<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 8-K
----------------------
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) February 16, 1999
------------------
Nabors Industries, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
1-9245 93-0711613
- ----------------------------------- ---------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
515 West Greens Road, Suite 1200, Houston, Texas 77067
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(281) 874-0035
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On October 19, 1999, Nabors Industries, Inc. entered into a definitive merger
agreement with Bayard Drilling Technologies, Inc. to acquire all of the
outstanding capital stock of Bayard. On February 16, 1999, Nabors' registration
statement with respect to such acquisition was declared effective. The unaudited
pro forma combined condensed financial statements giving effect to the
acquisition of Bayard by Nabors and the financial statements of Bayard and its
predecessors included in Nabors' registration statement are attached to this
report as Exhibits 99.1 and 99.2, and are incorporated into this report by
reference. Nabors' Year 2000 Compliance Program included in the registration
statement is attached to this report as Exhibit 99.3, and is incorporated into
this report by reference.
The purpose of this Current Report on Form 8-K is also to file Nabors' Statement
of Computation of Ratios of Earnings to Fixed Charges and Statement of
Computation of Pro Forma Ratio of Earnings to Fixed Charges (attached hereto as
Exhibits 12.1 and 12.2) for incorporation into the registration statement on
Form S-3 (File No. 333-25233) (the "Registration Statement"), to file the
consent of Grant Thornton LLP (attached hereto as Exhibit 23.1) for
incorporation into the Registration Statement, to file the consent of
PricewaterhouseCoopers LLP (attached hereto as Exhibit 23.2) for incorporation
into the Registration Statement, to file the consent of PricewaterhouseCoopers
LLP (attached hereto as Exhibit 23.3) for incorporation into the Registration
Statement, to file the consent of PricewaterhouseCoopers LLP (attached hereto as
Exhibit 23.4) for incorporation into the Registration Statement, to file the
consent of Ernst & Young LLP (attached hereto as Exhibit 23.5) for incorporation
into the Registration Statement and to file the consent of
PricewaterhouseCoopers LLP (attached hereto as Exhibit 23.6) for incorporation
into the Registration Statement.
On February 26, 1999, Bayard issued its earnings release for the quarter ended
December 31, 1998. A copy of the release is attached to this report as Exhibit
99.4, and is incorporated into this report by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
Exhibit 12.1 Statement of Computation of Ratios of Earnings to
Fixed Charges.
Exhibit 12.2 Statement of Computation of Pro Forma Ratio of
Earnings to Fixed Charges.
Exhibit 23.1 Consent of Grant Thornton LLP regarding the financial
statements of Bayard Drilling Technologies, Inc.
Exhibit 23.2 Consent of PricewaterhouseCoopers LLP regarding
the financial statements of Bayard Drilling
Technologies, Inc.
Exhibit 23.3 Consent of PricewaterhouseCoopers LLP regarding
the financial statements of Ward Drilling Company,
Inc.
Exhibit 23.4 Consent of PricewaterhouseCoopers LLP regarding
the financial statement of Trend Drilling Company,
Inc.
Exhibit 23.5 Consent of Ernst & Young LLP regarding the
financial statements of Bonray Drilling Corporation.
Exhibit 23.6 Consent of PricewaterhouseCoopers LLP regarding the
financial statements of Nabors Industries, Inc.
Exhibit 99.1 Unaudited Pro Forma Combined Condensed Financial
Statements.
Exhibit 99.2 Consolidated Financial Statements of Bayard Drilling
Technologies, Inc., Financial Statements of Trend
Drilling Company, Financial Statements of Ward
Drilling Company, Inc. and Financial Statements of
Bonray Drilling Corporation.
Exhibit 99.3 Nabors Industries, Inc. Year 2000 Compliance Program.
Exhibit 99.4 Bayard Drilling Technologies, Inc. Press Release
dated February 26, 1999.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NABORS INDUSTRIES, INC.
(Registrant)
Date: March 1, 1999 By: /s/ Anthony G. Petrello
---------------------------------
Anthony G. Petrello
President and Chief Operating
Officer
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------ -----------
<S> <C>
Exhibit 12.1 Statement of Computation of Ratios of Earnings to
Fixed Charges.
Exhibit 12.2 Statement of Computation of Pro Forma Ratio of
Earnings to Fixed Charges.
Exhibit 23.1 Consent of Grant Thornton LLP regarding the financial
statements of Bayard Drilling Technologies, Inc.
Exhibit 23.2 Consent of PricewaterhouseCoopers LLP regarding
the financial statements of Bayard Drilling
Technologies, Inc.
Exhibit 23.3 Consent of PricewaterhouseCoopers LLP regarding
the financial statements of Ward Drilling Company,
Inc.
Exhibit 23.4 Consent of PricewaterhouseCoopers LLP regarding
the financial statement of Trend Drilling Company,
Inc.
Exhibit 23.5 Consent of Ernst & Young LLP regarding the
financial statements of Bonray Drilling Corporation.
Exhibit 23.6 Consent of PricewaterhouseCoopers LLP regarding the
financial statements of Nabors Industries, Inc.
Exhibit 99.1 Unaudited Pro Forma Combined Condensed Financial
Statements.
Exhibit 99.2 Consolidated Financial Statements of Bayard Drilling
Technologies, Inc., Financial Statements of Trend
Drilling Company, Financial Statements of Ward
Drilling Company, Inc. and Financial Statements of
Bonray Drilling Corporation.
Exhibit 99.3 Nabors Industries, Inc. Year 2000 Compliance Program.
Exhibit 99.4 Bayard Drilling Technologies, Inc. Press Release
dated February 26, 1999.
</TABLE>
<PAGE> 1
EXHIBIT 12.1
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In thousands, except ratio amounts)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Pretax income $ 58,628 $ 81,600 $ 182,410
Add fixed charges as adjusted (from below) 7,933 12,258 16,980
-------- -------- ---------
Earnings $ 66,561 $ 93,858 $ 199,390
-------- -------- ---------
Fixed charges:
Interest expense:
Interest on indebtedness $ 7,297 $ 11,356 $ 15,993
Capitalized 747 985 1,191
Amortization of debt costs 314 528 527
Interest portion of rental expense 322 374 460
-------- -------- ---------
Fixed charges before adjustments 8,680 13,243 18,171
Less capitalized interest (747) (985) (1,191)
-------- -------- ---------
Fixed charges as adjusted $ 7,933 $ 12,258 $ 16,980
-------- -------- ---------
Ratio (earnings divided by fixed charges
before adjustments) 7.67 7.09 10.97
-------- -------- ---------
<CAPTION>
THREE TWELVE
MONTHS MONTHS NINE MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1997 1998
------------ ------------ ------------- ---------
<S> <C> <C> <C> <C>
Pretax income $ 62,616 $ 209,463 $ 146,847 $ 165,019
Add fixed charges as adjusted (from below) 4,107 16,769 12,662 12,268
-------- --------- --------- ---------
Earnings $ 66,723 $ 226,232 $ 159,509 $ 177,287
-------- --------- --------- ---------
Fixed charges:
Interest expense:
Interest on indebtedness $ 3,858 $ 15,807 $ 11,949 $ 11,472
Capitalized 297 1,435 1,138 1,602
Amortization of debt costs 121 516 395 367
Interest portion of rental expense 128 446 318 429
-------- --------- --------- ---------
Fixed charges before adjustments 4,404 18,204 13,800 13,870
Less capitalized interest (297) (1,435) (1,138) (1,602)
-------- --------- --------- ---------
Fixed charges as adjusted $ 4,107 $ 16,769 $ 12,662 $ 12,268
-------- --------- --------- ---------
Ratio (earnings divided by fixed charges
before adjustments) 15.15 12.43 11.56 12.78
-------- --------- --------- ---------
</TABLE>
<PAGE> 1
EXHIBIT 12.2
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF PRO FORMA RATIOS OF EARNINGS TO FIXED CHARGES
(In thousands, except ratio amounts)
Pro Forma
-----------------------------------
Twelve Nine
Months Months
Ended Ended
December 31, September 30,
1997 1998
------------ ------------
Pretax income $220,040 $172,666
Add fixed charges as adjusted (from below) 19,076 14,406
-------- --------
Earnings $239,116 $187,072
-------- --------
Fixed charges:
Interest expense:
Interest on indebtedness $ 17,683 $ 13,548
Capitalized 2,000 3,225
Amortization of debt costs 865 367
Interest portion of rental expense 528 491
-------- --------
Fixed charges before adjustments 21,076 17,631
Less capitalized interest (2,000) (3,225)
-------- --------
Fixed charges as adjusted $ 19,076 $ 14,406
-------- --------
Ratio (earnings divided by fixed charges
before adjustments) 11.35 10.61
-------- --------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
We have issued our report dated January 20, 1997, accompanying the financial
statements of Bayard Drilling Technologies, Inc. included in the Form 8-K by
Nabors Industries, Inc. ("Nabors") which are incorporated by reference in
Nabors' registration statement filed on Form S-3 (File No. 333-25233). We
consent to the incorporation by reference of the aforementioned report in the
Registration Statement and to the use of our name as it appears under the
caption "Experts".
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 1, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Nabors Industries, Inc. on Form S-3 (File No. 333-25233) of our report dated
February 19, 1998, on our audit of the consolidated financial statements of
Bayard Drilling Technologies, Inc. as of December 31, 1997 and for the year then
ended, which report is included in Nabors Industries, Inc.'s current report on
Form 8-K dated March 1, 1999. We also consent to the reference to our firm under
the captions "Experts".
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
March 1, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Nabors Industries, Inc. on Form S-3 (File No. 333-25233) of our report dated
August 22, 1997, on our audit of the financial statements of Ward Drilling
Company, Inc. as of December 31, 1996 and for the year then ended, which report
is included in Nabors Industries, Inc.'s current report on Form 8-K dated March
1, 1999. We also consent to the reference to our firm under the captions
"Experts".
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
March 1, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Nabors Industries, Inc. on Form S-3 (File No. 333-25233) of our report dated
April 28, 1997, on our audit of the financial statements of Trend Drilling
Company, Inc. as of December 31, 1996 and for the year then ended, which report
is included in Nabors Industries, Inc.'s current report on Form 8-K dated March
1, 1999. We also consent to the reference to our firm under the captions
"Experts".
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
March 1, 1999
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-3 (File No. 333-25233) and related
Prospectus Supplement of Nabors Industries, Inc. and to the incorporation by
reference therein of our report dated April 17, 1997, with respect to the
financial statements of Bonray Drilling Corporation incorporated by reference in
the Current Report on Form 8-K dated March 1, 1999 of Nabors
Industries, Inc.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 1, 1999
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Nabors Industries, Inc. on Form S-3 (File No. 333-25233) of our report dated
November 12, 1997, on our audits of the consolidated financial statements as of
September 30, 1997 and 1996, and for the years then ended, which report is
included in this Annual Report on Form 10-K. We also consent to the reference
to our firm under the caption "Experts".
/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
Houston, Texas
March 1, 1999
<PAGE> 1
EXHIBIT 99.1
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial
statements give effect to the acquisition of all of the outstanding capital
stock of Bayard by Nabors. The pro forma combination of Nabors and Bayard has
been accounted for under the purchase method of accounting.
The Unaudited Pro Forma Combined Condensed Balance Sheet is derived
from the unaudited condensed consolidated balance sheets of Nabors and Bayard
and is presented as if the merger was consummated on the balance sheet date. The
Unaudited Pro Forma Combined Condensed Statements of Operations for the nine
months ended September 30, 1998 and the twelve months ended December 31, 1997
are presented as if the merger was consummated as of January 1, 1997. Nabors
results have been recast to conform to the presentation of the twelve months
ended December 31, 1997 by adjusting Nabors audited results for the year ended
September 31, 1997 to exclude the unaudited results for the quarter ended
December 31, 1996 and to include the unaudited results for the quarter ended
December 31, 1997. The Pro Forma Statement of Operations for the twelve months
ended December 31, 1997 also gives effect to the results of operations for Trend
Drilling Co., Ward Drilling Company, Inc., and Bonray Drilling Corporation
before their acquisition by Bayard, all of which occurred at various dates in
1997, as if such acquisitions occurred on January 1, 1997.
The unaudited pro forma financial statements do not purport to indicate
what the combined results of operations of Nabors and Bayard would have been had
the merger occurred as of the dates indicated or the results of operations that
may be obtained in the future. The Unaudited Pro Forma Combined Condensed
Statements of Operations do not reflect the anticipated cost savings resulting
from integration of the operations of Nabors and Bayard. The pro forma
adjustments described in the accompanying notes are based on estimates derived
from information currently available.
The unaudited pro forma financial information should be read in
conjunction with the consolidated financial statements and related notes of
Nabors and Bayard contained in the Annual Report on Form 10-K of Nabors for the
year ended September 30, 1997 and the Annual Report on Form 10-K of Bayard for
the year ended December 31, 1997 and each company's Quarterly Report on Form
10-Q for the period ended September 30, 1998. The Form 10-K and Form 10-Q of
Nabors are incorporated by reference into this document. The consolidated
financial statements of Bayard and related notes are included in this document.
Additionally, reference should be made to Nabors' Transition Period Report on
Form 10-Q for the three month period ended December 31, 1997, which is
incorporated into this document by reference.
<PAGE> 2
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------- ---------------------------
Nabors Bayard Adjustments Combined
----------- --------- ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,737 $ 19,148 $(a) (5,458) $ 17,427
Marketable securities 9,062 9,062
Accounts receivable, net 180,136 15,750 195,886
Inventory and supplies 28,204 28,204
Prepaid expenses and other current assets 29,625 4,227 33,852
----------- --------- ------------ ----------
Total current assets 250,764 39,125 (5,458) 284,431
Property, plant and equipment, net 1,120,265 283,659 (b)(112,590) 1,291,334
Marketable securities 9,330 9,330
Other long-term assets 31,591 17,058 (b) (16,505) 32,144
----------- --------- ------------ ----------
Total assets $ 1,411,950 $ 339,842 $ (134,553) $1,617,239
----------- --------- ------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 14,242 $ 6,000 $ $ 20,242
Short-term borrowings 61,931 61,931
Trade accounts payable and accrued liabilities 144,491 25,707 (a) 3,000 173,198
Income taxes payable 16,792 16,792
----------- --------- ------------ ----------
Total current liabilities 237,456 31,707 3,000 272,163
Long-term obligations 217,431 113,222 330,653
Other long-term liabilities 38,385 1,572 (b) 9,683 49,640
Deferred income taxes 67,643 14,085 (b) (42,930) 38,798
----------- --------- ------------ ----------
Total liabilities 560,915 160,586 (30,247) 691,254
----------- --------- ------------ ----------
Commitments and contingencies
Stockholders' equity:
Capital stock 10,136 182 (a) 614 10,750
(b) (182)
Capital in excess of par value 397,271 180,489 (a) 74,336 471,607
(b)(180,489)
Accumulated other comprehensive income (9,098) (9,098)
Retained earnings (accumulated deficit) 457,543 (1,415) (b) 1,415 457,543
Less treasury stock, at cost (4,817) (4,817)
----------- --------- ------------ ----------
Total stockholders' equity 851,035 179,256 (104,306) 925,985
----------- --------- ------------ ----------
Total liabilities and stockholders' equity $ 1,411,950 $ 339,842 $ (134,553 $1,617,239
=========== ========= ============ ==========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE> 3
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma
Nabors Bayard Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 759,917 $ 64,802 $ $ 824,719
----------- ----------- ----------- -----------
Operating expenses:
Direct costs 487,801 48,447 536,248
General and administrative expenses 58,628 2,374 61,002
Depreciation and amortization 62,617 10,352 (c) (4,530) 68,439
----------- ----------- ----------- -----------
Operating expenses 609,046 61,173 (4,530) 665,689
----------- ----------- ----------- -----------
Operating income 150,871 3,629 4,530 159,030
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (11,839) (3,392) (d) 499 (14,732)
Interest income 1,205 1,217 2,422
Other income, net 24,782 347 25,129
----------- ----------- ----------- -----------
Other income (expense) 14,148 (1,828) 499 12,819
----------- ----------- ----------- -----------
Income from continuing operations before income taxes 165,019 1,801 5,029 171,849
Income taxes 61,057 758 (e) 1,837 63,652
----------- ----------- ----------- -----------
Net income from continuing operations $ 103,962 $ 1,043 $ 3,192 $ 108,197
----------- ----------- ----------- -----------
Earnings per share from continuing operations:
Basic $ 1.03 $ 1.01
----------- -----------
Diluted(f) $ .96 $ .94
----------- -----------
Weighted average number of shares outstanding
Basic 100,811 (g) 6,140 106,951
----------- ----------- -----------
Diluted(f) 112,969 (g) 6,140 119,109
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE> 4
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------- -----------------------
Bayard Bayard
Nabors Bayard Acquisitions(h) Combined Adjustments Combined
----------- -------- -------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,115,032 $ 55,747 $ 25,626 $ 81,373 $ $ 1,196,405
----------- -------- -------- -------- ---------- -----------
Operating expenses:
Direct costs 774,856 40,705 18,999 59,704 834,560
General and administrative expenses 72,478 1,868 1,572 3,440 75,918
Depreciation and amortization 72,350 7,943 2,747 10,690 (c)(3,716) 79,324
----------- -------- -------- -------- ---------- -----------
Operating expenses 919,684 50,516 23,318 73,834 (3,716) 989,802
----------- -------- -------- -------- ---------- -----------
Operating income 195,348 5,231 2,308 7,539 3,716 206,603
----------- -------- -------- -------- ---------- -----------
Other income (expense):
Interest expense (16,323) (3,065) (545) (3,610) (19,933)
Interest income 1,936 597 436 1,033 2,969
Other income, net 28,502 581 (67) 514 29,016
----------- -------- -------- -------- ---------- -----------
Other income (expense) 14,115 (1,887) (176) (2,063) 12,052
----------- -------- -------- -------- ---------- -----------
Income from continuing operations before income taxes 209,463 3,344 2,132 5,476 3,716 218,655
Income taxes 73,443 1,428 698 2,126 (e) 1,367 76,936
----------- -------- -------- -------- ---------- -----------
Net income from continuing operations $ 136,020 $ 1,916 $ 1,434 $ 3,350 $ 2,349 $ 141,719
----------- -------- -------- -------- ---------- -----------
Earnings per share from continuing operations:
Basic $ 1.39 $ 1.36
----------- -----------
Diluted (f) $ 1.24 $ 1.23
----------- -----------
Weighted average number of shares outstanding:
Basic 98,180 (g) 6,140 104,320
----------- ---------- ----------
Diluted (f) 113,793 (g) 6,140 119,933
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE> 5
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following is a summary of the significant assumptions and adjustments used
in preparing the Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1998 and the Unaudited Pro forma Combined Condensed Statements of
Operations for the nine months ended September 30, 1998 and for the twelve
months ended December 31, 1997.
(a) To reflect the purchase of Bayard for $5.46 million in cash and the
issuance of 6,140,456 shares of Nabors common stock in exchange for 100% of
the issued and outstanding shares of Bayard. These amounts represent the
conversion of each Bayard share into 0.3375 shares of Nabors common stock
and $0.30 in cash. Nabors common stock was valued at $12.0625 per share,
which represents the average market price of Nabors common stock for the
two day period prior to the agreement as to the final merger terms.
Additionally, the purchase price reflects the issuance by Nabors of 437,603
options and 133,988 warrants to purchase Nabors common stock, which were
valued at their estimated fair market value using the Black-Scholes option
pricing model, in exchange for the outstanding options and warrants of
Bayard.
The purchase price has been calculated as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Cash $ 5,458
Nabors common stock, valued at $12.0625 per share 74,069
Nabors options and warrants 881
Estimated acquisition costs 3,000
-------
Purchase price, including acquisition costs $83,408
=======
</TABLE>
(b) The purchase price including estimated acquisition costs have been
allocated to assets acquired and liabilities assumed based upon their
estimated fair values. The excess of the estimated fair value of the assets
acquired and liabilities assumed over the purchase price has been accounted
for as a reduction of the value assigned to property, plant and equipment.
The allocation of the purchase price of Bayard is as follows:
<TABLE>
<CAPTION>
(In thousands)
Purchase
Historical Price Pro Forma
Amount Allocation Adjustments
--------- --------- ---------
<S> <C> <C> <C>
Current assets $ 39,125 $ 39,125 $ --
Property, plant and equipment 283,659 171,069 (112,590)(i)
Other long-term assets 17,058 553 (16,505)(ii)
Current liabilities (31,707) (31,707) --
Long-term obligations, excluding current maturities (113,222) (113,222) --
Other long-term liabilities (1,572) (11,255) (9,683)(iii)
Deferred income taxes (14,085) 28,845 42,930(iv)
Capital stock (182) -- 182
Capital in excess of par value (180,489) -- 180,489
Accumulated deficit 1,415 -- (1,415)
--------- --------- ---------
$ -- $ 83,408 $ 83,408
========= ========= =========
</TABLE>
(i) The excess of the estimated fair value of the assets acquired and
liabilities assumed over the purchase price has been accounted
for as a reduction of the value assigned to property, plant and
equipment. The resulting amount allocated to property, plant and
equipment does not exceed fair market value based upon the
internal estimates of Nabors management.
(ii) To eliminate Bayard's historical goodwill, as well as deferred
financing costs associated with the Bayard $100 million, 11%,
Senior Notes due 2005 (the "Bayard 11% Notes").
<PAGE> 6
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(iii) To record debt premium based upon the estimated fair value of
the Bayard 11% Notes. The fair value of the Bayard 11% Notes was
estimated based on the present value of amounts to be paid,
discounted at a rate currently available to Bayard for borrowings
with similar terms and maturities.
(iv) To adjust deferred tax obligations for differences between the
financial statement basis (which has been decreased as described
in (b)(i) above) and the tax basis (which will not be decreased
because of the merger) of the assets acquired and liabilities
assumed in accordance with SFAS No. 109.
(c) Depreciation and amortization is adjusted to reflect Nabors depreciation
policy, as well as to reflect the reduction in the value assigned to
property, plant and equipment and the elimination of goodwill previously
recorded by Bayard.
(d) Interest expense is adjusted to reflect both the amortization of the fair
value premium and the elimination of the amortization of the deferred
financing costs recorded on the Bayard 11% Notes issued on June 26, 1998.
(e) Income tax expense is adjusted to reflect the tax effect of the pro forma
adjustments, as well as to reflect the combined tax position of the pro
forma combined companies.
(f) For the calculation of diluted earnings per share, net income is adjusted
to add back $4,075 and $5,554 for the nine months ended September 30, 1998
and the twelve months ended December 31, 1997, respectively, of after tax
interest expense on the Nabors $172,500, 5% Convertible Subordinated Notes.
(g) Assumes that 6,140,456 Nabors Shares were exchanged for 100% of the Bayard
shares at the beginning of the periods presented.
(h) Represents the results of operations for Trend, Ward and Bonray prior to
their acquisition by Bayard. These results have been included on a pro
forma basis due to their significance to Bayard. Operations subsequent to
the date of purchase of Trend, Ward and Bonray, on May 1, May 30 and
October 16, 1997, respectively, are included in the Bayard historical
results.
<PAGE> 1
EXHIBIT 99.2
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BAYARD DRILLING
TECHNOLOGIES, INC.
Report of Independent Certified Public Accountants........ F-2
Report of Independent Accountants......................... F-3
Balance Sheets as of December 31, 1996 and 1997, and
September 30, 1998..................................... F-4
Statements of Operations for the years ended December 31,
1995, 1996 and 1997, and nine months ended September
30, 1997 and 1998...................................... F-5
Statements of Equity (Deficit) for the years ended
December 31, 1995, 1996 and 1997 and nine months ended
September 30, 1998..................................... F-6
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and nine months ended September
30, 1997 and 1998...................................... F-7
Notes to Financial Statements............................. F-9
FINANCIAL STATEMENTS OF TREND DRILLING COMPANY
Report of Independent Accountants......................... F-25
Balance Sheets as of December 31, 1995 and 1996 and as of
April 30, 1997......................................... F-26
Statements of Operations for the years ended December 31,
1994, 1995 and 1996 and four months ended April 30,
1997 (unaudited)....................................... F-27
Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996....................... F-28
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and four months ended April 30,
1997 (unaudited)....................................... F-29
Notes to the Financial Statements......................... F-30
FINANCIAL STATEMENTS OF WARD DRILLING COMPANY, INC.
Report of Independent Accountants......................... F-35
Balance Sheet as of December 31, 1996 and May 31, 1997.... F-36
Statements of Operations and Retained Earnings for the
year ended December 31, 1996 and five months ended May
31, 1997 (unaudited)................................... F-37
Statements of Cash Flows for the year ended December 31,
1996 and five months ended May 31, 1997 (unaudited).... F-38
Notes to Financial Statements............................. F-39
FINANCIAL STATEMENTS OF BONRAY DRILLING CORPORATION
Report of Independent Auditors............................ F-42
Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996 and June 30, 1996.................... F-43
Statements of Operations and Accumulated Deficit for the
nine-month period ended September 30, 1997 (unaudited)
and for the six-month period ended December 31, 1996
and years ended June 30, 1996 and 1995................. F-44
Statements of Cash Flows for the nine-month period ended
September 30, 1997 (unaudited) and for the six-month
period ended December 31, 1996 and years ended June 30,
1996 and 1995.......................................... F-45
Notes to Financial Statements............................. F-46
</TABLE>
F-1
<PAGE> 2
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> 3
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> 4
BAYARD DRILLING TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 4,963 $ 49,302 $ 19,148
Restricted investments.................................... -- 880 525
Accounts receivable....................................... 286 19,491 15,750
Accounts receivable -- affiliate.......................... 798 -- --
Other current assets...................................... 1 538 3,702
------- -------- --------
Total current assets.............................. 6,048 70,211 39,125
Property, plant and equipment, net.......................... 26,973 155,673 283,659
Goodwill, net of accumulated amortization of $375 at
December 31, 1997 and $1,029 at September 30, 1998........ -- 12,704 12,050
Other assets................................................ 1,652 1,900 5,008
------- -------- --------
Total assets...................................... $34,673 $240,488 $339,842
======= ======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 409 $ 8,246 $ 13,596
Accounts payable -- affiliate............................. 412 494 415
Accrued liabilities....................................... 253 5,067 11,696
Current portion of long-term debt......................... 947 7,450 6,000
------- -------- --------
Total current liabilities......................... 2,021 21,257 31,707
------- -------- --------
Deferred income tax liabilities............................. 348 13,554 14,085
------- -------- --------
Other long term liabilities................................. -- 2,055 1,572
------- -------- --------
Long-term debt, less current maturities..................... 6,053 23,069 13,222
------- -------- --------
Subordinated notes, net of debt discount of $429 at December
31, 1997.................................................. -- 2,091 --
------- -------- --------
Notes payable, 11% Senior notes due 2005.................... -- -- 100,000
Commitments and Contingencies -- Note G, H & K
STOCKHOLDERS EQUITY:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized; none issued or outstanding................. -- -- --
Common stock, $0.01 par value, 100,000,000 shares
authorized; 5,600,000 shares issued and outstanding at
December 31, 1996; 18,183,945 at December 31, 1997; and
18,193,945 at September 30, 1998....................... 56 182 182
Additional paid-in capital (net of deferred compensation of
$258 at December 31, 1997 and $219 at September 30,
1998)..................................................... 26,229 180,400 180,489
Accumulated deficit......................................... (34) (2,120) (1,415)
------- -------- --------
Total equity...................................... 26,251 178,462 179,256
------- -------- --------
Total liabilities and equity...................... $34,673 $240,488 $339,842
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 5
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1995 1996 1997 1997 1998
------ ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Drilling.......................................... $5,491 $8,995 $39,165 $33,214 $64,802
Drilling -- affiliate............................. 1,914 798 16,582 -- --
Other............................................. 303 60 -- -- --
------ ------ ------- ------- -------
Total revenues............................. 7,708 9,853 55,747 33,214 64,802
------ ------ ------- ------- -------
COSTS AND EXPENSES:
Drilling.......................................... 6,075 7,653 40,705 24,246 48,447
General and administrative........................ 880 658 1,868 1,181 2,374
Depreciation and amortization..................... 791 1,126 7,943 4,918 10,352
Other............................................. 47 46 -- -- --
------ ------ ------- ------- -------
Total costs and expenses................... 7,793 9,483 50,516 30,345 61,173
------ ------ ------- ------- -------
Operating income (loss).................... (85) 370 5,231 2,869 3,629
------ ------ ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense.................................. (3) (11) (3,065) (2,172) (3,392)
Interest income................................... -- -- 597 68 1,217
Gain (loss) on sale of assets..................... (131) 54 544 303 354
Other............................................. (3) 17 37 5 (7)
------ ------ ------- ------- -------
Total other income (expense)............... (137) 60 (1,887) (1,796) (1,828)
------ ------ ------- ------- -------
Earnings (loss) before income taxes and
extraordinary item................................ (222) 430 3,344 1,073 1,801
Income tax provision -- deferred.................... -- 17 1,428 410 758
------ ------ ------- ------- -------
Net income (loss) before extraordinary item......... (222) 413 1,916 663 1,043
Extraordinary loss.................................. -- -- (4,002) -- (338)
------ ------ ------- ------- -------
Net earnings (loss)................................. $ (222) $ 413 $(2,086) $ 663 $ 705
====== ====== ======= ======= =======
EARNINGS (LOSS) PER SHARE:
Basic:
Before extraordinary item....................... $ .21 $ .10 $ .06
======= ======= =======
Extraordinary item.............................. $ (.44) -- (.02)
======= ======= =======
Net earnings (loss)............................. $ (.23) $ .10 $ .04
======= ======= =======
Diluted:
Before extraordinary item....................... $ .17 $ .07 $ .06
======= ======= =======
Extraordinary item.............................. $ (.35) -- (.02)
======= ======= =======
Net earnings (loss)............................. $ (.18) $ .07 $ .04
======= ======= =======
Weighted average common shares outstanding, basic... 5,600 5,600 9,064 6,679 18,191
====== ====== ======= ======= =======
Weighted average common shares outstanding,
diluted........................................... 5,600 5,749 11,500 9,607 18,474
====== ====== ======= ======= =======
PRO FORMA INFORMATION:
Additional income tax expense..................... -- 146
------ ------
Pro forma net earnings (loss)..................... $ (222) $ 267
------ ------
Pro forma earnings (loss) per share, basic and
diluted......................................... $ (.04) $ .05
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 6
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
----------------------------------------------------
PARTNERS ADDITIONAL
CAPITAL COMMON PAID-IN DEFERRED RETAINED
(DEFICIT) STOCK CAPITAL COST EARNINGS TOTAL
--------- ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... $ (276) $ -- $ -- $ -- $ -- $ --
Net earnings through date of
corporate capitalization...... 447 -- -- -- -- --
Net increase in equity arising
from affiliate transactions... 5,285 -- -- -- -- --
Issuance of stock in corporate
capitalization................ (5,456) 20 5,436 -- -- 5,456
Sale of stock.................... -- 20 9,980 -- -- 10,000
Issuance of stock options and
warrants for drilling
agreements and debt........... -- -- 1,319 -- -- 1,319
Issuance of stock and options for
property and equipment........ -- 16 9,494 -- -- 9,510
Net loss from date of corporate
capitalization to December 31,
1996.......................... -- -- -- -- (34) (34)
------- ---- -------- ----- ------- --------
Balance at December 31, 1996....... -- 56 26,229 -- (34) 26,251
Net loss......................... -- -- -- -- (2,086) (2,086)
Issuance of stock options to
employees..................... -- -- 60 (53) -- 7
Sale of stock.................... -- 89 107,020 -- -- 107,109
Issuance of stock options and
warrants...................... -- -- 5,068 -- -- 5,068
Executive compensation
agreements.................... -- -- 250 (205) -- 45
Issuance of stock for
acquisitions.................. -- 37 42,031 -- -- 42,068
------- ---- -------- ----- ------- --------
Balance at December 31, 1997....... -- 182 180,658 (258) (2,120) 178,462
Net income (unaudited)........... -- -- -- -- 705 705
Exercise stock options
(unaudited)................... -- -- 50 -- -- 50
Executive compensation agreements
(unaudited)................... -- -- -- 39 -- 39
------- ---- -------- ----- ------- --------
Balance at September 30, 1998
(unaudited)...................... $ -- $182 $180,708 $(219) $(1,415) $179,256
======= ==== ======== ===== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 7
BAYARD DRILLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................... $ (222) $ 413 $ (2,086) $ 663 $ 705
Adjustments to reconcile net earnings (loss)
to net cash (used in) provided by
operating activities --
Depreciation and amortization............. 791 1,126 7,943 4,918 10,352
(Gain) loss on sale of assets............. 131 (54) (544) (303) (354)
Extraordinary loss........................ -- -- 4,002 -- --
Compensation expense...................... -- -- 52 21 39
Deferred income taxes..................... -- 17 1,428 410 758
Change in assets and liabilities, net of
effects of affiliate transactions --
Decrease (increase) in accounts
receivable........................... 242 (2,059) (18,407) (12,526) 3,741
Increase in prepaid expenses........... -- -- (537) -- --
Decrease (increase) in other assets.... (6) (185) 513 (1,030) (3,590)
Increase (decrease) in accrued
liabilities.......................... (237) 251 4,814 3,564 6,629
Increase (decrease) in accounts
payable.............................. (389) (383) 1,432 12,895 5,350
Increase (decrease) in other
liabilities.......................... -- -- -- -- (483)
Increase (decrease) in payable to
affiliate............................ -- 412 82 -- (79)
------- -------- -------- -------- ---------
Net cash (used in) provided by
operating activities............... 310 (462) (1,308) 8,612 23,068
------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment....... (2,088) (10,578) (60,924) (50,454) (138,017)
Acquisition of businesses................... -- -- (26,056) (26,056) --
Proceeds from sale of assets................ 378 137 1,390 781 688
(Purchase) proceeds of investments.......... -- -- (880) (730) 355
------- -------- -------- -------- ---------
Net cash used in investing
activities......................... (1,710) (10,441) (86,470) (76,459) (136,974)
------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made to affiliates................. (8,828) (19,719) -- -- --
Advances received from affiliates........... 10,228 18,791 -- -- --
Proceeds from borrowings.................... -- 7,000 49,780 47,944 --
Proceeds from exercise of options........... -- -- -- -- 50
Net proceeds from issuance of stock......... -- 10,000 107,109 11,230 --
Proceeds from issuance of notes, net of
issuance costs............................ -- -- -- -- 97,450
Debt issuance costs......................... -- (206) (761) -- --
Payments on long-term debt.................. -- -- (24,011) (4,114) (13,748)
Payments under line of credit............... -- -- (8,701) -- --
Borrowings under line of credit............. -- -- 8,701 7,906 --
------- -------- -------- -------- ---------
Net cash provided by (used in) financing
activities............................. 1,400 15,866 132,117 62,966 83,752
------- -------- -------- -------- ---------
Net change in cash.......................... -- 4,963 44,339 (4,881) (30,154)
Cash at beginning of period................. -- -- 4,963 4,963 49,302
------- -------- -------- -------- ---------
Cash at end of period....................... $ -- $ 4,963 $ 49,302 $ 82 $ 19,148
======= ======== ======== ======== =========
Cash paid during the period for interest.... $ -- $ -- $ 2,854 $ 2,275 $ 2,110
Cash paid during the period for income
taxes..................................... $ -- $ -- $ -- $ -- $ --
======= ======== ======== ======== =========
</TABLE>
Continued
F-7
<PAGE> 8
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> 9
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
NOTE A -- NATURE OF OPERATIONS
Bayard Drilling Technologies, Inc. together with its predecessor, (the
"Company"), a Delaware corporation, is the successor to the drilling operations
of Anadarko Drilling Company ("Anadarko"), which began drilling operations in
1980. The Company provides land-based contract drilling services to major and
independent oil and gas companies in the Mid-Continent and Gulf Coast regions of
the United States.
Beginning in October 1996, AnSon Partners Limited Partnership ("APLP")
initiated a series of transactions among its wholly owned affiliates, Anadarko,
a partnership, and Bayard Drilling Company ("BDC"), a corporation, and the
Company. These series of transactions resulted in the corporate capitalization
of the Company in December 1996 with net assets, primarily drilling rigs,
previously owned by Anadarko. Such transactions were accounted for as a
reorganization of entities under common control.
NOTE B -- SUMMARY OF ACCOUNTING POLICIES
The summary of significant accounting policies applied in the preparation
of the accompanying financial statements follows.
1. BASIS OF PRESENTATION AND CONSOLIDATION
The financial statements and information for periods prior to December 1,
1996 represent those of the predecessor. The consolidated financial statements
for periods after December 31, 1996 include the accounts of the Company and its
wholly owned subsidiaries, Trend Drilling Company ("Trend") and WD Equipment,
L.L.C. and Bonray Drilling Corporation. All significant intercompany accounts
and transactions have been eliminated.
2. CASH
The Company considers all cash and investments with an original maturity of
90 days or less to be cash equivalents. The Company maintains its cash in a bank
deposit account which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. At December 31, 1997
and September 30, 1998, the Company had cash and cash equivalents in or at four
and three financial institutions respectively, where the balance exceeded
federally insured limits, in total by approximately $48.9 and $19.4 million,
respectively.
3. RESTRICTED INVESTMENTS
Restricted investments consist of certificates of deposits pledged to state
insurance departments and insurance companies to support payment of workers
compensation claims.
4. CONCENTRATION OF CREDIT RISK
The primary market for the Company's services are independent oil and gas
companies whose level of activities are related to, among other things, oil and
gas prices. The Company performs ongoing credit evaluations of its customers and
provides for potential credit losses when necessary. No allowance was required
at December 31, 1997, 1996 or 1995. At December 31, 1997 and September 30, 1998,
approximately 53% and 48%, respectively, of the Company's trade receivables and
over 63% and 48%, respectively, of total revenues were derived from the
Company's five largest customers in terms of total revenues.
F-9
<PAGE> 10
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, reduced by provisions to
recognize economic impairment in value when management determines that such
impairment has occurred. Drilling equipment is depreciated using the declining
balance method (which approximates straight line) over the estimated useful
lives from five to fifteen years. Other property and equipment are depreciated
on the same basis over estimated useful lives from three to ten years.
Refurbishments and upgrades of drilling equipment are capitalized if such
expenditures are significant and extend the lives of the equipment. Maintenance
and repairs are expensed as incurred. When assets are sold, retired or disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and the gain or loss is recognized.
It is the Company's policy to capitalize interest on construction costs for
rig refurbishments during the period in which those costs are incurred. The
Company incurred interest costs of approximately $3.6 million during 1997 and $5
million for the nine months ended September 30, 1998 of which approximately
$565,000 and $1.6 million, respectively, was capitalized in property and
equipment for rig construction. No interest costs were capitalized in 1996 or
1995.
6. REVENUE RECOGNITION
Revenues generated from the Company's dayrate drilling contracts are
recognized as services are performed and revenues generated from the Company's
footage drilling contracts are recognized as a percentage of completion. For all
drilling contracts under which the Company bears the risk of completion (such as
turnkey contracts) revenues and expenses are recognized using the completed
contracts method. When estimates of projected revenues and expenses indicate a
loss, the total estimated loss is accrued.
7. NET EARNINGS (LOSS) PER SHARE
Earnings per share are computed based on the weighted average number of
basic and diluted shares outstanding during the period pursuant to SFAS No. 128.
SFAS No. 128 simplifies the standards for computing earnings per share by
replacing the presentation of primary earnings per share with a presentation of
basic earnings per share and by simplifying the calculation of diluted earnings
per share. A reconciliation of the numerator and denominator used in the
calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------------------------ ------------------------------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item.......................... $1,916 $1,043
------ ------
Basic earnings per share........ 1,916 9,064 $.21 1,043 18,191 $.06
------ ---- ------
Effect of dilutive securities;
Warrants and options.......... 2,436 283
------ ------
Diluted earnings per share...... $1,916 11,500 $.17 $1,043 18,474 $.06
====== ====== ==== ====== ======
</TABLE>
Pro forma net earnings (loss) per share are presented to reflect the
provision for income taxes for periods Anadarko was a partnership.
Options to purchase 397,000 shares of common stock at $23 per share were
granted in November 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares. The options, which expire on November
4, 2003, were still outstanding at December 31, 1997.
F-10
<PAGE> 11
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Historical income taxes were not provided in the financial statements for
earnings attributable to Anadarko since the partners would pay income taxes or
receive as a deduction their distributive share of Anadarko's taxable income or
loss. The proforma income tax expense for 1996 was calculated using an effective
tax rate of 38%.
The Company uses the liability method of accounting for deferred income
taxes under SFAS No. 109, whereby deferred tax assets and liabilities are
recognized based upon differences between the financial statement and tax bases
of assets and liabilities using presently enacted tax rates. If it is more
likely than not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
9. GOODWILL AND OTHER ASSETS
Goodwill related to the acquisition of Trend and Bonray is being amortized
over fifteen years. Amortization expense of goodwill of $375,062 and $653,976,
respectively, has been recognized as of December 31, 1997 and September 30,
1998.
Other assets consist of (i) organizational costs incurred for the
organization of Bayard, (ii) debt issuance costs incurred on the term loan, and
(iii) issuance costs of the Senior Notes. Amortization expense for organization
costs is recognized over five years and debt issuance costs over the life of the
loan, which approximates five years, both on a straight-line basis. Amortization
expense of $1.4 million, $63,000 and $578,620 has been recognized for the years
ended December 31, 1997 and 1996 and for the nine months ended September 30,
1998, respectively.
On an ongoing basis, management reviews the valuation and amortization of
goodwill and other intangibles to determine possible impairment. The
recoverability of these assets is assessed by determining whether the carrying
value can be recovered from undiscounted future cash flows.
10. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period; accordingly actual results could differ from those estimates.
The Company has significant estimates for workers compensation liability due to
the retention of $500,000 per occurrence. At December 31, 1997 and 1996 and for
the nine months ended September 30, 1998, estimates for this retention were $1.7
million, $20,000 and $1.6 million, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and investments which
approximate fair value because of the short maturity of those instruments, a
payable to an affiliate which approximates fair value due to the demand nature
of this obligation, a floating rate term loan which approximates fair value
because the interest rate adjusts to the market rate, and notes payable which
approximate fair value because the interest rates on these notes reflects the
borrowing terms currently available to the Company.
12. INTERIM FINANCIAL STATEMENTS AND DISCLOSURES
In the opinion of management of Bayard Drilling Technologies, Inc.
("Bayard" or the "Company"), the unaudited interim financial statements for the
nine months ended September 30, 1998 and 1997 include all adjustments,
consisting of normal recurring accruals, necessary to present fairly the
Company's financial position as of September 30, 1998 and results of operations
and cash flows for the nine months ended
F-11
<PAGE> 12
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1998 and 1997. Results for the period ended September 30, 1998 are
not necessarily indicative of the results to be expected for the entire fiscal
year. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
13. STOCK BASED COMPENSATION
The Company applies APB Opinion 25 in accounting for its stock option
plans. Under this standard, compensation expense is only recognized for grants
of options which include an exercise price less than the market price of the
stock on the date of grant. Accordingly, based on the Company's grants for 1996,
for the year ended December 31, 1997 and for the nine months ended September 30,
1998, the Company recognized $0 and approximately $310,000 and $0, respectively,
of deferred compensation and $0 and approximately $52,000 and $39,000,
respectively, of compensation expense. For grants of options which include an
exercise price equal to or greater than the market price of the stock on the
date of grant, the Company has disclosed the pro forma effects of recording
compensation based on fair value in Note N to the financial statements as
allowed by Financial Accounting Standard No. 123 "Accounting for Stock-Based
Compensation."
NOTE C -- ACQUISITIONS
On May 1, 1997, the Company completed the acquisition of the common stock
of Trend ("Trend Acquisition") for $18 million in cash and 250,000 shares of
common stock which equates to $10.64 per share based on the appraisals of the
fair market value of the property and equipment acquired of $21,532,000. The
Company incurred costs of approximately $307,000 in connection with this
acquisition.
The Trend Acquisition was accounted for as a purchase. The following is an
analysis of the allocation of the purchase price:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 2,734
Property and equipment...................................... 21,532
Goodwill.................................................... 6,330
Current liabilities......................................... (2,265)
Long-term liabilities....................................... (1,340)
Deferred income tax liability............................... (6,330)
-------
Purchase price.............................................. $20,661
=======
</TABLE>
On May 30, 1997, the Company acquired WD Equipment, L.L.C. (which owned six
drilling rigs, but had no operations) from Ward Drilling Company, Inc. ("Ward
Acquisition") for approximately $8 million in cash and 400,000 shares of common
stock which equates to $8.95 per share based on the appraisal of the fair market
value of the assets acquired of $11,931,000. The Company also issued warrants to
purchase 200,000 shares of common stock at $10.00 per share. The warrant had an
estimated fair market value of $294,000 at the agreement closing date and was
recorded as an increase in property and equipment and additional paid in
capital.
On October 16, 1997, the Company completed the acquisition of Bonray
("Bonray Acquisition"), subject to certain working capital adjustments, for
3,015,000 shares of Common Stock, which equates to $11.86 per share based on the
appraisals of the fair market value of the property and equipment acquired of
$34,976,000.
F-12
<PAGE> 13
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bonray Acquisition was accounted for as a purchase. The following is a
preliminary analysis of the allocation of the purchase price:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 4,020
Property and equipment...................................... 34,976
Goodwill.................................................... 6,750
Current liabilities......................................... (3,162)
Long-term liabilities....................................... (74)
Deferred income tax liability............................... (6,750)
-------
Purchase price.............................................. $35,760
=======
</TABLE>
The following is the unaudited pro forma combined results of operations as
if Trend, Ward and Bonray had been acquired January 1, 1996 and 1997,
respectively (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
--------- ---------
<S> <C> <C>
Revenues.................................................... $47,952 $81,373
======= =======
Net income (loss)........................................... $(1,848) $ 3,174
======= =======
Net income (loss) per common share, basic................... $ (.33) $ .35
======= =======
Net income (loss) per common share, diluted................. $ (.32) $ .28
======= =======
</TABLE>
On June 26, 1998, the Company completed the acquisition of 25 drilling rigs
and certain related equipment and other assets from TransTexas Gas Corporation
("TransTexas") for $75 million in cash (the "TransTexas Acquisition"), which was
allocated to the cost basis of the rigs and equipment. The rigs will be
depreciated pursuant to the Company's depreciation policy. TransTexas utilized
the rigs solely for their own drilling activities and did not contract the rigs
to third parties. Therefore, there were no third party drilling revenues.
TransTexas accounted for the rigs and related costs and expenses as a cost
center. All of the acquired rigs are mechanical rigs capable of drilling to
depths of 12,000 feet or greater, with twelve of the rigs capable of drilling to
depths of 20,000 feet or greater. Four of the drilling rigs are awaiting
refurbishment when market conditions warrant. In addition, the Company and
TransTexas have entered into an Alliance Agreement that provides that for a
period of 30 months, if TransTexas engages in any land drilling activities in
Alabama, Louisiana, Mississippi, Oklahoma, New Mexico or Texas, TransTexas will
engage the Company to provide up to 15 of the Company's rigs for wells on which
TransTexas serves as operator.
F-13
<PAGE> 14
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS
DECEMBER 31, ENDED
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Drilling rigs and components........................ $42,303 $173,674 $305,354
Automobiles, trucks, and trailers................... 431 2,041 5,023
Buildings and property.............................. -- 461 2,061
Furniture, fixtures, and other...................... 7 532 777
------- -------- --------
42,741 176,708 313,215
Less accumulated depreciation....................... 15,768 21,035 29,556
------- -------- --------
$26,973 $155,673 $283,659
======= ======== ========
</TABLE>
NOTE E -- CHANGE IN ESTIMATED LIVES
Effective January 1, 1995, the Company changed the estimated remaining
lives of its drilling rigs and other related drilling equipment to 84 months
from remaining lives which ranged from 31 months to 113 months. The Company also
changed the estimated remaining life of drill collars from 20 months to 36
months. These changes were made to more closely approximate the remaining useful
lives of such assets. The effect of this change was to decrease the historical
net loss by approximately $539,000 and to reduce the pro forma net loss by
approximately $539,000 or $.05 per share (Note B(7)) for the year ended December
31, 1995.
Effective January 1, 1996, the Company changed the estimated remaining
lives of certain drilling component equipment from 84 months to 120 months and
changed the estimated remaining life of drill collars and pipe from 36 months to
60 months. After review and study by the Company, the useful lives of drilling
rigs acquired after January 1, 1996 were changed from 84 months to 144 months.
These changes were made to more closely approximate the remaining useful lives
of such assets. The effect of these changes was to increase the historical net
earnings by approximately $405,000 and to increase pro forma net earnings by
approximately $251,000, net of pro forma income taxes of $154,000, or $.02 per
share for the year ended December 31, 1996.
Effective July 1, 1997, the Company changed the estimated remaining lives
of its drilling rigs and other related drilling equipment to 180 months from
remaining lives of 144 months. These changes were made to more closely
approximate the remaining useful lives of such assets. The effect of these
changes was to increase earnings for the year ended December 31, 1997 by
approximately $505,000, net of income taxes of $310,000, or $.04 per share, on a
diluted basis.
NOTE F -- INCOME TAXES
On October 28, 1996, Anadarko conveyed its operating assets to its
wholly-owned subsidiary, BDC, which caused a change in tax status of the
drilling operations from a partnership to a taxable corporation. A deferred tax
asset was recognized for the temporary differences which existed at the date of
conveyance together with a related valuation allowance. At December 31, 1997,
the Company has net operating loss carry forwards of approximately $2 million,
of which $418,000 and $1,582,000 will expire in 2011 and 2012, respectively, if
unused.
F-14
<PAGE> 15
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense for the years ended December 31, 1995, 1996 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current................................................. $ -- $ -- $ --
Deferred................................................ -- 17 1,428
---- ---- ------
$ -- $ 17 $1,428
==== ==== ======
</TABLE>
Components of net deferred income tax liabilities are as follows:
<TABLE>
<CAPTION>
OCTOBER 28, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets (liabilities)
Operating loss carryforwards................... $ -- $ 167 $ 760
Property and equipment......................... 1,818 (515) (14,314)
Total valuation allowance...................... (1,818) -- --
------- ----- --------
Net deferred tax liabilities........... $ -- $(348) $(13,554)
======= ===== ========
</TABLE>
The Company's actual income tax expense, before extraordinary item,
differed from the federal statutory expense (based on a federal statutory rate
of 34%) for the years ended December 31, as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory
rate................................................. $(75) $ 146 $1,069
State income taxes..................................... -- -- 201
Amortization of goodwill............................... -- -- 142
Other items............................................ -- -- 16
Exclusion of partnership income taxes.................. 75 (129) --
---- ----- ------
$ -- $ 17 $1,428
==== ===== ======
</TABLE>
The Company's valuation allowance on tax assets was established October 28,
1996 due to a change in taxable status and decreased $1,818,000 during the
period from October 28, 1996 to December 31, 1996. The Company was not a taxable
entity in 1995. Effective December 1, 1996, the Company acquired assets with
deferred tax liabilities of approximately $2 million in which the purchase price
allocation resulted in the reduction of the Company's tax asset valuation
allowance of approximately $1,724,000. In 1997 the Company acquired assets with
deferred tax liabilities of approximately $13,080,000, which eliminated the
Company's tax asset valuation.
NOTE G -- LONG-TERM DEBT AND SUBORDINATED NOTES
Long-term debt at December 31, 1996 consisted of borrowings under loan
agreements (the "Loan Agreements") which provide for a term loan (the "Term
Loan") and a revolving loan (the "Revolving Loan"). The Term Loan of $7,000,000
bore interest at the Company's choice of LIBOR plus 4.25% (9.65% at December 31,
1996) or the prime rate of Chase Manhattan Bank, N.A. and requires monthly
payments of principal and interest in amounts sufficient to repay borrowings at
maturity on March 31, 2002. The Loan Agreements permit borrowings to a maximum
of $20 million under the Term Loan if defined collateral provisions are met. The
loan was collateralized by drilling equipment. The Loan Agreements also permit
borrowings up to $4 million under the Revolving Loan through December 31, 1998
subject to a $2 million limitation if the borrowings under the Term Loan exceed
$17 million.
F-15
<PAGE> 16
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Starting in 1997, the Loan Agreements require the maintenance of defined
collateral values, cash flow and liquidity ratios, financial reporting
requirements, and the maintenance of total liabilities to tangible net worth not
greater than 1.25 and imposes certain limitations on capital expenditures and
incurrence of additional debt.
In May 1997, the Company amended and increased the availability under the
Loan Agreements. The Term Loan provides the Company up to $30.5 million for the
purchase of additional land drilling rigs, the refurbishment of such rigs and
equipment and for working capital purposes. The Revolving Loan provides the
revolving credit loans of up to $10 million ($2 million of which is available
for the issuance of letters of credit) for general corporate purposes. Amounts
outstanding under the Revolving Loan (none at December 31, 1997) bear interest
based on Fleet National Bank's prime rate plus 1.5% (approximately 10% at
December 31) and mature in April 2000. Amounts outstanding under the Term Loan
of approximately $27.1 million at December 31, 1997, bear interest, at the
election of the Company, at floating rates equal to Chase Manhattan Bank's prime
rate plus 2.0% or LIBOR plus 4.25% (approximately 10% at December 31) and mature
in March 2002. The Loan Agreements are collateralized by substantially all of
the assets of the Company, including drilling rigs, equipment and drilling
contracts, and contain customary restrictive covenants (including covenants
restricting the ability of the Company to pay dividends or encumber assets) and
an affirmative covenant to maintain Total Available Liquidity (as defined in the
Loan Agreements) of at least $4.5 million through December 31, 1997 and $3
million through December 31, 1998. Pursuant to the Loan Agreements, the Company
must maintain certain financial ratios, including a Cash Flow Coverage ratio (as
defined in the Loan Agreements) of at least 1.25 to 1 until December 1997, 1.5
to 1 in 1998 and 1.75 to 1 thereafter, and a ratio of Total Liabilities (as
defined in the Loan Agreements) to Tangible Net Worth no greater than 1.25 to 1
in 1997 and 1 to 1 in 1998. Under the Loan Agreements the Company is obligated
to pay certain fees, including an annual commitment fee in an amount equal to
0.5% of the unused portion of the commitment.
Additionally, the Company issued Subordinated Notes due May 1, 2003 in the
original principal amounts of $18 million and $2.52 million (the "Subordinated
Notes") to Chesapeake Energy Corporation ("Chesapeake") and Energy Spectrum
Partners LP ("Energy Spectrum"), respectively. The Subordinated Notes bear
interest at either (i) 11% per annum, payable in cash or (ii) 12.875% per annum,
payable in the form of additional Subordinated Notes, which interest is payable
quarterly in arrears. On each quarterly interest payment date, the Company may
make an election as to the interest rate to be applied for the previous quarter.
The Subordinated Notes are redeemable, solely at the option of the Company, in
whole or in part, at any time after May 31, 1998 at varying redemption prices.
The Company must offer to redeem the Subordinated Notes upon the occurrence of
certain events constituting a "Change of Control" (as defined in the
Subordinated Notes) at a redemption price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
redemption. The Subordinated Notes are convertible into Common Stock at the
option of the Company, in whole or in part, in conjunction with a "Convertible
Event" (as defined in the Subordinated Notes), which includes certain
underwritten public offerings (including the Initial Public Offering), mergers,
consolidations and other business combination transactions. The Subordinated
Notes are general unsecured subordinated obligations of the Company that are
subordinated in rights of payment to all existing and future senior indebtedness
of the Company, pari passu with all existing and future subordinated
indebtedness of the Company and senior in right of payment to all future junior
subordinated indebtedness of the Company. At December 31, 1997, the amount of
Subordinated Notes outstanding was approximately $2.5 million as the $18 million
Subordinated Note to Chesapeake was extinguished in November 1997 with proceeds
from the Initial Public Offering. See Note "J" for further discussion on the
discount that was recorded related to this subordinate debt.
The Company also has three notes totaling approximately $3.4 million at
December 31, 1997 and $2.5 million at September 30, 1998, with a capital
financing corporation. The debt bears interest at 9.5% and is collateralized by
certain equipment (top drives) of the Company and letters of credit totaling
approximately $700,000. The debt matures in July, October and November of 2000.
The note agreement does not specify any
F-16
<PAGE> 17
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restrictive financial covenants that must be met but contains a cross default
provision that states any default on the Company's Term or Revolving Notes
constitutes a default on this note as well.
The Company recorded an extraordinary loss of $4.0 million (net of income
tax effect of $1.3 million) in the fourth quarter relating to the early
extinguishment of certain subordinate debt in the amount of approximately $2.1
million and other payments in the amount of approximately $3.2 million by
utilizing proceeds from the Company's Initial Public Offering completed in
November 1997.
At December 31, 1997, the aggregate yearly maturities on long-term
obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- -----------
<S> <C>
1998........................................................ $ 7,450,000
1999........................................................ 7,647,000
2000........................................................ 7,331,000
2001........................................................ 6,385,000
2002........................................................ 1,706,000
Thereafter.................................................. 2,520,000
-----------
$33,039,000
===========
</TABLE>
On June 26, 1998, the Company issued $100 million of Senior Notes and used
$75 million of such proceeds to fund the TransTexas Acquisition. The Company
used the remaining proceeds for general corporate purposes, including
acquisitions of drilling equipment and the refurbishment of rigs. The Senior
Notes mature on June 30, 2005. Interest on the Senior Notes is payable
semi-annually on June 30 and December 31 of each year, commencing on December
31, 1998. The Senior Notes are not redeemable prior to June 30, 2003, on or
after which the Senior Notes will be redeemable, in whole or in part, at the
option of the Company, at the redemption prices set forth in the Indenture
relating to the Senior Notes (the "Indenture"), plus accrued and unpaid interest
and certain other charges, if any, thereon to the date of redemption. In
addition, at any time on or before June 30, 2001, the Company may redeem up to
35% of the original aggregate principal amount of the Senior Notes with the net
proceeds of certain qualifying equity offerings at a redemption price equal to
111% of the principal amount thereof, plus accrued and unpaid interest and
certain other charges, if any, thereon to the date of redemption, provided that
at least $65 million in aggregate principal amount of Senior Notes remains
outstanding immediately after the occurrence of such redemption. Upon a
transaction resulting in a change of control, each holder of the Senior Notes
will have the right to require the Company to repurchase all or any part of such
holder's Senior Notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest and certain other charges, if any, thereon to
the date of repurchase. The Senior Notes are senior unsecured obligations of the
Company and rank pari passu in right of payment with all existing and future
senior indebtedness and other senior obligations of the Company, and senior in
right of payment to all future subordinated indebtedness of the Company.
Each of the Company's wholly owned domestic subsidiaries (each, a
"Guarantor") has issued a guarantee (a "Guarantee") of the Company's obligations
under the Notes. The Guarantees are senior unsecured obligations of each
respective Guarantor and rank pari passu in right of payment with all other
indebtedness and liabilities of such Guarantor that are not subordinated by
their terms to other indebtedness of such Guarantor, and senior in right of
payment to all subordinated indebtedness of such Guarantor.
The Company had outstanding at September 30, 1998 $16.7 million of long
term debt under the Term Loan Agreement. The Term Loan was incurred to finance
the purchase of certain land drilling rigs, the refurbishment of such rigs and
equipment and for working capital purposes. On May 14, 1998, in connection with
the Company's corporate reorganization into a holding company structure, (i) the
Company prepaid $6.2 million of the Term Loan, obtained a release of all
collateral for the Term Loan, except 12 drilling rigs
F-17
<PAGE> 18
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and related equipment, and transferred to Bayard Drilling, L.P., the Company's
wholly owned operating subsidiary ("Bayard Drilling"), substantially all of its
assets, subject to such liens, and (ii) Bayard Drilling and Bayard Drilling,
L.L.C., another wholly owned subsidiary of the Company ("Bayard L.L.C."), agreed
to guarantee the Term Loan. Prior to such prepayment and collateral release, the
Term Loan was secured by substantially all of the assets of Bayard and Trend. In
connection with the Senior Notes Offering, the Term Loan was further amended to
add Bonray as a guarantor of the Company's obligations.
The Term Loan Agreement requires the Company and its subsidiaries to
maintain collateral security for the Term Loan based on appraised fair market
value and orderly liquidation value of the Company's drilling rigs and
associated rig equipment equivalent to the balance of the Term Loan, and adhere
to specified cash flow, leverage and liquidity ratios and minimum net worth and
liquidity requirements. The Term Loan Agreement contains restrictions on, among
other things, the ability of the Company and its subsidiaries to pay dividends,
make investments, incur indebtedness and liens, and make capital expenditures
and requires the maintenance of liquidity of $3 million through December 31,
1998. The Term Loan Agreement also contains affirmative covenants typical of
secured loan arrangements with finance companies, such as requiring financial
reports, insurance maintenance, legal, environmental and permit compliance. The
Company is prohibited from prepaying the Term Loan until after December 31,
1999.
The Term Loan bears interest at the Company's choice of LIBOR plus 4.25%
per annum (9.89% at September 30, 1998) or the prime rate of The Chase Manhattan
Bank plus 2.00% per annum and requires equal monthly payments of principal,
together with accrued interest, in amounts sufficient to repay borrowings at
maturity on March 31, 2002.
The Revolving Loan Agreement provides revolving credit loans, subject to a
borrowing base comprised of a portion of the Company's accounts receivable, of
up to $10 million ($2 million of which is available for letters of credit) for
general corporate purposes. The Company has not borrowed under the Revolving
Loan Agreement since November 1997 but has approximately $1.3 million of letters
of credit outstanding thereunder.
Any borrowings under the Revolving Loan Agreement would bear interest based
on Fleet National Bank's prime rate plus 1.5% (approximately 10.0% at September
30, 1998). A portion of the proceeds from the Initial Public Offering was used
to repay all outstanding amounts under the Revolving Loan Agreement. The Company
pays certain fees under the Revolving Loan Agreement, including a commitment fee
equal to 0.5% of the unused portion of the maximum commitment. Fleet's
commitment to lend under the Revolving Loan Agreement ends in April 2000. The
Company may terminate the Revolving Loan Agreement upon 60 days' prior written
notice to Fleet and the payment of a termination fee of 2% of the facility.
The Revolving Loan Agreement is collateralized by certain assets of Bayard
and Trend that were transferred to Bayard Drilling pursuant to the Company's
corporate reorganization into a holding company structure, including accounts
receivable, certain equipment and inventory, the Company's El Reno, Oklahoma
yard and the same 12 drilling rigs that collateralize the Term Loan Agreement,
together with equipment and drilling contracts related to such rigs. The
Revolving Loan Agreement is also secured by the receivables and certain other
assets of Bayard, Bayard Drilling, Bayard LLC, Trend and Bonray. Until May 14,
1998, the Revolving Loan Agreement was also collateralized by all drilling rigs
of Bayard and Trend, upon which date Fleet released all but such 12 rigs and
related assets. Bayard Drilling, Bayard LLC, Trend and Bonray have agreed to
guarantee the obligations under the Revolving Loan Agreement. The Revolving Loan
Agreement contains customary restrictive covenants that are substantially
similar to the covenants contained in the Term Loan Agreement.
F-18
<PAGE> 19
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- RELATED PARTY TRANSACTIONS
Before the corporate capitalization, AnSon Gas Corporation a wholly owned
affiliate of APLP served as the managing general partner responsible for all
management and operational functions of the Company and charged the Company for
such expenses. The Company expensed approximately $198,000 and $390,000 for such
services received in 1996 and 1995, respectively.
Prior to December 31, 1996, the Company and its affiliates made advances to
each other from time to time which generally had no specific repayment terms.
In December 1996, Anadarko granted the Company a transferable option,
exercisable at any time prior to June 30, 1998, to either purchase from Anadarko
a storage yard located in Weatherford, Oklahoma (the "Weatherford Storage Yard")
for a price of $1,000 in cash or lease from Anadarko, for any period specified
by the Company through a date not later than December 31, 1999, the Weatherford
Storage Yard for a lease price of $100 per year. In August 1997, the Company
acquired from Anadarko approximately 5 acres of land also in Weatherford,
Oklahoma, in consideration for the relinquishment by the Company of the option
to acquire or lease the Weatherford Storage Yard.
In May 1997, the Company paid Energy Spectrum a fee in the amount of
$220,000 for financial advisory and other services rendered to the Company in
connection with the completion of the Trend Acquisition, including the
evaluation and negotiation of the Trend Acquisition and for assistance in the
arrangement of alternative financial sources and structuring, negotiating and
closing the amended financing arrangements with CIT and Fleet. The Company also
reimbursed Energy Spectrum for expenses incurred in connection with the
rendering of such services.
The Company purchased drilling equipment and supplies from an affiliate
totaling $2,862,000 and $779,000 in 1996 and 1995, respectively. The Company
also transferred drilling equipment to an affiliate at the Company's basis
totaling $29,000, net of accumulated depreciation, which resulted in a decrease
in payable to affiliate. The Company has in the past purchased rigs and related
equipment from U.S. Rig & Equipment, Inc., an affiliate of Roy T. Oliver, who
served as a director of the Company until his resignation on August 13, 1997.
During 1997, the Company purchased approximately $5.0 million from U.S. Rig &
Equipment, Inc. Additionally, in August 1997, the Company sold one of its rigs
to an affiliate of Mr. Oliver for $500,000. Additionally, in November 1997, the
Company agreed to acquire six rigs and related drilling equipment for $14
million and such rigs will require additional refurbishment prior to placement
into service. In connection therewith, the Company made a cash down payment of
$3.5 million and closed the transaction in January 1998.
The Company has engaged affiliates of APLP and other related affiliates for
trucking services related to the movement of the Company's rigs on numerous
occasions. During 1997 and the nine months ended September 30, 1998, the Company
utilized these affiliates in consideration for such trucking services of
approximately $2.7 million.
From December 13, 1996 through December 31, 1997, APLP made available to
the Company certain of APLP's employees, office space and administrative
equipment, such as computer and telephone systems. In consideration for such
assistance, the Company has reimbursed APLP an aggregate of approximately
$236,000.
Interest expense incurred during the year ended December 31, 1997 and for
the nine months ended September 30, 1998 included approximately $680,000 and
$71,000, respectively, to current or former affiliates.
NOTE I -- SIGNIFICANT CUSTOMERS
During the year ended December 31, 1997, approximately 30% of revenues were
generated from current or former affiliated customers. Except for six rigs under
long term contracts with Chesapeake, dayrates billed
F-19
<PAGE> 20
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to affiliated customers approximated those billed to nonaffiliated customers.
During 1996, sales to two customers were, respectively, 75% (inclusive of
$798,000 attributable to Chesapeake, which became an affiliate in December 1996)
and 18% of drilling revenues. During 1995, sales to one customer totaled 36% of
drilling revenue.
NOTE J -- STOCKHOLDER'S EQUITY AND OPTIONS
In December 1996, the Company issued 2,000,000 shares of Common Stock to
Anadarko for the operating assets of BDC, Anadarko's subsidiary. Further, the
Company issued 2,000,000 shares of Common Stock to Energy Spectrum for $10
million cash. The Company also acquired six drilling rigs and related equipment
by the issuance of 1,600,000 shares of Common Stock and put options on the
Company's common stock. The drilling rigs were recorded in accordance with
appraisals of the estimated fair value of the assets acquired ($9.5 million) and
the net deferred income tax liability assumed. The estimated fair value of the
put options are recorded as additional contributed capital to the Company.
The Company executed in December 1996 certain drilling agreements to supply
six drilling rigs to Chesapeake at rates equal to defined comparable market
rates but not less than $5,000 per day per rig. The Company granted the operator
an option to purchase 2,000,000 shares of Common Stock at $6 per share, subject
to performance of the operator under the drilling agreement. The estimated fair
value of the options of $1,100,000 was recorded as additional paid-in capital
and a deferred charge to be amortized over a twelve month period consistent with
the annual negotiations of contract terms. At December 31, 1997, the deferred
charge was fully amortized, and the Company and Chesapeake were unable to agree
on an appropriate rate adjustment related to these drilling agreements,
therefore the Company exercised its option to terminate the Chesapeake Drilling
Agreements.
In February 1997, the Company sold 100,000 shares of Common Stock at $2.50
per share to the President of the Company, which are subject to the terms of a
Restricted Stock Award Agreement. Deferred compensation in the amount of
$250,000 was recorded related to this stock grant as the purchase price was
below the fair market value of the Company's Common Stock at the date of grant.
See -- Note "N".
On December 10, 1996, the Company granted the issuer of the Term Loan (Note
G) warrants to immediately purchase up to 290,000 shares of the Company's Common
Stock at $8 per share or up to 300,000 shares at $8 per share when total
outstanding Common Stock exceeds 6,000,000 shares. The warrants expire at the
earlier of December 13, 2001 or eighteen months after completion of the initial
public stock offering by the Company. The warrant holder can also elect to
receive in stock the excess of the stock market value over the warrant exercise
price. These warrants have an estimated fair value of $219,000, which has been
recorded as debt issue costs and is being amortized over the term of the loan.
The Company purchased during May 1997, two drilling rigs from U.S. Rig &
Equipment, Inc. for cash and granted options to purchase 100,000 shares of
Common Stock at $8 per share.
In connection with the issuance of Subordinated Notes executed in May 1997,
the Company issued 1,140,000 shares of Common Stock at $7 per share.
Additionally, the Company issued two series of detachable Warrants, designated
as Series A Warrants and Series B Warrants. The Series A Warrants are
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.
F-20
<PAGE> 21
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the Company granted options to employees to purchase 59,600
shares of Common Stock at $8 per share. Deferred compensation in the amount of
$59,600 was recorded related to these stock options as the exercise price was
below the fair market value of the Company's Common Stock at the date of grant.
See -- Note "N". In November 1997, the Company granted options to employees and
executive officers to purchase 397,000 shares of Common Stock at $23 per share.
During 1996 and 1997, the Company issued stock options to three executive
officers pursuant to the 1997 Stock Option and Stock Award Plan to purchase
200,000, 50,000 and 50,000 shares of Common Stock, respectively, at an exercise
price of $5, $5 and $10 per share, respectively. Except for 10,000 options
exercised in April 1998, at an exercise price of $5 per share none of such
options has been exercised, and all of such options remain outstanding.
In October 1997, the Company consummated the Chesapeake Transactions,
resulting in the cancellation of the Chesapeake Option, the payment to the
Company of $9 million in cash by Chesapeake, the redemption of the $18 million
principal amount of Subordinated Notes held by Chesapeake for an aggregate cash
payment by the Company of $18.2 million and the issuance of 3,194,000 shares of
Common Stock to Chesapeake.
At the August 19, 1997 Board of Directors meeting, the number of authorized
shares of Common Stock was increased from 10,000,000 to 100,000,000 and the
number of authorized shares of preferred stock was increased from 2,000,000 to
20,000,000. Additionally, a two-for-one stock split effected as a stock dividend
on August 22, 1997 was approved. All stock option data, per share earnings and
references to common stock have been restated to give effect to the stock split.
On July 31, 1997, Energy Spectrum exercised in full its Series A Warrants,
at a price of $0.01 per share, for 98,000 shares of Common Stock.
In April 1998, the Company redeemed in full the $2.52 million principal
amount of Subordinated Notes issued to Energy Spectrum together with accrued
interest of $47,740. In connection therewith, Energy Spectrum waived its rights
to require the Company to redeem the Subordinated Notes at 110% of par value.
This redemption coupled with the redemption of $18 million principal amount of
Subordinated Notes from Chesapeake at the time of the Initial Public Offering,
leaves no Subordinated Notes outstanding.
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company has entered into two year employment agreements with three
executive officers, which provide for the payment of the remaining term of each
agreement upon a change of control. As of September 30, 1998, benefits under
such agreements, assuming a change of control, would aggregate approximately
$134,580.
As of September 30, 1998, the Company had construction commitments totaling
approximately $500,000 for rigs in various stages of refurbishment.
A shortage of drill pipe exists in the contract drilling industry in the
United States. This shortage has caused the price of drill pipe to increase
significantly over the past 30 months and has required orders for new drill pipe
to be placed at least one year in advance of expected use. The price increase
and the delay in delivery has caused the Company to substantially increase
capital expenditures for drill pipe in recent months. In the event the shortage
continues, the Company may be unable to obtain the drill pipe required to expand
its contract drilling operations. The Company has committed approximately $1.5
million for drill pipe orders at September 30, which is subject to cancellation
without penalty 90 days prior to the scheduled delivery date.
NOTE L -- SUBSEQUENT EVENTS
A purported class action lawsuit is pending against the Company, certain
directors and officers of the Company, the managing underwriters of the Initial
Public Offering, and certain current and former stockholders of the Company,
alleging violations of federal securities laws in connection with the Initial
Public
F-21
<PAGE> 22
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Offering. The lawsuit, Yuan v. Bayard Drilling Technologies, Inc., et al.
("Yuan"), was filed on February 3, 1998 in the United States District Court for
the Western District of Oklahoma. The principal plaintiff in Yuan is Tom Yuan.
The defendants in this case include the Company, Chesapeake, Energy Spectrum
LLC, James E. Brown, David E. Grose, Carl B. Anderson, III, Merrill A. Miller,
Jr., Sidney L. Tassin, Lew O. Ward, Mike Mullen, Roy T. Oliver, Donaldson,
Lufkin & Jenrette Securities Corporation, Lehman Brothers, Inc., Prudential
Securities, Inc., Rauscher Pierce Refsnes, Inc. (a predecessor to Dain Rauscher
Incorporated) and Raymond James & Associates, Inc.
The plaintiffs in this lawsuit purport to sue on their own behalf and on
behalf of all persons who purchased shares of Common Stock on or traceable to
the Initial Public Offering. In the lawsuit, plaintiffs allege claims against
all defendants under the Securities Act. The plaintiffs allege that the
registration statement and prospectus for the Initial Public Offering contained
materially false and misleading information and omitted to disclose material
facts. In particular, the plaintiffs allege that such registration statement and
prospectus failed to disclose financial difficulties of Chesapeake, the
Company's largest customer, and the effects of such difficulties on Chesapeake's
ability to continue to provide the Company with substantial drilling contracts.
The petitions further allege that the Company failed to disclose pre-offering
negotiations with R.T. Oliver Drilling, Inc., whom the plaintiffs allege was a
related party, for the purchase of drilling rigs. In addition, the petitions
allege that the Company failed to disclose that its growth strategy required
costly refurbishment of older drilling rigs that would dramatically increase the
Company's costs, which could not be sustained by internally generated cash
flows. Plaintiffs are seeking rescission and damages.
Two other suits, Khan v. Bayard Drilling Technologies, Inc., et al.
("Khan") and Burkett v. Bayard Drilling Technologies, Inc., et al. ("Burkett"),
which were filed in District Court in and for Oklahoma County, State of Oklahoma
on January 14, 1998 and February 2, 1998, respectively, and alleged essentially
the same claims as Yuan, were dismissed without prejudice in May 1998 on a joint
application filed by all parties. The plaintiffs in Khan and Burkett, along with
others, have been appointed as lead plaintiffs in the Yuan federal court suit,
now styled to include the other lead plaintiffs, as Yuan, et al. A motion to
dismiss the claims in this lawsuit has been filed by the Company and the other
defendants and is currently pending before the court.
The Company is also involved in other litigation arising from time to time
in the ordinary course of its business, including workers' compensation claims
and disputes arising out of its drilling activities. Such disputes include a
claim filed against the Company and Marathon Oil Company on November 13, 1998 in
the District Court of Washita County in the State of Oklahoma. Eldred L. and
Patricia A. Schneberger, the plaintiffs in this lawsuit, seek an order of
abatement and actual, consequential and punitive damages for losses allegedly
incurred in connection with a drilling project that utilized one of the
Company's rigs.
The Company believes the allegations in the lawsuits referenced above are
without merit and is defending vigorously the claims brought against it. The
Company is unable, however, to predict the outcome of these lawsuits or the
costs to be incurred in connection with their defense and there can be no
assurance that this litigation will be resolved in the Company's favor. An
adverse result or prolonged litigation could have a material adverse effect on
the Company's financial position or results of operations.
Since the Consolidation Transactions and the Initial Public Offering of
11,040,000 shares of Common Stock, par value $0.01 per share of the Company,
which was completed in November 1997, and prior to December 31, 1997, the
Company agreed to purchase six additional rigs from R.T. Oliver for
approximately $14 million in cash. The Oliver Acquisition was completed on
January 9, 1998. The Company expects to refurbish and purchase complementary
equipment, including drill pipe, for these rigs at an aggregate cost of
approximately $28 million.
F-22
<PAGE> 23
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan for certain eligible employees who
have attained the age of 21 and completed at least one year of service.
Participants may contribute up to 15% (20% prior to October 1997) of
compensation for any plan year. The Company's discretionary contribution is
based on the participants' total years of service. The Company has made
contributions of approximately $283,000 through September 30, 1998.
NOTE N -- BENEFIT AND COMPENSATION PLAN
In April 1997, the Board of Directors approved the adoption of an Employee
Stock Plan ("the Plan") whereby 1,600,000 shares of Common Stock are authorized
for issuance under the Plan to officers and employees. The Plan permits the
issuance of qualified or nonqualified stock options, as well as granting of
certain other awards, including shares of restricted stock. Options granted
become vested at the rate of 20% per year one year after being granted, with the
options expiring six years from the original grant date. The exercise price for
options granted through December 31, 1997 was based on the Company's estimate of
the fair market value on the date of the grant. Through December 31, 1997,
756,600 options and 100,000 shares of restricted stock (denoted below) were
issued under the Plan, 40,000 of which were exercisable at December 31, 1997 at
a weighted average exercise price of $5.
Activity pertaining to the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 10, 1996............................ -- --
Granted................................................... 200,000 $ 5.00
Exercised................................................. -- --
-------
Outstanding at January 1, 1997.............................. 200,000 $ 5.00
Granted................................................... 656,600 $16.16
Exercised................................................. -- --
------- ------
December 31, 1997......................................... 856,600 $13.55
=======
</TABLE>
<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.
F-23
<PAGE> 24
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion 25 in accounting for the Plan. Had
compensation been determined on the basis of fair value pursuant to FASB
Statement No. 123, net income and earnings per share would have been reduced as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
------ ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income (loss) (in thousands):
As reported............................................... $267 $(2,086)
Pro forma (net of effective tax of 38%)................... 261 (2,677)
Earnings per share, basic and fully diluted:
As reported, basic........................................ .05 (.23)
Pro forma, basic.......................................... .05 (.30)
As reported, diluted...................................... .05 (.18)
Pro forma, diluted........................................ .05 (.23)
</TABLE>
The fair value of each option granted is estimated using the Black-Scholes
model. This model includes, among others, a variable of stock volatility. As the
Company has not established a significant trading history, the volatility used
in the model was .40 for options granted through June 30, 1997 and .43 for
options granted since July 1, 1997 based on volatility of the stock price of a
similar entity that has been publicly traded for several years. Dividend yield
was estimated to remain at zero with risk free interest rates ranging between
5.72 and 6.31 percent. As there is no prior experience available to use in
estimating an expected life for the options, an average of the time between the
vesting and expiration dates of the options was used in determining the expected
lives of the options ranging from 3.5 to 5.5 years. Fair value of options
granted during 1997 and 1996 under the Plan were $4.6 million and $416,000,
respectively.
F-24
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheets of Trend Drilling Company
as of December 31, 1996 and 1995, and the related statements of operations,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respect, the financial position of Trend Drilling Company as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Oklahoma City, Oklahoma
April 28, 1997
F-25
<PAGE> 26
TREND DRILLING COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------- APRIL 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 448,857 $ 570,873 $ 149,352
Accounts receivable.................................... 2,398,231 3,474,043 2,544,526
Other current assets................................... 34,899 40,661 40,661
Deferred tax asset..................................... 175,593 -- --
---------- ---------- ----------
Total current assets........................... 3,057,580 4,085,577 2,734,539
Property, plant and equipment, net..................... 4,781,019 4,176,964 4,133,639
Goodwill, net of accumulated amortization of $60,000,
$84,000 and $92,000, respectively................... 60,000 36,000 28,000
Deferred tax asset..................................... 186,688 379,850 379,850
---------- ---------- ----------
Total assets................................... $8,085,287 $8,678,391 $7,276,028
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $2,358,575 $1,424,415 $ 583,405
Accrued liabilities.................................... 626,883 1,049,338 280,049
Income taxes payable................................... -- 986,834 1,157,103
Current portion of long-term debt...................... 1,457,976 415,445 232,394
Deferred tax liability................................. -- 11,939 11,939
---------- ---------- ----------
Total current liabilities...................... 4,443,434 3,887,971 2,264,890
---------- ---------- ----------
Long-term debt........................................... 1,755,437 1,339,992 1,339,992
---------- ---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 25,000 shares authorized;
500 shares issued and outstanding................... 500 500 500
Additional paid-in capital............................. 2,483,880 2,483,880 2,483,880
Retained earnings (accumulated deficit)................ (597,964) 966,048 1,186,766
---------- ---------- ----------
Stockholders' equity........................... 1,886,416 3,450,428 3,671,146
---------- ---------- ----------
Total liabilities and stockholders' equity..... $8,085,287 $8,678,391 $7,276,028
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 27
TREND DRILLING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FOUR MONTHS
--------------------------------------- ENDED
1994 1995 1996 APRIL 30, 1997
----------- ----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Drilling contracts..................... $12,563,991 $12,283,649 $15,692,056 $6,389,703
----------- ----------- ----------- ----------
OPERATING EXPENSES:
Drilling............................... 10,070,842 9,218,081 11,752,135 4,844,669
General and administrative............. 1,415,842 1,878,347 1,647,330 514,937
Depreciation and amortization.......... 1,077,292 1,344,835 1,602,832 627,350
----------- ----------- ----------- ----------
Total operating expenses....... 12,563,976 12,441,263 15,002,297 5,986,956
----------- ----------- ----------- ----------
Operating income (loss).................. 15 (157,614) 689,759 402,747
----------- ----------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest expense....................... (183,768) (280,741) (261,331) (46,750)
Interest income........................ 5,880 17,380 8,035 --
Other.................................. 140,021 43,673 53,523 --
Gain on disposition of equipment....... 71,366 42,573 2,055,230 --
----------- ----------- ----------- ----------
Total other income (expense)... 33,499 (177,115) 1,855,457 (46,750)
----------- ----------- ----------- ----------
Income (loss) before income taxes........ 33,514 (334,729) 2,545,216 355,997
Income tax benefit (expense)............. (17,177) 112,906 (981,204) (135,279)
----------- ----------- ----------- ----------
Net Income (loss)........................ $ 16,337 $ (221,823) $ 1,564,012 $ 220,718
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 28
TREND DRILLING COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
CAPITAL IN EARNINGS
COMMON EXCESS OF (ACCUMULATED
STOCK PAR VALUE DEFICIT) TOTAL
------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993..................... $500 $2,483,880 $ (392,478) $2,091,902
Net income................................... -- -- 16,337 16,337
---- ---------- ---------- ----------
Balance, December 31, 1994..................... 500 2,483,880 (376,141) 2,108,239
Net loss..................................... -- -- (221,823) (221,823)
---- ---------- ---------- ----------
Balance, December 31, 1995..................... 500 2,483,880 (597,964) 1,886,416
Net income................................... -- -- 1,564,012 1,564,012
---- ---------- ---------- ----------
Balance, December 31, 1996..................... $500 $2,483,880 $ 966,048 $3,450,428
==== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 29
TREND DRILLING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FOUR MONTHS
-------------------------------------- ENDED
1994 1995 1996 APRIL 30, 1997
----------- ----------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 16,337 $ (221,823) $1,564,012 $ 220,718
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............ 1,077,292 1,344,836 1,602,832 627,350
Gain on disposition of property, plant
and equipment.......................... (71,366) (42,573) (2,055,230) --
Deferred tax expense (benefit)........... 17,177 (112,906) (5,630) --
Change in assets and liabilities:
Accounts receivable.................... (1,436,642) (120,759) (1,075,812) 929,517
Prepaid expenses....................... 2,867 (19,349) (5,762) --
Accounts payable and accrued
liabilities......................... 903,866 929,719 (511,705) (1,610,299)
Income taxes payable................... -- -- 986,834 170,269
Deferred revenue....................... (172,250) -- -- --
----------- ----------- ---------- -----------
Net cash provided by operating
activities........................ 337,281 1,757,145 499,539 337,555
----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of equipment......... 264,219 42,573 2,872,647 --
Capital expenditures........................ (3,645,969) (1,552,257) (1,792,194) (576,027)
----------- ----------- ---------- -----------
Net cash provided by (used in)
investing activities.............. (3,381,750) (1,509,684) 1,080,453 (576,027)
----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt.............. 3,000,000 850,000 775,000 --
Principal payments under debt obligations... (299,809) (658,104) (2,232,976) (183,049)
----------- ----------- ---------- -----------
Net cash provided by (used in)
financing activities.............. 2,700,191 191,896 (1,457,976) (183,049)
----------- ----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents................................. (344,278) 439,357 122,016 (421,521)
Cash and cash equivalents, beginning of
period...................................... 353,778 9,500 448,857 570,873
----------- ----------- ---------- -----------
Cash and cash equivalents, end of period...... $ 9,500 $ 448,857 $ 570,873 $ 149,352
=========== =========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest................................. $ 136,857 $ 232,553 $ 254,110 $ 46,750
=========== =========== ========== ===========
Income taxes............................. $ -- $ -- $ -- $ 275,000
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE> 30
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS
INFORMATION RELATING TO THE FOUR MONTHS ENDED APRIL 30, 1997 IS UNAUDITED
(A) NATURE OF OPERATIONS
Trend Drilling Company (the "Company"), an Oklahoma corporation, began
operations in 1981. The Company provides contract drilling services in the
Mid-Continent region of the United States. The Company's customers are primarily
independent oil and gas companies.
On February 13, 1997, the owner of the Company and sole stockholder,
entered into a stock purchase agreement (the "Agreement"), with Bayard Drilling
Technologies, Inc. ("Bayard") for the sale of the Company (the "Bayard
Acquisition"). The executed agreement states a purchase price of $18 million
plus shares of Bayard stock, adjusted for changes in working capital as of the
closing date compared to December 31, 1996.
(B) SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
REVENUE RECOGNITION
The Company recognizes revenue and expenses on dayrate contracts as the
drilling progresses (percentage-of-completion method). For footage and turnkey
contracts, the Company recognizes the revenue and expenses upon completion of
the well (completed-contract method).
Revenue earned of $279,390, but not billed, is included in accounts
receivable at December 31, 1996.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheet, the Company considers cash equivalents
to be all instruments that had a remaining maturity of three months or less at
the date of purchase.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation of
property, plant and equipment is determined primarily on the straight-line
method over the estimated useful lives of the assets at the following rates:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings................................................... 15-39
Drilling rigs and related equipment......................... 5-14
Vehicles.................................................... 5
Furniture and office equipment.............................. 5-10
</TABLE>
Upon retirement or disposal, the related cost and accumulated depreciation
are removed from the accounts and any gain or loss is included in operations.
Repairs and maintenance, which extend the useful life of property, plant and
equipment, are capitalized.
GOODWILL
The excess of the purchase price over the fair value of assets acquired is
amortized on the straight-line method over five years. Amortization expense was
$24,000 for the years-ended December 31, 1996, 1995 and 1994.
F-30
<PAGE> 31
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Accordingly, deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
the enacted tax rate in effect in the years in which the differences are
expected to reverse. Deferred tax expense represents the change in the deferred
tax liability balance.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with oil
and natural gas companies. For the years ended December 31, 1996 and 1995 over
ninety-five percent of the Company's trade receivables were from ten or less
customers. These customers also represented 63%, 51% and 54% of total revenues
for 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company had deposits in domestic banks
in excess of federally insured limits of approximately $467,000 and $348,000,
respectively.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts for certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS AND DISCLOSURES
In the opinion of management, the unaudited interim financial statements
for the period ended April 30, 1997 and unaudited interim financial statement
disclosures subsequent to December 31, 1996 include all adjustments, consisting
of normal recurring accruals, necessary to present fairly the Company's results
of operations for the four months ended April 30, 1997.
(C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Building................................................... $ 295,946 $ 295,946
Drilling rigs and related equipment........................ 12,323,939 12,887,107
Vehicles................................................... 233,018 227,018
Furniture and office equipment............................. 153,984 141,131
Leasehold costs............................................ -- 9,290
----------- -----------
13,006,887 13,560,492
Less accumulated depreciation.............................. 8,225,868 9,383,528
----------- -----------
$ 4,781,019 $ 4,176,964
=========== ===========
</TABLE>
F-31
<PAGE> 32
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(D) LONG-TERM DEBT
Long-term debt consisted of the following at December 31,
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Notes payable to banks...................................... $3,213,413 $1,755,437
Less current portion........................................ 1,457,976 415,445
---------- ----------
Total long-term debt.............................. $1,755,437 $1,339,922
========== ==========
</TABLE>
On March 26, 1996, the Company entered into a term loan (the "Note") of
$3,098,058, which consolidated all of the Company's bank borrowings into one
term loan. At December 31, 1996, long-term debt consisted of borrowings under
this note of $1,755,437 which bears an interest rate at the prime rate, adjusted
quarterly (8.25% at December 31, 1996). The Note contains a subjective
acceleration clause which allows the lender to demand payment of the Note when
the lender, at its sole discretion, determines that the Note is impaired.
However, the Note has been classified based on the scheduled maturities in the
accompanying balance sheet as management does not believe such impairment has
occurred. The Note requires the maintenance of financial reporting requirements
and annual personal financial statements from the owner of the Company.
The Note requires monthly payments of principal and interest in amounts
sufficient to repay borrowings at maturity on March 26, 2001. The Note is
collateralized by Accounts Receivable and Property, Plant and Equipment and is
personally guaranteed by the owner of the Company.
At December 31, 1995, long-term debt consisted of borrowings under four
bank notes with an aggregate amount of $3,213,413 which bore interest at a rate
of 1% over prime (which was 8.75% on December 31, 1995).
At December 31, 1996, the aggregate scheduled yearly maturities on
long-term obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997........................................................ $ 415,445
1998........................................................ 373,762
1999........................................................ 406,799
2000........................................................ 442,757
2001........................................................ 116,674
----------
$1,755,437
==========
</TABLE>
(E) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1994, 1995
and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- --------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ -- $882,957
State.............................................. -- -- 103,877
Deferred:
Federal............................................ 15,369 (101,021) (5,037)
State.............................................. 1,808 (11,885) (593)
------- --------- --------
$17,177 $(112,906) $981,204
======= ========= ========
</TABLE>
F-32
<PAGE> 33
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax expense (benefit) differs from the amount computed by
multiplying income (loss) before income taxes by the U.S. federal income tax
statutory rate. The reasons for this difference are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- --------- --------
<S> <C> <C> <C>
Computed expected tax expense (benefit).............. $11,394 $(113,807) $865,373
State income taxes................................... 1,340 (13,389) 101,808
Non-deductible business meals and entertainment
expense............................................ 4,443 14,290 14,023
------- --------- --------
$17,177 $(112,906) $981,204
======= ========= ========
</TABLE>
The components of the deferred tax assets and (liabilities) consisted of
the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss and tax credit carry-forwards.......... $ 38,549 $ --
Excess of book basis over tax basis of current
liabilities............................................ 112,054 --
Excess of tax basis over book basis of current assets..... 24,990 --
Depreciation of property, plant and equipment............. 190,488 383,650
Deferred tax liabilities:
Excess of tax basis over book basis of current
liabilities............................................ -- (11,939)
Amortization of goodwill.................................. (3,800) (3,800)
-------- --------
Net deferred tax asset...................................... $362,281 $367,911
======== ========
</TABLE>
(F) RELATED PARTIES
The Company has several affiliates in the oil and gas industry with which
the Company does business throughout the year. The type of transactions with
these related parties varies from the Company drilling wells for affiliates to
affiliates moving rigs from one well site to another, as well as receiving
certain administrative support for which the Company was not billed (i.e.,
computer support).
As of December 31, 1996 and 1995, the Company had trade receivables with
related parties in the amount of $375,016 and $32,633, respectively, and trade
payables with related parties of $168,169 and $505,426, respectively.
For the period ended December 31, 1996, 1995 and 1994 the Company had
revenues of $462,535, $917,743 and $1,422,658, respectively and expenses of
$2,121,975, $2,003,356 and $1,660,169, respectively, with related parties.
The Company leases office space from an affiliate. For the years ended
December 31, 1996, 1995 and 1994, the Company paid rent of approximately
$10,000.
The Company has an agreement for 1997 to continue renting this office space
for approximately $1,000 per month.
F-33
<PAGE> 34
TREND DRILLING COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(G) EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan ("the Plan") for certain eligible
employees who have attained the age of 21 and completed at least six months of
service. Participants may contribute up to 15% of compensation for any Plan
year. The Company's discretionary contribution is allocated to each
participant's account in the proportion which that participant's compensation
bears to the total compensation of all eligible participants. The Company made
contributions of approximately $130,000, $35,000 and $20,000 to the Plan in
1996, 1995 and 1994, respectively.
F-34
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying balance sheet of Ward Drilling Company,
Inc. as of December 31, 1996, and the related statement of operations and
retained earnings, and cash flows for the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ward Drilling Company as of
December 31, 1996, and the results of its operations and its cash flows for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND, L.L.P.
Oklahoma City, Oklahoma
August 22, 1997
Bon
F-35
<PAGE> 36
WARD DRILLING COMPANY, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1997
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 7,038 $ --
Accounts receivable....................................... 1,733,647 1,287,069
Prepaids and other assets................................. 781,470 520,204
----------- -----------
Total current assets.............................. 2,522,155 1,807,273
----------- -----------
EQUIPMENT:
Drilling equipment........................................ 14,701,019 14,843,582
Other equipment........................................... 444,606 448,918
Other..................................................... 373,263 376,882
----------- -----------
15,518,888 15,669,382
Less accumulated depreciation............................. 8,569,372 8,509,445
----------- -----------
Net equipment.......................................... 6,949,516 7,159,937
----------- -----------
Total assets...................................... $ 9,471,671 $ 8,967,210
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Book overdraft............................................ $ 118,765 $ 5,295
Accounts payable.......................................... 1,246,022 383,329
Accrued expenses.......................................... 590,161 474,582
Advances from affiliate and stockholder................... 3,265,480 3,899,629
----------- -----------
Total current liabilities......................... 5,220,428 4,762,835
----------- -----------
Note payable to bank........................................ 500,000 --
----------- -----------
Commitments and contingencies
STOCKHOLDER'S EQUITY:
Common stock of $1 par value. Authorized 25,000 shares;
issued and outstanding 1,000 shares.................... 1,000 1,000
Additional paid-in capital................................ 99,014 99,014
Retained earnings......................................... 3,651,229 4,104,361
----------- -----------
Total stockholder's equity........................ 3,751,243 4,204,375
----------- -----------
Total liabilities and stockholder's equity...... $ 9,471,671 $ 8,967,210
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 37
WARD DRILLING COMPANY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
DECEMBER 31, FIVE MONTHS ENDED
1996 MAY 31, 1997
------------ -----------------
(UNAUDITED)
<S> <C> <C>
DRILLING REVENUES........................................... $11,384,944 $4,956,971
----------- ----------
OPERATING EXPENSES:
Drilling.................................................. 9,890,597 3,914,240
Depreciation.............................................. 966,328 413,249
General and administrative................................ 484,748 196,747
----------- ----------
Total operating expenses.......................... 11,341,673 4,524,236
----------- ----------
Operating income.................................. 43,271 432,735
----------- ----------
OTHER INCOME (EXPENSE):
Interest income........................................... 34,536 16,810
Interest expense.......................................... (72,056) (27,224)
Gain on sale of assets.................................... 7,895 --
Miscellaneous income...................................... 66,678 30,810
----------- ----------
Total other income................................ 37,053 20,396
----------- ----------
Net income (loss)................................. $ 80,324 $ 453,131
=========== ==========
Retained earnings at beginning of year...................... $ 3,570,905
===========
Retained earnings at end of year............................ $ 3,651,229
===========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 38
WARD DRILLING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, FIVE MONTHS ENDED
1996 MAY 31, 1997
------------ -----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 80,324 $ 453,131
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 966,328 413,249
Gain on sale of assets................................. (7,895) --
Change in assets and liabilities:
(Increase) decrease in accounts receivable........... (485,735) 446,578
(Increase) decrease in prepaids and other assets..... (330,577) 261,266
Decrease in cost incurred or contracts in progress... 463,588 --
Decrease in accounts payable......................... (75,797) (862,693)
Increase (decrease) in accrued expenses.............. 250,400 (115,579)
----------- ---------
Net cash provided by operating activities.............. 860,636 595,952
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, including major
repairs and betterments................................ (1,564,162) (623,669)
Proceeds from sale of assets.............................. 21,034 --
----------- ---------
Net cash used in investing activities.................. (1,543,128) (623,669)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on revolving line of credit...................... 50,000
Payments on revolving line of credit...................... -- (500,000)
Advances from affiliate and stockholder................... 1,301,282 634,149
Payments to affiliates.................................... (616,136) --
Decrease in book overdraft................................ (52,671) (113,470)
----------- ---------
Net cash provided by financing activities.............. 682,475 20,679
----------- ---------
Net decrease in cash........................................ (17) (7,038)
Cash at beginning of year................................... 7,055 7,038
----------- ---------
Cash at end of year......................................... $ 7,038 $ --
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 57,244 $ 20,000
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 39
WARD DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION RELATING TO THE FIVE MONTHS ENDED MAY 31, 1997 IS UNAUDITED
(A) NATURE OF OPERATIONS
Ward Drilling Company (the "Company"), an Oklahoma corporation, began
operations in 1981. The Company provides contract drilling services in the
Mid-Continent region of the United States for independent oil and gas companies.
In May 1997, the Company's parent, L.O. Ward Revocable Trust transferred
all the fixed assets of the Company into WD Equipment L.L.C. in anticipation of
the sale of these assets to Bayard Drilling Technologies, Inc. ("Bayard"), which
was consummated on May 31, 1997 (the "Bayard Acquisition"). The Company and
Bayard agreed to a purchase price of approximately $8 million plus 400,000
shares of Bayard stock plus warrants to purchase up to 200,000 shares of Bayard
stock in exchange for the purchase of WD Equipment L.L.C.
(B) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue and expenses on dayrate contracts as the
drilling progresses (percentage-of-completion method). For turnkey and footage
contracts, the Company recognizes the revenue and expenses upon completion of
the well (completed-contract method).
CASH AND CASH EQUIVALENTS
The Company considers cash equivalents to be all instruments that had a
remaining maturity of three months or less at the date of purchase.
EQUIPMENT
Equipment is recorded at cost. Depreciation on drilling equipment is
determined using the units-of-production method based upon management's
estimates of remaining drilling days by rig. Depreciation on all other equipment
is determined using the straight-line method over the estimated useful lives of
the assets ranging from three to seven years. Upon retirement or disposal, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is included in operations.
The costs of major repairs and overhauls which extend the useful life of
drilling equipment are capitalized by charges to the allowance for accumulated
depreciation. Other additions and improvements are charged to the applicable
equipment account.
INCOME TAXES
The Company is an electing S corporation for federal and state income tax
purposes. The Company's taxable income or loss will be included in its
stockholder's income tax return. Accordingly, no provision for income taxes has
been included in these financial statements.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with oil
and natural gas companies. At December 31, 1996 over ninety-eight percent of the
Company's trade receivables were from four customers. For the year ended
December 31, 1996 the ten largest customers account for over 96% of total
revenues.
At December 31, 1996 the Company had deposits in domestic banks in excess
of federally insured limits of approximately $156,000.
F-39
<PAGE> 40
WARD DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts for certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) NOTE PAYABLE TO BANK
The Company has available a line of credit with a bank for $500,000 which
expires in March 1998. The line of credit is collateralized by inventory,
accounts receivable, and other miscellaneous assets. Interest is at the bank's
base rate plus one percent (9.25% and 9.5% at December 31, 1996 and 1995,
respectively.) Upon consummation of the sale of the Company on May 31, 1997,
this line of credit was extinguished.
(D) RELATED PARTIES
The Company conducts drilling activities for companies owned or controlled
by L.O. Ward, one of the trustees of the L.O. Ward Revocable Trust (the Related
Parties); however no drilling activities were conducted for the Related Parties
in 1996.
General and administrative expense in the accompanying statement of
operations is net of management fee income received from one of the Related
Parties aggregating $10,320 in 1996.
The Company allocates office space and administrative expenses directly to
Related Parties. Amounts allocated under this arrangement aggregated
approximately $25,000 for 1996.
The Company paid approximately $75,000 in 1996 to one of the Related
Parties for services which includes finding drilling contracts for the Company
and certain other administrative services. Certain expenses incurred by the
Related Parties and attributable to the Company's operations are not billed to
the Company.
Accounts receivable at December 31, 1996 included $8,446 of receivables
from affiliated entities. Accounts payable at December 31, 1996 included
$241,233 owed to affiliated entities.
(E) EMPLOYMENT AGREEMENTS
The Company has issued stock appreciation rights to certain employees which
may entitle them to receive bonuses. These bonuses are based on net income and
the ratio of stock appreciation rights owned by the employees to total
outstanding shares of common stock at year end. Ninety-nine stock appreciation
rights were outstanding at December 31, 1996. A bonus payment of approximately
$37,500 was payable to employees at December 31, 1996.
(F) SAVINGS PLAN
The Company participates in a salary deferral retirement plan which is
available to substantially all employees. Participants in the plan may make
contributions to the plan, with the Company matching up to 25% of the employee's
basic contribution. The basic contribution cannot exceed 5% of the employee's
base salary. Total contributions by the Company were approximately $10,000 in
1996.
(G) CONTINGENCIES
The Company maintains a self insurance plan for workers' compensation and
is liable for claims up to $400,000 per-occurrence. The Company is involved in
legal actions arising out of workers' compensation claims. In the opinion of
management, the ultimate disposition of these matters will not have a material
F-40
<PAGE> 41
WARD DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
adverse effect on the Company's financial position. Total expense for workers'
compensation was approximately $335,000 in 1996, and accrued liabilities
included a reserve for unpaid and incurred but not reported claims of $310,000
at December 31, 1996.
F-41
<PAGE> 42
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bonray Drilling Corporation
We have audited the accompanying balance sheets of Bonray Drilling
Corporation as of December 31, 1996 and June 30, 1996, and the related
statements of operations and accumulated deficit and cash flows for the
six-month period ended December 31, 1996 and the years ended June 30, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bonray Drilling Corporation
at December 31, 1996 and June 30, 1996, and the results of its operations and
its cash flows for the six-month period ended December 31, 1996 and the years
ended June 30, 1996 and 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 17, 1997
F-42
<PAGE> 43
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
-------- ------------ -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 187 $ 58 $ 667
Temporary Investments..................................... -- -- 150
Accounts receivable (Note 5).............................. 2,172 2,100 4,131
Accounts receivable -- parent............................. -- -- (55)
Drilling contracts in progress............................ 20 -- 115
Prepaid expenses.......................................... 89 166 184
------- ------- -------
Total current assets............................... 2,468 2,324 5,302
Properties and equipment:
Drilling equipment (Notes 1 and 3)........................ 20,411 20,927 19,400
Land...................................................... 110 110 110
Buildings................................................. 356 356 73
Other equipment........................................... 1,145 1,006 546
------- ------- -------
22,022 22,399 20,129
Less accumulated depreciation (Note 1).................... 14,179 14,210 1,519
------- ------- -------
Net properties and equipment................................ 7,843 8,189 18,610
------- ------- -------
Note receivable -- parent (Note 3).......................... -- -- 21,820
------- ------- -------
Loan origination fees....................................... -- -- 545
------- ------- -------
Total assets....................................... $10,311 $10,513 $46,277
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 689 $ 871 $ 1,529
Notes payable (Note 3):
Short-term line of credit............................... 555 -- --
Other................................................... 189 343 --
Accrued liabilities:
Salaries and wages...................................... 246 268 271
Payroll and other taxes................................. 57 17 62
Workers' compensation insurance (Note 4)................ 446 768 879
Income taxes payable.................................... -- 4 19
Other................................................... 120 120 34
------- ------- -------
Total current liabilities.......................... 2,302 2,391 2,794
Obligations due after one year:
Note payable (Note 3)..................................... -- -- 23,000
Workers' compensation insurance (Note 4).................. 75 75 70
Other..................................................... 28 14 --
Deferred income taxes..................................... -- -- 2,030
Stockholders' equity:
Common stock, $1.00 par value; 800,000 shares authorized;
432,740 shares issued at December 31, 1996 and June 30,
1996; 423,540 shares issued at September 30, 1997....... 433 433 424
Capital in excess of par value............................ 12,497 12,497 17,146
Retained earnings (accumulated deficit) (Note 1).......... (4,932) (4,805) 813
------- ------- -------
7,998 8,125 18,383
Less 9,200 shares of treasury stock, at cost.............. 92 92 --
------- ------- -------
Total stockholders' equity......................... 7,906 8,033 18,383
------- ------- -------
Total liabilities and stockholders' equity......... $10,311 $10,513 $46,277
======= ======= =======
</TABLE>
See accompanying notes.
F-43
<PAGE> 44
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH NINE-MONTH
------------------- PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30, DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
-------- -------- ------------ -------------
(DOLLARS IN THOUSANDS, (UNAUDITED)
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Contract drilling operations (Note 5)........... $ 8,486 $ 10,257 $ 6,004 $ 14,279
Gain (loss) on sales of assets.................. 1,029 (66) 27 (57)
Interest and other income....................... 172 89 27 456
-------- -------- -------- --------
Total revenues.......................... 9,687 10,280 6,058 14,678
Costs and expenses (Note 4):
Contract drilling operations.................... 6,865 8,189 4,836 10,240
General and administrative...................... 752 864 473 860
Interest and other expense...................... 39 85 43 548
Depreciation.................................... 1,130 1,284 569 1,707
-------- -------- -------- --------
8,786 10,422 5,921 13,355
-------- -------- -------- --------
Income (loss) before provision for income taxes... 901 (142) 137 1,323
Provision for income taxes (Note 2)............... 35 -- 10 563
-------- -------- -------- --------
Net income (loss)................................. 866 (142) 127 760
Accumulated deficit at beginning of period........ (5,656) (4,790) (4,932) (4,805)
Elimination of accumulated deficit from purchase
adjustment (Note 1)............................. -- -- -- 4,858
-------- -------- -------- --------
Retained earnings (accumulated deficit) at end of
period.......................................... $ (4,790) $ (4,932) $ (4,805) $ 813
======== ======== ======== ========
Net income (loss) per share....................... $ 2.05 $ (0.34) $ 0.30 $ 1.79
======== ======== ======== ========
Weighted average shares outstanding............... 423,540 423,540 423,540 423,540
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-44
<PAGE> 45
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH NINE-MONTH
------------------- PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30, DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
-------- -------- ------------ -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers....................... $ 10,910 $10,628 $ 6,457 $ 13,123
Cash paid to suppliers and employees............... (10,178) (9,662) (5,325) (12,233)
Interest received.................................. 36 5 -- 408
Interest paid...................................... (27) (66) (27) (436)
Income taxes paid.................................. (30) (5) (6) --
Other cash receipts................................ 152 85 61 35
-------- ------- ------- --------
Net cash provided by operating activities.......... 863 985 1,160 897
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of assets...................... 1,659 27 43 --
Capital expenditures............................... (2,120) (987) (931) (6,051)
-------- ------- ------- --------
Net cash used by investing activities.............. (461) (960) (888) (6,051)
CASH FLOWS FROM FINANCING ACTIVITIES
Contributed capital................................ -- -- -- 4,582
Borrowings on notes payable........................ -- -- 395 23,000
Note receivable -- parent.......................... -- -- -- (21,820)
Short term investment.............................. -- -- -- (150)
Payments on notes payable.......................... (86) (553) (241) (171)
Net increase (decrease) in borrowings on short-term
line of credit................................... (165) 555 (555) 322
-------- ------- ------- --------
Net cash provided (used) by financing activities... (251) 2 (401) 5,763
-------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 151 27 (129) 609
Cash and cash equivalents at beginning of period... 9 160 187 58
-------- ------- ------- --------
Cash and cash equivalents at end of period......... $ 160 $ 187 $ 58 $ 667
======== ======= ======= ========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss).................................. $ 866 $ (142) $ 127 $ 760
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation..................................... 1,130 1,284 569 1,707
(Gain) loss on sales of assets................... (1,029) 66 (27) (57)
Deferred income taxes............................ -- -- -- 563
Change in assets and liabilities:
Decrease (increase) in current assets:
Accounts receivable......................... (434) (33) 72 (2,086)
Drilling contracts in progress.............. 13 1 20 (115)
Prepaid expenses............................ 9 5 (77) (18)
Loan origination fees....................... -- -- -- (545)
Increase (decrease) in current liabilities:
Accounts payable............................ 68 (276) 182 658
Accrued liabilities......................... (48) 479 308 49
Accrued workers' compensation insurance and
other due after one year................. 288 (399) (14) (19)
-------- ------- ------- --------
Total adjustments........................ (3) 1,127 1,033 137
-------- ------- ------- --------
Net cash provided by operating
activities............................. $ 863 $ 985 $ 1,160 $ 897
======== ======= ======= ========
</TABLE>
DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITY
During the year ended June 30, 1995, the Company acquired property, plant
and equipment by issuing a note payable of $828,050.
See accompanying notes.
F-45
<PAGE> 46
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996 AND YEARS ENDED JUNE 30, 1996 AND 1995
INFORMATION RELATING TO THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1997 IS UNAUDITED
1. BASIS OF FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Bonray Drilling Corporation (the "Company") is engaged in domestic onshore
contract drilling of oil and gas wells. The Company currently owns and has
available for operation fifteen drilling rigs located in Oklahoma, having depth
capabilities ranging from 7,000 to 25,000 feet.
On February 10, 1997, substantially all of the Company's shares of
outstanding common stock were purchased by DLB Oil & Gas, Inc. ("DLB") for $30
per share or approximately $12,700,000. As a result of the completed
transaction, the Company became a subsidiary of DLB. Effective on the date of
the acquisition, the Company changed its fiscal year end from June 30 to
December 31 to correspond with the year end of DLB.
The transaction was accounted for as a purchase using push down accounting
treatment. This resulted in a step up in the basis of the acquired assets of
approximately $6.3 million, the establishment of approximately $1.5 million of
deferred income taxes and the elimination of the previously recorded balance of
accumulated depreciation and amortization. Additionally, the accumulated deficit
of $4,858,000 was eliminated as a result of a new basis established for the
acquired assets and liabilities.
Cash and Cash Equivalents
Cash and cash equivalents include cash deposits in banks and short-term
investments with original maturities of three months or less from the date of
purchase by the Company.
Contract Drilling Operations
Revenue earned from footage and turnkey contracts is recognized by the
completed contract method, while revenue earned from daywork contracts is
recognized by the percentage-of-completion method. Provision is made for the
entire amount of expected losses on contracts, if any, in the period in which
such losses are first determined.
Valuation of Properties and Equipment
Drilling equipment is stated at amounts representing historical cost prior
to the February 10, 1997 acquisition by DLB (pushed-down cost thereafter)
adjusted by prior year write-downs based on the expected future economic value
of such equipment. This value was determined by projecting the estimated future
undiscounted cash flows generated by drilling equipment based on the Company's
historical utilization rates and profit margins as well as consideration of the
economic conditions of the industry. The Company continues to review these
assets for possible impairment based on expected future cash flows and other
available information and has determined that no impairment in the value of the
assets exists at September 30, 1997, December 31, 1996 or June 30, 1996 or 1995.
However, due to the uncertainty of such factors it is reasonably possible that
the estimated future cash flows may change. Additions to drilling equipment,
land, buildings and other equipment are reported at cost.
F-46
<PAGE> 47
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation
Depreciation of drilling equipment is computed on an operating day basis
(net of estimated salvage value), except for drilling rigs and related equipment
which are "mothballed" or otherwise not expected to be used for an extended
period of time. During the year ended June 30, 1996, there was a decrease in the
estimated salvage value of these inactive drilling rigs and equipment. As a
result, depreciation on this equipment was increased during the year ended June
30, 1996 to reduce the net book value of these assets to their estimated salvage
value. Depreciation recorded on these inactive rigs and equipment was $269,000
and $36,000 for the years ended June 30, 1996 and 1995, respectively (none for
the six-month period ended December 31, 1996). The net book value of such
drilling equipment is $457,000, which approximates the estimated salvage value
of the equipment at December 31, 1996.
Depreciation of buildings and other equipment is computed by the
straight-line method over the estimated useful lives of the assets.
Income (Loss) Per Share
Income (loss) per share is computed on the basis of weighted average number
of shares of common stock and dilutive common stock equivalents outstanding.
Credit Risk
The Company operates its rigs in the state of Oklahoma and grants credit,
which is generally unsecured, to its customers (Note 5). At December 31, 1996,
approximately 90% of the Company's accounts receivable were from five customers.
The Company has not experienced any significant credit losses in the six-month
period ended December 31, 1996 or the nine-month period ended September 30,
1997, or the years ended June 30, 1996 or 1995 and is not aware of any
significant uncollectible accounts at December 31, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating their fair values of financial instruments: Cash and cash equivalents
are estimated to have a fair value approximating the carrying amount due to the
short maturity of those instruments. Notes payable have variable interest rates
with carrying values approximating fair values.
Interim Financial Statements and Disclosures
In the opinion of management, the unaudited interim financial statements as
of and for the nine-month period ended September 30, 1997 and unaudited interim
financial statement disclosures subsequent to December 31, 1996 include all
adjustments, consisting of normal recurring accruals and push-down adjustments,
necessary to present fairly the Company's financial position as of September 30,
1997 and results
F-47
<PAGE> 48
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of operations and cash flows for the nine-month period ended September 30, 1997.
Results for the period ended September 30, 1997 are not necessarily indicative
of the results to be expected for the entire year.
2. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1996 and
June 30, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
-------- ------------
<S> <C> <C>
Deferred tax liability --
Tax depreciation over book depreciation and write-downs... $ 658 $ 629
====== ======
Deferred tax assets:
Net revenues and expenses recognized for tax purposes
which are deferred for financial purposes.............. $ 25 $ 25
Net operating loss carryforwards.......................... 2,073 1,999
------ ------
Total deferred tax assets before valuation allowance........ 2,098 2,024
Less valuation allowance recognized....................... 1,440 1,395
------ ------
Net deferred tax assets..................................... $ 658 $ 629
====== ======
</TABLE>
The deferred tax assets and liability are offset and, therefore, no
deferred tax asset or liability is reflected in the Company's balance sheets at
December 31, 1996 and June 30, 1996.
The difference between the amount of the provision for income taxes and the
amount which would result from the application of the statutory rate to income
(loss) before provision for income taxes is analyzed as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH
JUNE 30, PERIOD ENDED
------------ DECEMBER 31,
1995 1996 1996
----- ---- ------------
<S> <C> <C> <C>
Provision (credit) for income taxes at a statutory
rate................................................... $ 306 $(48) $ 47
Difference resulting from:
Increase (decrease) in valuation allowance for net
deferred tax assets................................. (330) 24 (45)
Alternative minimum tax................................ 35 -- --
Other.................................................. 24 24 8
----- ---- ----
Provision for income taxes............................... $ 35 $ -- $ 10
===== ==== ====
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards for
federal tax purposes of approximately $4,600,000 which will expire beginning in
the year 2001 if not used. At December 31, 1996, the net operating loss
carryforwards for state tax purposes amounted to approximately $12,100,000.
F-48
<PAGE> 49
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE
In July 1997, the Company entered into a $23 million credit agreement in
connection with which substantially all of the Company's assets were pledged as
collateral. Additionally, the company's parent, DLB, pledged as collateral all
of the outstanding common stock of the Company. Upon consummation of the
acquisition of the Company by Bayard, the shares of common stock of the Company
were released by the lender and the shares of common stock of Bayard acquired by
DLB in the acquisition were pledged in lieu thereof. In connection with the
acquisition, the note payable to Lehman Commercial Paper, Inc. was transferred
to DLB, thereby eliminating the note receivable from DLB.
During the six-month period ended December 31, 1996, the Company acquired
drilling equipment with the proceeds from two notes with a bank in the amounts
of $245,000 and $150,000, respectively. The notes are payable in monthly
installments of principal and interest in the amounts of $21,415 and $13,102,
respectively, until paid in full with interest at a rate of 1/2% above the
national prime lending rate (aggregate rate of 8.75% at December 31, 1996) and
are secured by the equipment purchased as well as other specific drilling
equipment owned by the Company. The balances of the two notes at December 31,
1996 are $205,000 and $138,000, respectively, all of which is due within one
year. During 1997, all of these outstanding note balances were retired by DLB.
The Company has a revolving line of credit agreement (the "credit
agreement") with a bank. Credit availability is subject to a monthly borrowing
base determination calculated as 75% of the Company's accounts receivable less
than 90 days old, not to exceed $750,000. At December 31, 1996, no borrowings
were outstanding under the revolving line of credit ($555,000 outstanding at
June 30, 1996). The credit agreement, which expired November 3, 1997, provided
for monthly interest payments, which accrued at a rate of 1/2 of 1% over the
lender's national prime rate (aggregate rate of 8.75% at December 31, 1996).
Outstanding advances and accrued interest are due in full upon expiration of the
credit agreement. The credit agreement is secured by the Company's accounts
receivable.
During the year ended June 30, 1995, the Company acquired drilling and
other equipment by issuing a note payable to the seller of the equipment. The
$189,000 balance on the note at June 30, 1996 was paid by the Company during the
six-month period ended December 31, 1996.
4. WORKERS' COMPENSATION
The Company is covered by a workers' compensation insurance plan for its
employees under which the Company is responsible for claims up to $100,000 per
incident.
At December 31, 1996 and June 30, 1996, the Company has an estimated net
liability for accrued workers' compensation costs totaling $843,000 and $521,000
respectively. Under the plan, the Company is to reimburse the administrator for
costs as the administrator pays those costs, normally over a five-year period.
Accordingly, at both December 31, 1996 and June 30, 1996, $75,000 is classified
as due after one year, in the accompanying balance sheets.
Total workers' compensation costs incurred by the Company were $538,000 for
the six-month period ended December 31, 1996 and $597,000 and $979,000 for the
years ended June 30, 1996 and 1995, respectively, and were based on actual and
estimated claims incurred. For the six-month period ended December 31, 1996 and
the year ended June 30, 1996, workers' compensation expense was reduced by
$38,000 and $48,000 ($0.09 and $0.11 per share, respectively) for changes in
estimates of claims relating to
F-49
<PAGE> 50
THE ACQUISITION OF BONRAY DRILLING CORPORATION BY DLB WAS ACCOUNTED FOR USING
THE PURCHASE METHOD OF ACCOUNTING. ACCORDINGLY, THE PURCHASE PRICE WAS
"PUSHED-DOWN" AND RECORDED IN THE ACCOMPANYING FINANCIAL STATEMENTS WHICH
AFFECTS THE COMPARABILITY OF THE SEPTEMBER 30, 1997 FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.
BONRAY DRILLING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
prior fiscal years. Workers' compensation expense for the year ended June 30,
1995 was increased by $40,000 ($0.09 per share), for changes in the estimated
costs of claims that occurred in prior fiscal years.
The Company accrues losses for workers' compensation based on management's
estimate of the expected cost of claims incurred. The estimates are based upon
known information, historical experiences and consideration of risk reduction
techniques, when applicable, such as stop loss insurance on individual claims.
Due to uncertainties inherent in the estimation process, it is reasonably
possible that these estimates will be revised in the near-term; however,
management does not expect that such changes will be material to the financial
position or results of operations of the Company.
5. MAJOR CUSTOMERS
Contract drilling operations revenues include revenues from certain
customers, which individually account for 10% or more of contract drilling
operations revenues as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH
----------------------------- PERIOD ENDED
CUSTOMER JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996
- -------- ------------- ------------- -----------------
<S> <C> <C> <C>
A......................................... $ 879 $3,333 $1,301
B......................................... 2,561 1,881 1,166
C......................................... -- -- 728
D......................................... 2,082 1,042 721
E......................................... -- -- 695
------ ------ ------
$5,522 $6,256 $4,611
====== ====== ======
</TABLE>
6. SUBSEQUENT EVENTS
On October 16, 1997, the Company was acquired by Bayard for 3,015,000
shares of common stock, par value $0.01 per share, of Bayard, subject to certain
working capital adjustments.
7. CONTINGENCIES
During the normal course of business, the Company enters into agreements
and executes transactions that may result in a contingent liability to the
Company. At September 30, 1997, management does not believe such contingencies
would be material to the financial statements.
F-50
<PAGE> 1
EXHIBIT 99.3
NABORS' YEAR 2000 COMPLIANCE PROGRAM
Background. The Y2K problem refers to the fact that a number of
computers, computer programs and other equipment with embedded chips or
processors, referred to collectively as "systems," in use today use two digits
rather than four digits to define the applicable year. Any systems that are date
sensitive may recognize a date of "00" as the year 1900 rather than the year
2000. This could result in miscalculations or system failures causing
disruptions of operations, as well as potentially exposing Nabors to third party
liability.
Y2K Compliance Program. Nabors has initiated a Y2K compliance program
to ensure that all of the critical systems and processes that are under its
direct control remain functional. Nabors has organized a task force of key
employees and engaged an outside consultant to assist in the management of its
Y2K compliance program. Nabors' Y2K compliance program will focus on Nabors'
systems as well as the systems of key third party service providers, product
suppliers and customers. The first phase of the program consists of inventorying
or identifying all systems. The identified systems will then be prioritized and
all critical systems will be assessed for Y2K compliance. Systems will be
remediated or replaced as necessary and contingency plans will be developed if
deemed appropriate. Nabors is currently in the inventory and assessment phases
of the program, which it expects to complete by March 31, 1999, with the entire
program being completed well in advance of the Year 2000.
Critical Systems. The systems that are critical to Nabors' operations
include both its accounting and administrative systems and its operational
systems. Upgrades to a number of Nabors' accounting and administrative systems
in the ordinary course of business have had the added benefit of resolving
certain Y2K compliance issues. Accordingly, Nabors believes its critical
accounting and administrative systems, which consists primarily of computer
hardware and software, to be substantially Y2K compliant. Nabors' critical
operational systems consist primarily of systems in use on Nabors' drilling
rigs. Nabors is currently performing an inventory of each drilling rig's
critical systems and is in the process of assessing these systems for Y2K
compliance. Currently, Nabors is not in a position to reasonably predict the
likely worst case Y2K scenario for its drilling rigs, but expects to be able to
do so following the completion of its drilling rig assessment.
Key Third Parties. Third parties that are key to Nabors' operations
include suppliers that provide capital equipment and other supplies and services
essential to the operation of Nabors' drilling rigs or business, and customers
that provide a source of revenue and cash flow to Nabors. Any significant Y2K
disruptions of Nabors' key suppliers and customers could adversely impact
Nabors' financial condition, results of operations or cash flows. Nabors is
directly contacting key suppliers and customers to determine the state of their
Y2K readiness, and is reviewing posted information of various suppliers in
assessing its own Y2K compliance. Because Nabors must rely on representations
made by key third parties with respect to their state of Y2K readiness, it
cannot guarantee that all of the Systems of key third parties that are relied
upon by Nabors will remain functional. Nabors expects to have completed
identifying and contacting all key third parties with respect to their Y2K
readiness by March 31, 1999.
Costs. To date, the incremental costs incurred by Nabors that relate
solely to the Y2K compliance program have been minimal. These costs are
exclusive of upgrades made to Nabors' systems in the ordinary course of business
and consist primarily of fees paid to an outside consultant and internal
employee time. Based upon Nabors' current assessments, the costs to complete
Nabors' Y2K compliance program will not have a material effect on Nabors'
financial condition, results of operations or cash flows. All current and future
costs related to Nabors' Y2K compliance program have been and are expected to be
funded with cash generated from Nabors' operations.
Risks. There are numerous uncertainties that make the ultimate impact
of Y2K disruptions in the United States or other countries where Nabors operates
difficult to predict. While Nabors will obtain representations from key third
parties with respect to their Y2K readiness, there will be certain Systems or
processes relied on by Nabors that are outside of Nabors' control. The failure
by key third parties to
<PAGE> 2
correct their Y2K issues could adversely effect Nabors. Additionally, Nabors
could be unsuccessful in identifying and remediating or replacing all of its
non-compliant systems, and as such, Nabors' financial condition, results of
operations and cash flows could be materially impacted. While Nabors does not
currently anticipate any catastrophic system failures, no assurances can be made
that such failures will not ultimately occur.
Contingency Plans. If during the course of Nabors' assessment of its critical
systems, it is determined that the risk of Y2K disruptions is significant,
contingency plans will be developed as appropriate. Such plans might include the
use of alternative service providers or product suppliers. Currently, Nabors
does not have any contingency plans in place based on current Y2K readiness
assessments.
<PAGE> 1
EXHIBIT 99.4
Contact: David E. Grose, CFO FOR IMMEDIATE RELEASE
Phone: (405)840-9550 ext. 204 February 26, 1999
BAYARD DRILLING TECHNOLOGIES, INC.
REPORTS FOURTH QUARTER AND YEAR END RESULTS
Oklahoma City, Oklahoma (February 26, 1999) - Bayard Drilling Technologies, Inc.
reported today a net loss for the quarter ended December 31, 1998 of $6.3
million or $.35 per share (diluted) on revenues of $14.3 million, compared with
net income of $1.3 million or $.08 per share (diluted) on revenues of $22.5
million for the quarter ended December 31, 1997. This decrease is due to the
decline in rig utilization to 35% in the fourth quarter of 1998 compared to 88%
in the fourth quarter of 1997 as well as a one time non-recurring charge of
$730,000 for costs related to the proposed merger of Bayard with Nabors
Industries, Inc.
For the year ended December 31, 1998 Bayard reported a net loss (before an
extraordinary loss) of $5.2 million or $.29 per share (diluted) on revenues of
$79.1 million, compared with net income of $1.9 million or $.17 per share
(diluted) on revenues of $55.7 million for the year ended December 31, 1997.
The Company recorded an extraordinary loss of $338,000 during the second quarter
for the year ended December 31, 1998 relating to the early extinguishment of
certain subordinate debt and from the payment on term notes using proceeds from
the Company's initial public offering completed in November 1997. After
reflecting the extraordinary loss, Bayard's loss was $5.6 million or $.31 per
share (diluted) for the year ended December 31, 1998.
Contract drilling revenues declined 37% during the fourth quarter of 1998 to
$14.3 million from $22.5 million in the fourth quarter of 1997 and rose 42%
during the year ended December 31, 1998 to $79.1 million from $55.7 million for
1997. The decrease in fourth quarter drilling revenues results from the decline
in rig utilization rates to 35% during the fourth quarter of 1998 from 88% for
the comparative period in 1997. The increase in drilling revenues for the year
ended December 31, 1998 reflects the growth of the Company's contract drilling
rig fleet and increases in the average revenue per day. Rig utilization declined
to 56% for the year ended December 31, 1998 compared to 93% for 1997. Direct
operating costs were 81% of contract drilling revenues for the year ended
December 31, 1998 as compared to 73% in 1997.
As previously reported, 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 prices of oil and gas have
decreased significantly, which has significantly affected demand for land
drilling rigs. These developments have adversely affected the Company's results
and may continue to impact results in future periods. The historical financial
results presented in this press release include periods in which the size of the
Company's contract drilling fleet as well as the level of its expenditures for
acquiring, refurbishing and placing into service additional rigs varied
significantly. Accordingly, the Company does not believe that results of prior
periods necessarily provide a suitable basis of comparison.
Bayard Drilling Technologies, Inc. is a leading provider of domestic land-based
drilling services to major and independent oil and gas companies in the
Mid-Continent, Gulf Coast and South Texas regions. The common stock of Bayard
Drilling is listed on the American Stock Exchange (BDI). As previously
announced, Bayard has entered into an agreement with Nabors Industries, Inc.
which provides for the merger of Bayard with a subsidiary of Nabors. For further
information, please contact David Grose, 405-840-9550 ext. 204 or to request
Investor Materials, 405-840-9550 ext. 208.
Statements made in this press release that state the Company's or management
intentions, beliefs, expectations or predictions for the future are
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those projected in such forward-looking
statements.
<PAGE> 2
In addition to the factors set forth above, other important factors that could
cause actual results to differ materially include, but are not limited to,
industry conditions, integration of acquisitions, demand for oil and gas, and
ability to retain management and experienced personnel. Additional information
concerning factors that could cause actual results to differ materially from
those in the forward-looking statements is contained from time to time in the
Company's SEC filings. Copies of these filings may be obtained by contacting the
Company or the SEC. The Company disclaims any intention or obligation to update
or review any forward-looking statements, whether as a result of new
information, future events or otherwise.
<PAGE> 3
BAYARD DRILLING TECHNOLOGIES, INC
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended Year Ended
December 31 December 31
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 22,533 $ 14,270 $ 55,747 $ 79,072
Operating Income (Loss) 2,362 (7,480) 5,231 (3,851)
Other Income(Expense):
Interest Expense 893 2,979 3,065 6,371
Interest Income/Other 802 534 1,178 2,098
Income (Loss) Before Income Taxes 2,271 (9,925) 3,344 (8,124)
Income Taxes (Benefit) - Deferred 1,019 (3,638) 1,428 (2,880)
Net Income (Loss) Before
Extraordinary Item 1,252 (6,287) 1,916 (5,244)
Earnings (Loss) per Share Before
Extraordinary Item:
Basic .08 (.35) .21 (.29)
Diluted .08 (.35) .17 (.29)
Extraordinary Loss (4,002) -- (4,002) (338)
Net Income (Loss) (2,750) (6,287) (2,086) (5,582)
Earnings (Loss) per Share:
Basic (.17) (.35) (.23) (.31)
Diluted (.17) (.35) (.18) (.31)
Operating Expenses:
Direct Costs 16,459 15,802 40,705 64,249
General & Administrative 687 1,938 1,868 4,312
Depreciation & Amortization 3,025 4,010 7,943 14,362
Weighted Average Number of
Shares Outstanding:
Basic 16,053 18,194 9,064 18,191
Diluted 16,653 18,194 11,500 18,191
</TABLE>
<PAGE> 4
BAYARD DRILLING TECHNOLOGIES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1997 1998
-------- --------
<S> <C> <C>
Current Assets $ 70,211 $ 17,191
Property & Equipment, Net 155,673 285,316
Other Assets 14,604 15,833
-------- --------
Total Assets $240,488 $318,340
======== ========
Current Liabilities $ 21,257 $ 20,998
Senior Long-Term Debt
Less Current Maturities 23,069 11,683
Subordinated Notes & Other 4,146 2,207
Deferred Income Taxes 13,554 10,448
Notes Payable, 11% Senior Notes -- 100,000
Stockholders' Equity 178,462 173,004
-------- --------
Total Liabilities and Stockholders Equity $240,488 $318,340
======== ========
</TABLE>
-End-
