share ratably in any assets of the Company
remaining after payment in full of all creditors and provision for any
liquidation preferences on any outstanding preferred stock ranking prior to the
Common Stock.
PREFERRED STOCK
The Certificate authorizes the Board, subject to limitations prescribed
by law, to provide for the issuance of up to 20,000,000 shares of Preferred
Stock in one or more series. The Board is authorized to establish the number of
shares to be included in any such series and to fix the designations, powers,
preferences and rights of the shares of each such series, and any
qualifications, limitations or restrictions thereof.
The Company believes that the ability of the Board to issue one or more
series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs which might arise from time to time. The authorized shares of
Preferred Stock, as well as shares of Common Stock, will be available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed or
traded. If the approval of the Company's stockholders is not required for the
issuance of shares of Preferred Stock or Common Stock, the Board may determine
not to seek stockholder approval.
Although the Board has no intention at the present time of doing so, it
could issue a series of Preferred Stock that may, depending on the terms of such
series, hinder, delay or prevent the completion of a merger, tender offer or
other takeover attempt. Among other things, the Board could issue a series of
Preferred Stock having terms that could discourage an acquisition attempt
through which an acquiror may be able to change the composition of the Board,
including a tender offer or other transaction that some, or a majority, of the
Company's stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
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CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Board consists of directors who are elected for one-year terms at
each annual meeting of stockholders. Stockholders may remove a director only for
cause. In general, the Board, not the stockholders, has the right to appoint
persons to fill vacancies on the Board.
The Certificate contains a "fair price" provision that requires the
affirmative vote of the holders of at least 80% of the Company's voting stock
and the affirmative vote of at least 66 2/3% of the Company's voting stock not
owned, directly or indirectly, by a Company Related Person (as hereinafter
defined) to approve any merger, consolidation, sale or lease of all or
substantially all of the Company's assets, or certain other transactions
involving a Company Related Person. For purposes of this fair price provision, a
"Company Related Person" is any person beneficially owning 10% or more of the
voting power of the outstanding capital stock of the Company who is a party to
the transaction at issue. The voting requirement is not applicable to certain
transactions, including those that are approved by the Company's Continuing
Directors (as defined in the Certificate) or that meet certain "fair price"
criteria contained in the Certificate.
The Certificate further provides that stockholders may act only at annual
or special meetings of stockholders and not by written consent, that special
meetings of stockholders may be called only by the Board, and that only business
proposed by the Board may be considered at special meetings of stockholders.
The Certificate also provides that the only business (including election
of directors) that may be considered at an annual meeting of stockholders, in
addition to business proposed (or persons nominated to be directors) by the
directors of the Company, is business proposed (or persons nominated to be
directors) by stockholders who comply with the notice and disclosure
requirements set forth in the Certificate. In general, the Certificate requires
that a stockholder give the Company notice of proposed business or nominations
no later than 60 days before the annual meeting of stockholders (meaning the
date on which the meeting is first scheduled and not postponements or
adjournments thereof) or (if later) ten days after the first public notice of
the annual meeting is sent to common stockholders. In general, the notice must
also contain information about the stockholder proposing the business or
nomination, his interest in the business, and (with respect to nominations for
director) information about the nominee of the nature ordinarily required to be
disclosed in public proxy solicitations. The stockholder also must submit a
notarized letter from each of his nominees stating the nominee's acceptance of
the nominations and indicating the nominee's intention to serve as director if
elected.
The Certificate also restricts the ability of stockholders to interfere
with the powers of the Board in certain specified ways, including the
constitution and composition of committees and the election and removal of
officers.
The Certificate provides that approval by the holders of at least 66 2/3%
of the outstanding voting stock of the Company is required to amend the
provisions of the Certificate discussed above and certain other provisions,
except that (i) approval by the holders of at least 80% of the outstanding
voting stock of the Company, together with approval by the holders of at least
66 2/3% of the outstanding voting stock not owned, directly or indirectly, by
the Company Related Person, is required to amend the fair price provisions and
(ii) approval of the holders of at least 80% of the outstanding voting stock is
required to amend the provisions prohibiting stockholders from acting by written
consent.
DELAWARE ANTI-TAKEOVER STATUTE
The Company is a Delaware corporation and is subject to Section 203 of
the Delaware General Corporation Law (the "DGCL"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of the outstanding voting stock of the Company) from engaging in a
"business combination" (as defined in Section 203) with the Company for three
years following the date that person becomes an interested stockholder unless
(i) before that person became an interested stockholder, the Board approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination, (ii) upon completion of the transaction
that resulted in the interested stockholder's becoming an interested
stockholder, the interested stockholder owns at least 85% of the Company's
voting stock outstanding at the time the transaction commenced (excluding stock
held by directors who are also officers of the Company and by employee stock
plans that do not
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provide employees with the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer), or (iii)
following the transaction in which that person became an interested stockholder,
the business combination is approved by the Board and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock of the Company not owned by the interested
stockholder.
Under Section 203, these restrictions also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving the Company and a person who was not an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the Company's directors, if that extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Certificate provides, as authorized by Section 102(b)(7) of the DGCL,
that a director of the Company will not be personally liable to the Company or
any of its stockholders for monetary damages for breach of fiduciary duty as a
director involving any act or omission of any such director, except that such
provisions do not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
as it now exists or hereafter may be amended, or (iv) for any transaction from
which the director derived an improper personal benefit. The Certificate also
provides that if the DGCL is amended after the date of filing of the Certificate
to authorize corporate action further limiting or eliminating the personal
liability of directors, then the liability of a director of the Company, in
addition to the limitation on personal liability provided for already, shall be
limited to the fullest extent permitted by the DGCL as so amended. Any repeal or
modification of such provision in the Certificate by the stockholders of the
Company will be effective prospective only, and will not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.
The Certificate also provides for indemnification of directors to the
fullest extent permitted by the DGCL. Such indemnification may be available for
liabilities arising in connection with the Exchange Offer. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. Pursuant to its Certificate, the
Company may indemnify its officers, employees, agents and other persons to the
fullest extent permitted by the DGCL. The Company's Bylaws obligate the Company,
under certain circumstances, to advance expenses to its directors and officers
in defending an action, suit or proceeding for which indemnification may be
sought. The Company has entered into Indemnification Agreements with certain of
its directors and officers. See "Management--Indemnification Agreements."
The Company's Bylaws also provide that the Company shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Company, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of the Company's subsidiaries or, at
the request of the Company, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
where the Company would have the power to indemnify such person against such
liability under the DGCL.
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PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account in connection with the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by Participating Broker-Dealers during the period referred to below in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired by such Participating Broker-Dealers for
their own accounts as a result of market-making activities or other trading
activities (other than a resale of an unsold allotment from the original sale of
Old Notes). The Company has agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such Exchange Notes for a period ending 180 days from
the Expiration Date. However, a Participating Broker- Dealer who intends to use
this Prospectus in connection with the resale of Exchange Notes received in
exchange for Old Notes pursuant to the Exchange Offer must notify the Company,
or cause the Company to be notified, on or prior to the Expiration Date, that it
is a Participating Broker-Dealer. Such notice may be given in the space provided
for that purpose in the Letter of Transmittal or may be delivered to the
Exchange Agent at one of the addresses set forth in the Letter of Transmittal.
See "The Exchange Offer -- Resales of Exchange Notes."
The Company will not receive any proceeds from the issuance of the
Exchange Notes offered hereby. Exchange Notes received by Participating
Broker-Dealers for their own accounts in connection with the Exchange Offer may
be sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any Participating Broker-Dealer that
resells Exchange Notes that were received by it for its own account in
connection with the Exchange Offer and any broker or dealer that participates in
a distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act, and any profit on any such resale of
Exchange Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Baker & Botts, L.L.P., Dallas, Texas.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for
each of the two years in the period ended December 31, 1996 included in this
Prospectus have been audited by Grant Thornton LLP, independent public
accountants, as stated in their reports thereon appearing elsewhere herein, 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 the
Company as of December 31, 1997 and for the fiscal year then ended, included in
this Prospectus have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent public accountants, given upon the
authority of that firm as experts in auditing and accounting.
In preparation for its initial public offering, the Board appointed
PricewaterhouseCoopers LLP as auditors for the Company'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 the Company 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. The audit reports previously issued by Grant
117
<PAGE> 123
Thornton LLP with respect to the Company'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.
118
<PAGE> 124
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 March 31, 1998 . . . . . . . . . . . . . . . . F-4
Statements of Operations for the years ended December 31, 1995, 1996 and 1997, and three months
ended March 31, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997 and three
months ended March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997, and three months
ended March 31, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
PRO FORMA CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 1997 . . . . . F-23
Unaudited Pro Forma Combined Statement of Operations for the three months ended March 31, 1998 . . F-24
Unaudited Pro Forma Combined Balance Sheet as of March 31, 1998 . . . . . . . . . . . . . . . . . . F-25
Notes to Unaudited Pro Forma Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . F-26
</TABLE>
F-1
<PAGE> 125
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> 126
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> 127
BAYARD DRILLING TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- ---------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash ....................................................... $ 4,963 $ 49,302 $ 27,738
Restricted investments ..................................... -- 880 524
Accounts receivable ........................................ 286 19,491 23,112
Accounts receivable--affiliate ............................. 798 -- --
Other current assets ....................................... 1 538 1,065
--------- --------- ---------
Total current assets ............................... 6,048 70,211 52,439
Property, plant and equipment, net ......................... 26,973 155,673 179,807
Goodwill, net of accumulated amortization of $375 at
December 31, 1997 and $593 at March 31, 1998 ............ -- 12,704 12,487
Other assets ............................................... 1,652 1,900 1,861
--------- --------- ---------
Total assets ....................................... $ 34,673 $ 240,488 $ 246,594
========= ========= =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................... $ 409 $ 8,246 $ 14,028
Accounts payable--affiliate ................................ 412 494 --
Accrued liabilities ........................................ 253 5,067 4,749
Current portion of long-term debt .......................... 947 7,450 7,450
--------- --------- ---------
Total current liabilities .......................... 2,021 21,257 26,227
--------- --------- ---------
Deferred income tax liabilities ............................ 348 13,554 14,848
--------- --------- ---------
Other long term liabilities ................................ -- 2,055 2,039
--------- --------- ---------
Long-term debt, less current maturities .................... 6,053 23,069 21,137
--------- --------- ---------
Subordinated notes, net of debt discount of $429 at
December 31, 1997 and $409 at March 31, 1998 ............ -- 2,091 2,111
--------- --------- ---------
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 at March 31, 1998 ............................. 56 182 182
Additional paid-in capital (net of deferred compensation
of $258 at December 31, 1997 and $245 at March 31,
1998) ................................................... 26,229 180,400 180,413
Accumulated deficit ........................................ (34) (2,120) (363)
--------- --------- ---------
Total equity ....................................... 26,251 178,462 180,232
--------- --------- ---------
Total liabilities and equity ....................... $ 34,673 $ 240,488 $ 246,594
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 128
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- -------------------------------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Drilling ............................................. $ 5,491 $ 8,995 $ 39,165 $ 4,111 $ 23,962
Drilling--affiliate .................................. 1,914 798 16,582 -- --
Other ................................................ 303 60 -- -- --
--------- --------- --------- --------- ---------
Total revenues ............................... 7,708 9,853 55,747 4,111 23,962
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Drilling ............................................. 6,075 7,653 40,705 3,047 17,221
General and administrative ........................... 880 658 1,868 195 755
Depreciation and amortization ........................ 791 1,126 7,943 876 3,169
Other ................................................ 47 46 -- -- --
--------- --------- --------- --------- ---------
Total costs and expenses ..................... 7,793 9,483 50,516 4,118 21,145
--------- --------- --------- --------- ---------
Operating income (loss) ...................... (85) 370 5,231 (7) 2,817
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ..................................... (3) (11) (3,065) (145) (367)
Interest income ...................................... -- -- 597 17 496
Gain (loss) on sale of assets ........................ (131) 54 544 -- 52
Other ................................................ (3) 17 37 -- 34
--------- --------- --------- --------- ---------
Total other income (expense) ................. (137) 60 (1,887) (128) 215
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes and extraordinary
item ................................................. (222) 430 3,344 (135) 3,032
Income tax provision--deferred ......................... -- 17 1,428 51 1,275
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary item ............ (222) 413 1,916 (84) 1,757
Extraordinary loss ..................................... -- -- (4,002) -- --
--------- --------- --------- --------- ---------
Net earnings (loss) .................................... $ (222) $ 413 $ (2,086) $ (84) $ 1,757
========= ========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Basic:
Before extraordinary item ......................... $ .21 $ (.01) $ .10
========= ========= =========
Extraordinary item ................................ $ (.44) -- --
========= ========= =========
Net earnings (loss) ............................... $ (.23) $ (.01) $ .10
========= ========= =========
Diluted: ............................................. --
=========
Before extraordinary item ......................... $ .17 $ (.01) $ .10
========= ========= =========
Extraordinary item ................................ $ (.35) -- --
========= ========= =========
Net earnings (loss) ............................... $ (.18) $ (.01) $ .10
========= ========= =========
Weighted average common shares outstanding, basic ...... 5,600 5,600 9,064 5,700 18,184
========= ========= ========= ========= =========
Weighted average common shares outstanding,
diluted .............................................. 5,600 5,749 11,500 8,191 18,488
========= ========= ========= ========= =========
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> 129
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) .................. -- -- -- -- 1,757 1,757
Executive compensation agreements
(unaudited) .......................... -- -- -- 13 -- 13
--------- --------- --------- --------- --------- ---------
Balance at March 31, 1998 (unaudited)...... $ -- $ 182 $ 180,658 $ (245) $ (363) $ 180,232
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 130
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .......................... $ (222) $ 413 $ (2,086) $ (84) $ 1,757
Adjustments to reconcile net earnings
(loss) to net cash (used in) provided by
operating activities-- .................... 791 1,126 7,943 876 3,169
Depreciation and amortization
(Gain) loss on sale of assets ............. 131 (54) (544) -- (52)
Extraordinary loss ........................ -- -- 4,002 -- --
Compensation expense ...................... -- -- 52 -- 13
Deferred income taxes ..................... -- 17 1,428 (51) 1,275
Change in assets and liabilities, net of
effects of affiliate transactions --
Decrease (increase) in accounts .............. 242 (2,059) (18,407) (2,157) (3,621)
receivable
Increase in prepaid expenses ................. -- -- (537) -- --
Decrease (increase) in other assets .......... (6) (185) 513 (733) (520)
Increase (decrease) in accrued
liabilities ............................... (237) 251 4,814 1,398 (318)
Increase (decrease) in accounts payable ...... (389) (383) 1,432 3,794 5,288
Increase (decrease) in other liabilities ..... -- -- -- -- (16)
Increase (decrease) in payable to
affiliate ................................. -- 412 82 -- --
--------- --------- --------- --------- ---------
Net cash (used in) provided by operating
activities ................................ 310 (462) (1,308) 3,043 6,975
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ........ (2,088) (10,578) (60,924) (13,711) (27,094)
Acquisition of businesses .................... -- -- (26,056) -- --
Proceeds from sale of assets ................. 378 137 1,390 -- 63
(Purchase) proceeds of investments ........... -- -- (880) (730) 355
--------- --------- --------- --------- ---------
Net cash used in investing
activities ......................... (1,710) (10,441) (86,470) (14,441) (26,676)
--------- --------- --------- --------- ---------
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 8,700 --
Net proceeds from issuance of stock .......... -- 10,000 107,109 250 --
Debt issuance costs .......................... -- (206) (761) -- --
Payments on long-term debt ................... -- -- (24,011) (474) (1,863)
Payments under line of credit ................ -- -- (8,701) -- --
Borrowings under line of credit .............. -- -- 8,701 -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities .............................. 1,400 15,866 132,117 8,476 (1,863)
--------- --------- --------- --------- ---------
Net change in cash ........................... -- 4,963 44,339 (2,922) (21,564)
Cash at beginning of period .................. -- -- 4,963 4,963 49,302
--------- --------- --------- --------- ---------
Cash at end of period ........................ $ -- $ 4,963 $ 49,302 $ 2,041 $ 27,738
========= ========= ========= ========= =========
Cash paid during the period for interest ..... $ -- $ -- $ 2,854 $ -- $ 844
Cash paid during the period for income
taxes ..................................... $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
Continued
F-7
<PAGE> 131
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> 132
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED MARCH 31, 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 March 31, 1998, the Company had cash and cash equivalents in or at four
financial institutions, where the balance exceeded federally insured limits, in
total by approximately $48.9 and $27.3 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 March 31, 1998,
approximately 53% and 44%, respectively, of the Company's trade receivables and
over 63% and 52%, respectively, of total revenues were derived from the
Company's five largest customers in terms of total revenues.
F-9
<PAGE> 133
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
$859,000 for the three months ended March 31, 1998 of which approximately
$565,000 and $492,000, 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 THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 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 $ 1,757
---------- ----------
Basic earnings per
share ...................... 1,916 9,064 $ .21 1,757 18,184 $ .10
---------- ---------- ----------
Effect of dilutive
securities; Warrants and
options .................... 2,436 304
---------- ----------
Diluted earnings per
share ...................... $ 1,916 11,500 $ .17 $ 1,757 18,488 $ .10
========== ========== ========== ========== ========== ==========
</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> 134
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
$217,992, respectively, has been recognized as of December 31, 1997 and March
31, 1998.
Other assets consist of (i) organizational costs incurred for the
organization of Bayard and (ii) debt issuance costs incurred on the term loan.
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
$114,000 has been recognized for the years ended December 31, 1997 and 1996 and
for the three months ended March 31, 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 three months ended March 31, 1998, estimates for this retention were $1.7
million, $20,000 and $1.9 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
three months ended March 31, 1998 and 1997 include all adjustments, consisting
of normal recurring accruals, necessary to present fairly the Company's
financial position as of March 31, 1998 and results of operations and cash flows
for the three months ended March 31, 1998 and 1997. Results for the period ended
March 31, 1998 are not necessarily indicative of the results to be expected for
the entire fiscal year. For
F-11
<PAGE> 135
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 three months ended March 31,
1998, the Company recognized $0 and approximately $310,000 and $0, respectively,
of deferred compensation and $0 and approximately $52,000 and $13,000,
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.
The Bonray Acquisition was accounted for as a purchase. The following is
a preliminary analysis of the allocation of the purchase price:
F-12
<PAGE> 136
<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>
NOTE D--PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS
DECEMBER 31, ENDED
---------------------- MARCH 31,
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Drilling rigs and components .................. $ 42,303 $ 173,674 $ 199,884
Automobiles, trucks, and trailers ............. 431 2,041 2,101
Buildings and property ........................ -- 461 523
Furniture, fixtures, and other ................ 7 532 674
--------- --------- ---------
42,741 176,708 203,182
Less accumulated depreciation ............... 15,768 21,035 23,375
--------- --------- ---------
$ 26,973 $ 155,673 $ 179,807
========= ========= =========
</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.
F-13
<PAGE> 137
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.
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.
F-14
<PAGE> 138
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.
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.
F-15
<PAGE> 139
The Company also has three notes totaling approximately $3.4 million at
December 31, 1997, with a capital financing corporation. The debt bears interest
at December 31, 1997 of 9.5% and is collateralized by certain equipment (top
drives) of the Company. 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>
1998X .......................................................... $ 7,450,000
1999X .......................................................... 7,647,000
2000X .......................................................... 7,331,000
2001X .......................................................... 6,385,000
2002X .......................................................... 1,706,000
Thereafter ..................................................... 2,520,000
-----------
$33,039,000
===========
</TABLE>
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
F-16
<PAGE> 140
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 three months ended March 31, 1998, the Company
utilized these affiliates in consideration for such trucking services of
approximately $1.7 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.
Interest expense incurred during the year ended December 31, 1997 and for
the three months ended March 31, 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
F-17
<PAGE> 141
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
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 March 31, 1998, benefits under such
agreements, assuming a change of control, would aggregate approximately
$322,000.
F-18
<PAGE> 142
As of March 31, 1998, the Company had construction commitments totaling
approximately $10 million for rigs in various stages of refurbishment.
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 $9.0
million for drill pipe ordered 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. In each of these lawsuits, the 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 joined in Yuan's motion to be appointed as lead plaintiffs in the
Yuan federal court suit.
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 Bayard and Sperry-Sun Drilling Services, Inc. on
May 29, 1998 in the District Court of Oklahoma County in the State of Oklahoma.
R.C. Taylor Companies, Inc., the plaintiff in that lawsuit, seeks actual and
punitive damages for costs allegedly incurred in connection with a directional
drilling project that utilized one of the Company's rigs.
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.
F-19
<PAGE> 143
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 $82,000 through March 31, 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>
<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:
F-20
<PAGE> 144
<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-21
<PAGE> 145
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma financial statements are derived from
the historical financial statements of the Company included elsewhere in this
Prospectus. The Pro Forma Combined Statements of Operations for the year ended
December 31, 1997 gives effect to (i) the Trend Acquisition, the Ward
Acquisition and the Bonray Acquisition (each defined herein), all of which
occurred at various dates in 1997, as if such acquisitions occurred on January
1, 1997 and (ii) interest expense adjustment to reflect the retirement of
certain Subordinated Notes from proceeds of the Initial Public Offering (iii)
interest expense adjustments to reflect the prepayment of 25% ($6.2 million) of
the outstanding principal amount of the Term Loan and (iv) the retirement of the
outstanding principal amount of the Revolving Loan. There is no pro forma effect
for the TransTexas Acquisition because the rigs were utilized solely by
TransTexas for internal purposes and had no internal or external revenues. The
Pro Forma Statement of Operations for the period ended March 31, 1998 reflect
adjustments for the transactions in (iii) above and the retirement of the $2.52
million principal of Subordinated Notes. The Pro Forma Balance Sheet at March
31, 1998 reflects the repayment by the Company of 25% of the outstanding
principal amount of the Term Loan, the retirement of the Subordinated Notes and,
the sale of the Notes and the application of net proceeds to fund the purchase
price of the TransTexas Acquisition, as if they had occurred on March 31, 1998.
The unaudited pro forma combined financial information should be read in
conjunction with the notes thereto and the historical financial statements of
the Company including the notes thereto, which are included elsewhere in this
Prospectus.
The unaudited pro forma combined financial statements do not purport to
be indicative of the results of operations that would actually have occurred if
the transactions described had occurred as presented in such statements or that
may occur in the future. In addition, future results may vary significantly from
the results reflected in such statements due to general economic conditions, oil
and gas commodity prices, the demand and prices for contract drilling services,
changes in the number of rigs available for service, the Company's ability to
successfully integrate the operations of the TransTexas Acquisition with its
current business and several other factors, many of which are beyond the
Company's control. See "Risk Factors."
F-22
<PAGE> 146
BAYARD DRILLING TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------------
TREND(a) WARD(a) BONRAY(a)
FOUR MONTHS FIVE MONTHS NINE MONTHS
ENDED ENDED ENDED
APRIL 30, MAY 31, SEPTEMBER 30,
BAYARD 1997 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ..................... $ 55,747 $ 6,390 $ 4,957 $ 14,279
COSTS AND EXPENSES:
Drilling costs ............. 40,705 4,845 3,914 10,240
Depreciation and
amortization ............. 7,943 627 413 1,707
General and
administrative ........... 1,868 515 197 860
------------ ------------ ------------ ------------
Total costs and
expenses ............... 50,516 5,987 4,524 12,807
------------ ------------ ------------ ------------
Operating income ......... 5,231 403 433 1,472
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ............ 597 -- 16 420
Interest expense and
financing
costs .................... (3,065) (47) (27) (471)
Gain (loss) on sale of
assets ................... 544 -- -- (57)
Other ...................... 37 -- 31 (41)
------------ ------------ ------------ ------------
Total other income
(expense) .............. (1,887) (47) 20 (149)
------------ ------------ ------------ ------------
Income (loss) before
taxes .................... 3,344 356 453 1,323
------------ ------------ ------------ ------------
Income tax expense
(benefit) ................ 1,428 135 -- 563
------------ ------------ ------------ ------------
Net income (loss) before
extraordinary loss: ...... $ 1,916 $ 221 $ 453 $ 760
============ ============ ============ ============
Earning (loss) per share,
before extraordinary
loss:
basic .................... $ .21
============
diluted .................. $ .17
============
Weighted average shares
outstanding:
basic .................... 9,064
============
diluted .................. 11,500
============
<CAPTION>
PRO FORMA
------------------------------------------------------------------
ACQUISITION
AND OTHER AS
ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ..................... $ -- $ 81,373 $ -- $ 81,373
COSTS AND EXPENSES:
Drilling costs ............. -- 59,704 -- 59,704
Depreciation and
amortization ............. 386(b) 11,576 -- 11,576
500(c)
General and
administrative ........... -- 3,440 -- 3,440
------------ ------------ ------------ ------------
Total costs and
expenses ............... 886 74,720 -- 74,720
------------ ------------ ------------ ------------
Operating income ......... (886) 6,653 -- 6,653
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ............ -- 1,033 (726)(f) 307
Interest expense and
financing
costs .................... 1,172(d) (2,438) 779(g) (1,659)
Gain (loss) on sale of
assets ................... -- 487 -- 487
Other ...................... -- 27 -- 27
------------ ------------ ------------ ------------
Total other income
(expense) .............. 1,172 (891) 53 (838)
------------ ------------ ------------ ------------
Income (loss) before
taxes .................... 286 5,762 53 5,815
------------ ------------ ------------ ------------
Income tax expense
(benefit) ................ 239(e) 2,365 20(h) 2,385
------------ ------------ ------------ ------------
Net income (loss) before
extraordinary loss: ...... $ 47 $ 3,397 $ 33 $ 3,430
============ ============ ============ ============
Earning (loss) per share,
before extraordinary
loss:
basic .................... $ .37 $ .38
============ ============
diluted .................. $ .30 $ .30
============ ============
Weighted average shares
outstanding:
basic .................... 9,064 9,064
============ ============
diluted .................. 11,500 11,500
============ ============
</TABLE>
The accompanying notes are an integral part of these pro
forma financial statements.
F-23
<PAGE> 147
BAYARD DRILLING TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- ----------------------------
BAYARD ADJUSTMENTS AS ADJUSTED
<S> <C> <C> <C>
Revenues ................................ $ 23,962 $ -- $ 23,962
COSTS AND EXPENSES:
Drilling costs ........................ 17,221 -- 17,221
Depreciation and amortization ......... 3,169 -- 3,169
General and administrative ............ 755 -- 755
---------- ---------- ----------
Total costs and expenses ...... 21,145 -- 21,145
---------- ---------- ----------
Operating income .............. 2,817 -- 2,817
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income ....................... 496 (100)(f) 396
Interest expense and financing costs .. (367) 114(j) (253)
Gain (loss) on sale of assets ......... 52 -- 52
Other ................................. 34 -- 34
---------- ---------- ----------
Total other income (expense) .. 215 14 229
---------- ---------- ----------
Income (loss) before taxes .............. 3,032 14 3,046
Income tax expense (benefit) ............ 1,275 (25)(k) 1,250
---------- ---------- ----------
Net income (loss) ....................... $ 1,757 $ 39 $ 1,796
========== ========== ==========
Earning (loss) per share:
basic ................................. $ .10 $ .10
========== ==========
diluted ............................... $ .10 $ .10
========== ==========
Weighted average shares outstanding:
basic ................................. 18,184 18,184
========== ==========
diluted ............................... 18,488 18,488
========== ==========
</TABLE>
The accompanying notes are an integral part of
these pro forma financial statements.
F-24
<PAGE> 148
BAYARD DRILLING TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------- --------------------------------
BAYARD(L) ADJUSTMENTS AS ADJUSTED
<S> <C> <C> <C>
Current Assets:
Cash and investments ......................... $ 28,262 $ 13,439(i)(j) $ 41,701
Accounts receivable .......................... 23,112 -- 23,112
Other ........................................ 1,065 -- 1,065
----------- ----------- -----------
Total current assets ................. 52,439 12,939 65,878
Property & Equipment, net .................... 179,807 75,000(i) 254,807
Goodwill, net ................................ 12,487 -- 12,487
Other ........................................ 1,861 3,250(i) 5,111
----------- ----------- -----------
Total assets ......................... $ 246,594 $ 91,689 $ 338,283
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................. $ 14,028 $ -- $ 14,028
Accrued liabilities .......................... 4,749 -- 4,749
Current portion of long-term debt ............ 7,450 -- 7,450
----------- -----------
Total current liabilities ............ 26,227 -- 26,227
----------- -----------
Long-term debt ................................. 21,137 (6,200)(j) 14,937
----------- ----------- -----------
Subordinated Notes ............................. 2,111 (2,111)(j) --
----------- ----------- -----------
Senior Notes ................................... -- 100,000(i) 100,000
----------- ----------- -----------
Other long term liabilities .................... 2,039 -- 2,039
----------- -----------
Deferred income tax liabilities ................ 14,848 -- 14,848
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock ................................. 182 -- 182
Additional paid-in capital ................... 180,413 -- 180,413
Accumulated deficit .......................... (363) -- (363)
----------- -----------
Total stockholders' equity ........... 180,232 -- 180,232
----------- ----------- -----------
Total liabilities and stockholders'
equity ............................. $ 246,594 $ 91,689 $ 338,283
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these pro forma financial statements.
F-25
<PAGE> 149
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(TABLES IN THOUSANDS)
(a) Represents the results of operations for Trend, Ward and Bonray prior to
their acquisition by Bayard. Operations subsequent to the date of
purchase of each of Trend, Ward and Bonray, May 1, May 30 and October
16, 1997, respectively, are included in the Bayard historical results.
(b) To adjust depreciation expense on assets acquired in the Trend, Ward and
Bonray Acquisitions using allocated purchase prices and based on
estimated useful lives of 15 years calculated on a straight-line basis.
(c) To record amortization of goodwill attributable to the Trend and Bonray
Acquisitions over 15 years on a straight-line basis.
(d) To eliminate interest expense on (i) an aggregate principal amount of
$18 million of Subordinated Notes issued in the May Financing and (ii)
the outstanding amount of the Revolving Loan, both paid off from
proceeds of the Initial Public Offering.
(e) To adjust income tax expense recognized by Bayard, Trend and Bonray to
conform to the Company's pro forma income tax position.
(f) To adjust interest income for interest earned on Initial Public Offering
proceeds used for the repayment of debt.
(g) To adjust historical interest expense for the repayment of debt on Notes
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
INCURRED PRO FORMA
<S> <C> <C>
Term Loan............................................... $2,163 $ 541
Subordinated Notes (Energy Spectrum).................... 238 238
------ -----
$2,401 $ 779
====== =====
</TABLE>
(h) To record a provision for federal and state income tax at the rate of
41%.
(i) To record (i) the issuance of $100 million of Notes generating net
proceeds of approximately $96.75 million (net of $3.25 million of
discount and associated costs of the Initial Offering) and (ii) the
application of $75 million of the net proceeds to the Company from the
Initial Offering to fund the purchase price of the TransTexas
Acquisition.
(j) To record (i) the repayment by the Company of 25% ($6.2 million) of
the outstanding principal amount of the Term Loan and (ii) the
repayment and retirement of the principal amount ($2.1 million, net of
discount) of Subordinated Notes previously held by Energy Spectrum,
both of which were paid with proceeds from the Initial Public Offering.
(k) To adjust income tax expense recognized by Bayard to conform to
the Company's pro forma income tax position.
F-26
<PAGE> 150
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION
WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Disclosure Regarding Forward-Looking
Statements ............................................................ iv
Available Information ................................................... v
Prospectus Summary ...................................................... 1
Risk Factors ............................................................ 15
The Company ............................................................. 25
The TransTexas Acquisition .............................................. 27
Use of Proceeds ......................................................... 28
Capitalization .......................................................... 29
Selected Consolidated Financial and
Operating Data ........................................................ 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................................................ 32
Business ................................................................ 39
Management .............................................................. 50
Principal Stockholders .................................................. 61
Certain Relationships and Related
Transactions .......................................................... 64
The Exchange Offer ...................................................... 71
Description of Exchange Notes ........................................... 81
Certain U.S. Federal Tax Consequences to
U.S. Holders .......................................................... 109
Certain U.S. Federal Tax Consequences to Non-
U.S. Holders .......................................................... 110
Description of Certain Indebtedness ..................................... 112
Description of Capital Stock ............................................ 114
Plan of Distribution .................................................... 117
Legal Matters ........................................................... 117
Experts ................................................................. 117
Index to Financial Statements ........................................... F-1
</TABLE>
================================================================================
================================================================================
BAYARD DRILLING TECHNOLOGIES, INC.
BAYARD DRILLING, L.L.C.
BAYARD DRILLING, L.P.
BONRAY DRILLING CORPORATION
TREND DRILLING CO.
-------------------------------------------
PROSPECTUS
-------------------------------------------
OFFER TO EXCHANGE
BAYARD DRILLING TECHNOLOGIES, INC.
11% SENIOR NOTES DUE 2005, SERIES B
FOR ANY AND ALL OF ITS OUTSTANDING
11% SENIOR NOTE DUE 2005, SERIES A
July 31, 1998
================================================================================
