<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K/A
-------------------------
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) April 7, 1999
--------------------------------
Nabors Industries, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
<TABLE>
<S> <C>
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)
</TABLE>
(281) 874-0035
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
On April 7, 1999, Nabors Industries, Inc. acquired all of the common
stock of Bayard Drilling Technologies, Inc. in a merger in which Nabors
Acquisition Corp. VII, a wholly owned subsidiary of Nabors, merged with and
into Bayard, with Bayard surviving the merger and becoming a wholly owned
subsidiary of Nabors. As a result of the merger, Nabors owns all of the issued
and outstanding common stock of Bayard. All obligations of Bayard prior to the
merger, including its debt, remained obligations of Bayard after the merger.
Certain information about the transaction was reported in a Form 8-K filed
April 22, 1999. The required pro forma information was not available at that
time. The following financial statements and financial information are filed
as part of this amendment to the Form 8-K.
(a) Financial Statements of the Business Acquired
The financial statements required to be filed were previously reported
in Bayard's annual report on Form 10-K for the year ended December 31, 1998
filed with the Securities and Exchange Commission on March 30, 1999. These
financial statements are filed as an exhibit to this Form 8-K/A and are
incorporated into this document by reference.
(b) Pro Forma Financial Information
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 audited 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
year ended December 31, 1998 are presented as if the merger was
consummated as of January 1, 1998.
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 each company's Annual Report on Form 10-K for
the year ended December 31, 1998.
2
<PAGE> 3
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
Historical ProForma
------------------------------ ------------------------------
Nabors Bayard Adjustments Combined
---------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,748 $ 2,553 $ (5,460)(a) $ 13,841
Marketable securities 6,702 6,702
Accounts receivable, net 174,304 12,800 187,104
Inventory and supplies 25,740 25,740
Prepaid expenses and other current assets 42,021 1,838 43,859
---------- ---------- ----------- ------------
Total current assets 265,515 17,191 (5,460) 277,246
Property, plant and equipment, net 1,127,154 285,316 (158,613)(b) 1,253,857
Marketable securities 23,890 23,890
Goodwill 8,037 11,832 17,091 (b) 36,960
Other long-term assets 25,646 5,001 (4,120)(b) 26,527
---------- ---------- ----------- ------------
Total assets $1,450,242 $ 319,340 $ (151,102) $ 1,618,480
---------- ---------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 11,329 $ 6,050 $ $ 17,379
Short-term borrowings 74,565 74,565
Trade accounts payable and accrued liabilities 143,796 14,947 4,000 (a) 162,743
Income taxes payable 14,668 14,668
---------- ---------- ----------- ------------
Total current liabilities 244,358 20,997 4,000 269,355
Long-term obligations 217,034 111,683 328,717
Other long-term liabilities 49,182 3,207 9,683 (b) 62,072
Deferred income taxes 72,199 10,448 (66,462)(b) 16,185
---------- ---------- ----------- ------------
Total liabilities 582,773 146,335 (52,779) 676,329
---------- ---------- ----------- ------------
Commitments and contingencies
Stockholders' equity:
Capital stock 10,138 182 614 (a) 10,752
(182)(b)
Capital in excess of par value 394,562 180,525 74,068 (a) 468,630
(180,525)(b)
Accumulated other comprehensive income (10,983) (10,983)
Retained earnings (accumulated deficit) 478,569 (7,702) 7,702 (b) 478,569
Less treasury stock, at cost (4,817) (4,817)
---------- ---------- ----------- ------------
Total stockholders' equity 867,469 173,005 (98,323) 942,151
---------- ---------- ----------- ------------
Total liabilities and stockholders' equity $1,450,242 $ 319,340 $ (151,102) $ 1,618,480
---------- ---------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
financial statements.
3
<PAGE> 4
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------ ------------------------------
Nabors Bayard Adjustments Combined
---------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 968,157 $ 79,072 $ $ 1,047,229
---------- ---------- --------------- ------------
Operating expenses:
Direct costs 623,844 64,249 688,093
General and administrative expenses 77,026 4,312 (723)(c) 80,615
Depreciation and amortization 84,949 14,362 (7,921)(d) 91,390
---------- ---------- --------------- ------------
Operating expenses 785,819 82,923 (8,644) 860,098
---------- ---------- --------------- ------------
Operating income (loss) 182,338 (3,851) 8,644 187,131
---------- ---------- --------------- ------------
Other income (expense):
Interest expense (15,463) (6,371) 1,034 (e) (20,800)
Interest income 1,480 1,404 2,884
Other income, net 31,626 694 32,320
---------- ---------- --------------- ------------
Other income (expense) 17,643 (4,273) 1,034 14,404
---------- ---------- --------------- ------------
Income (loss) from continuing operations
before income taxes (benefit) 199,981 (8,124) 9,678 201,535
Income taxes (benefit) 74,993 (2,880) 3,824 (f) 75,937
---------- ---------- --------------- ------------
Net income (loss) from continuing operations $ 124,988 $ (5,244) $ 5,854 $ 125,598
========== ========== =============== ============
Earnings per share from continuing operations:
Basic $ 1.24 $ 1.17
---------- ------------
Diluted (g) $ 1.16 $ 1.10
---------- ------------
Weighted average number of shares
outstanding:
Basic 100,807 6,142 (h) 106,949
---------- --------------- ------------
Diluted (g) 112,555 6,142 (h) 118,697
---------- --------------- ------------
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed financial statements.
4
<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 Sheets as of
December 31, 1998 and the Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 31,1998.
(a) To reflect the purchase of Bayard for $5.46 million in cash and the
issuance of 6,142,421 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 .3375 shares of Nabors common stock
and $.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 357,372
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 $ 5,460
Nabors common stock, valued at $12.0625 per share 74,093
Nabors options and warrants 589
Estimated acquisition costs 4,000
--------------
Purchase price, including acquisition costs $ 84,142
==============
</TABLE>
(b) The purchase price including estimated acquisition costs has been allocated
to assets acquired and liabilities assumed based upon their estimated fair
values.
The preliminary allocation of the purchase price of Bayard is as follows:
<TABLE>
<CAPTION>
Debit (Credit)
Historical Purchase Price Pro Forma
Amount Allocation Adjustments
----------------- ------------------ ---------------
(In thousands)
<S> <C> <C> <C> <C>
Current assets $ 17,191 $ 17,191 $ --
Property, plant and equipment, net 285,316 126,703 (158,613) (i)
Goodwill 11,832 28,923 17,091 (ii)
Other long-term assets 5,001 881 (4,120) (iii)
Current liabilities (20,997) (20,997) --
Long-term obligations, excluding
current maturities (111,683) (111,683) --
Other long-term liabilities (3,207) (12,890) (9,683) (iv)
Deferred income taxes (10,448) 56,014 66,462 (v)
Capital stock (182) -- 182
Capital in excess of par value (180,525) -- 180,525
Accumulated deficit 7,702 -- (7,702)
----------------- ------------------ ----------------
$ -- $ 84,142 $ 84,142
================= ================== ================
</TABLE>
(i) To reduce the carrying value of property, plant and equipment to
fair value pursuant to an appraisal by an independent certified
appraiser.
(ii) The excess of the purchase price over the estimated fair value
of the identifiable assets acquired and liabilities assumed
has been accounted for as goodwill.
5
<PAGE> 6
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(iii) To eliminate Bayard's deferred financing costs associated with
the Bayard $100 million, 11%, Senior Notes due 2005 (the
"Bayard 11% Notes").
(iv) 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.
(v) 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.
(c) To eliminate nonrecurring merger related costs.
(d) 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. This adjustment also
reflects the amortization of goodwill recorded in the transaction over
a thirty-year period.
(e) Interest expense is adjusted to reflect the amortization of the fair
value premium recorded for the Bayard 11% Notes and the elimination of
historical amortization of deferred financing costs associated with
the Bayard 11% Notes.
(f) 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.
(g) For the calculation of diluted earnings per share, net income is
adjusted to add back $5,392,000 of after tax interest expense on the
Nabors $172,500,000, 5% Convertible Subordinated Notes.
(h) Assumes that 6,142,421 Nabors shares were exchanged for 100% of the
Bayard shares at the beginning of the period presented.
6
<PAGE> 7
(c) Exhibits
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP
Exhibit 99.1 Consolidated Financial Statements of Bayard Drilling
Technologies, Inc.
7
<PAGE> 8
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: June 21, 1999 By: /s/ ANTHONY G. PETRELLO
----------------------------------------
Name: Anthony G. Petrello
Title: President and Chief Operating
Officer
8
<PAGE> 9
EXHIBIT INDEX
-------------
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP
Exhibit 99.1 Consolidated Financial Statements of Bayard Drilling
Technologies, Inc.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion on Nabors Industries, Inc. Form 8-K of our
report dated February 16, 1999, except for Note B which the date is March 17,
1999 relating to the financial statements of Bayard Drilling Technologies for
the year ended December 31, 1998.
PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
June 18, 1999
<PAGE> 1
EXHIBIT 99.1
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BAYARD DRILLING TECHNOLOGIES, INC.
Report of Independent Accountants................................................... F-2
Report of Independent Certified Public Accountants.................................. F-3
Balance Sheets as of December 31, 1997 and 1998..................................... F-4
Statements of Operations for the years ended December 31, 1996, 1997 and 1998....... F-5
Statements of Equity for the years ended December 31, 1996, 1997 and 1998........... F-6
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998....... F-7
Notes to Financial Statements ...................................................... F-9
</TABLE>
F-1
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Bayard Drilling Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Bayard
Drilling Technologies, Inc. at December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. These consolidated financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Oklahoma City, Oklahoma
February 26, 1999, except
for Note B for which the
date is March 17, 1999
F-2
<PAGE> 3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Bayard Drilling Technologies, Inc.
We have audited the accompanying statements of operations, equity (deficit), and
cash flows of Bayard Drilling Technologies, Inc. (Note A), 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 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 results of operations and cash flows of Bayard
Drilling Technologies, Inc., for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
January 20, 1997
F-3
<PAGE> 4
BAYARD DRILLING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
ASSETS 1997 1998
<S> <C> <C>
CURRENT ASSETS:
Cash ........................................................................ $ 49,302 $ 2,553
Restricted investments ...................................................... 880 525
Accounts receivable ......................................................... 19,491 12,654
Accounts receivable - affiliate ............................................. -- 146
Prepaid expenses and other current assets ................................... 538 1,313
Total current assets ................................................ 70,211 17,191
Property, plant and equipment, net ............................................ 155,673 285,316
Goodwill, net of accumulated amortization of $375 and $1,247, respectively .... 12,704 11,832
Other assets .................................................................. 1,900 5,001
Total assets ........................................................ $ 240,488 $ 319,340
========= =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 8,246 $ 9,685
Accounts payable - affiliate ............................................... 494 98
Accrued liabilities ......................................................... 5,067 5,164
Current portion of long-term debt ........................................... 7,450 6,050
Total current liabilities ........................................... 21,257 20,997
Deferred income tax liabilities ............................................... 13,554 10,448
Other long-term liabilities ................................................... 2,055 3,207
Long-term debt, less current maturities ....................................... 23,069 11,683
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 H, I, L & M
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; 18,183,945 and 18,199,765 shares issued and
outstanding at December 31, 1997 and 1998, respectively .................. 182 182
Additional paid-in capital (net of deferred compensation of $258
and $206 at December 31, 1997 and 1998, respectively) .................... 180,400 180,525
Retained earnings (accumulated deficit) ..................................... (2,120) (7,702)
Total equity ........................................................ 178,462 173,005
Total liabilities and equity ........................................ $ 240,488 $ 319,340
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-4
<PAGE> 5
BAYARD DRILLING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1997 1998
<S> <C> <C> <C>
REVENUES:
Drilling ...................................................................... $ 8,995 $ 39,165 $ 78,616
Drilling -- affiliate ......................................................... 798 16,582 --
Other ......................................................................... 60 -- 456
-------- -------- --------
Total revenues ............................................................. 9,853 55,747 79,072
-------- -------- --------
COSTS AND EXPENSES:
Drilling ...................................................................... 7,653 40,705 63,782
General and administrative .................................................... 658 1,868 4,312
Depreciation and amortization ................................................. 1,126 7,943 14,362
Other ......................................................................... 46 -- 467
-------- -------- --------
Total costs and expenses ................................................... 9,483 50,516 82,923
-------- -------- --------
Operating income (loss) .................................................... 370 5,231 (3,851)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense .............................................................. (11) (3,065) (6,371)
Interest income ............................................................... -- 597 1,404
Gain on sale of assets ........................................................ 54 544 688
Other ......................................................................... 17 37 6
-------- -------- --------
Total other income (expense) ............................................... 60 (1,887) (4,273)
-------- -------- --------
Earnings (loss) before income taxes ............................................. 430 3,344 (8,124)
Income tax (provision) benefit -- deferred ...................................... (17) (1,428) 2,880
-------- -------- --------
Net income (loss) before extraordinary item ..................................... 413 1,916 (5,244)
Extraordinary loss, net of income tax of $1.3 million and $244, respectively .... -- (4,002) (338)
-------- -------- --------
Net income (loss) $ 413 $ (2,086) $ (5,582)
======== ======== ========
EARNINGS (LOSS) PER SHARE:
Basic:
Before extraordinary item .................................................... $ .21 $ (.29)
======== ========
Extraordinary item ........................................................... $ (.44) $ (.02)
======== ========
Net loss ..................................................................... $ (.23) $ (.31)
======== ========
Diluted:
Before extraordinary item .................................................... $ .17 $ (.29)
======== ========
Extraordinary item ........................................................... $ (.35) $ (.02)
======== ========
Net loss ..................................................................... $ (.18) $ (.31)
======== ========
PRO FORMA INFORMATION:
Additional income tax expense ................................................. 146
--------
Pro forma net earnings (loss) ................................................. $ 267
========
Pro forma earnings (loss) per share, basic and diluted ........................ $ .05
========
Weighted average common shares outstanding, basic ............................... 5,600 9,064 18,191
======== ======== ========
Weighted average common shares outstanding, diluted ............................. 5,749 11,500 18,191
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-5
<PAGE> 6
BAYARD DRILLING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-------------------------------------------------------
PARTNERS ADDITIONAL RETAINED
CAPITAL COMMON PAID-IN DEFERRED EARNINGS
(DEFICIT) STOCK CAPITAL COMPENSATION (DEFICIT) 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 loss ........................................... -- -- -- -- (5,582) (5,582)
Issuance of stock options to employees ............. -- -- 73 -- -- 73
Issuance of stock options and warrants ............. -- -- -- -- -- --
Executive compensation agreements .................. -- -- -- 52 -- 52
--------- -------- ----------- ------------ --------- ---------
Balance at December 31, 1998 ......................... $ -- $ 182 $ 180,731 $ (206) $ (7,702) $ 173,005
========= ======== =========== ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-6
<PAGE> 7
BAYARD DRILLING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ............................................................ $ 413 $ (2,086) $ (5,582)
Adjustments to reconcile net earnings (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization ................................................ 1,126 7,943 14,362
Gain on sale of assets ....................................................... (54) (544) (688)
Extraordinary loss ........................................................... -- 4,002 338
Compensation expense ......................................................... -- 52 52
Deferred income taxes ........................................................ 17 1,428 (2,880)
Change in assets and liabilities, net of effects of
Affiliate transactions:
Decrease (increase) in accounts receivable ................................. (2,059) (18,407) 6,691
Increase in prepaid expenses ............................................... -- (537) (775)
Decrease (increase) in other assets ........................................ (185) 513 (1,490)
Increase in accrued liabilities ............................................ 251 4,814 97
Increase in other liabilities .............................................. -- -- 1,152
Increase (decrease) in accounts payable .................................... (383) 1,432 1,439
Increase (decrease) in payable to affiliate ................................ 412 82 (396)
--------- --------- ---------
Net cash (used in) provided by operating activities ..................... 462) (1,308) 12,320
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .......................................... (10,578) (60,924) (143,002)
Acquisition of businesses ...................................................... -- (26,056) --
Proceeds from sale of assets ................................................... 137 1,390 1,292
(Purchase) proceeds of investments ............................................. -- (880) 355
--------- --------- ---------
Net cash used in investing activities ................................... (10,441) (86,470) (141,355)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made to affiliates .................................................... (19,719) -- --
Advances received from affiliates .............................................. 18,791 -- --
Proceeds from borrowings ....................................................... 7,000 49,780 --
Proceeds from exercise of stock options ........................................ -- -- 73
Proceeds from issuance of stock ................................................ 10,000 107,109 --
Proceeds from issuance of senior notes ......................................... -- -- 100,000
Payment of debt issuance costs ................................................. (206) (761) (2,550)
Payments on long-term debt ..................................................... -- (24,011) (15,237)
Payments under line of credit .................................................. -- (8,701) --
Borrowings under line of credit ................................................ -- 8,701 --
--------- --------- ---------
Net cash provided by financing activities ............................... 15,866 132,117 82,286
--------- --------- ---------
Net change in cash ............................................................... 4,963 44,339 (46,749)
Cash at beginning of period ...................................................... -- 4,963 49,302
--------- --------- ---------
Cash at end of period ............................................................ $ 4,963 $ 49,302 $ 2,553
========= ========= =========
Cash paid during the period for interest ......................................... $ -- $ 2,854 $ 8,246
Cash paid during the period for income taxes ..................................... $ -- $ -- $ --
========= ========= =========
</TABLE>
Continued
F-7
<PAGE> 8
BAYARD DRILLING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Supplemental noncash activity:
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 affiliate 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
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"), an Oklahoma 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 -- PROPOSED MERGER AGREEMENT AND RELATED MATTERS
Nabors Industries, Inc. and Bayard Drilling Technologies, Inc. have
entered into a definitive merger agreement pursuant to which the Company will
merge with a wholly owned, newly created, special purpose subsidiary of Nabors,
with the Company surviving as a wholly owned subsidiary of Nabors. If the merger
is consummated, each share of Bayard common stock will be converted into the
right to receive, .3375 shares of Nabors common stock and $.30 in cash. The
transaction consists of approximately $90 million in equity and $120 million in
debt, which will remain the obligation of the Company after the merger. The
merger will be accounted for under the purchase method and is expected to close
in early April 1999. A special meeting of the Company's stockholders was held on
March 16, 1999 to consider and vote upon the merger agreement. At that special
meeting, stockholders representing a majority of the outstanding shares of
Bayard common stock voted to adopt the merger agreement. After the merger, the
former stockholders of Bayard will own approximately 5.7% of the outstanding
shares of Nabors common stock. Nabors common stock trades on the American Stock
Exchange under the symbol "NBR."
Bayard expects that funds provided by operations before the
consummation date of the merger and to the extent required, borrowings under
loan agreements, will be sufficient to meet its obligations as well as
operating costs and expenses. If the merger is not consummated or is delayed
for a significant period of time, the Company may be required to implement a
plan to seek additional capital from private sources as well as disposing of
certain of its assets in order to continue its operations.
NOTE C -- 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"), WD
Equipment, L.L.C. and Bonray Drilling Corporation ("Bonray"). 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, 1998, the Company had cash and cash equivalents in or at three financial
institutions, where the balance exceeded federally insured limits. Management
periodically assesses the financial condition of the financial institutions and
believes that any possible credit risk is minimal.
3. Restricted Investments
F-9
<PAGE> 10
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 1998, 1997 or 1996. At December 31, 1998 approximately
49% of the Company's trade receivables and over 47% of total revenues were
derived from the Company's five largest customers in terms of total revenues.
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. Equipment
held for upgrades and refurbishments will be depreciated when placed into
service. 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.
The Company capitalizes 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 and $8.3 million, during
1997 and 1998, respectively, of which approximately $565,000 and $2.0 million
was capitalized in property and equipment for rig construction. No interest
costs were capitalized in 1996.
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:
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PER
INCOME SHARES SHARE
(numerator) (denominator) AMOUNT
----------- ------------- ------
(in thousands, except per share data)
<S> <C> <C> <C>
Income (loss) before extraordinary item $ (5,244)
Basic earnings (loss) per share (5,244) 18,191 $ (.29)
----------- ------------- ------
Effect of dilutive securities:
Warrants and options --
-------------
Diluted earnings (loss) per share $ (5,244) 18,191 (.29)
=========== ============= ======
</TABLE>
F-10
<PAGE> 11
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PER
INCOME SHARES SHARE
(numerator) (denominator) AMOUNT
----------- ------------- ------
(in thousands, except per share data)
<S> <C> <C> <C>
Income before extraordinary item $ 1,916
-----------
Basic earnings per share 1,916 9,064 .21
----------- ------
Effect of dilutive securities:
Warrants and options 2,436
-------------
Diluted earnings per share $ 1,916 11,500 $ .17
=========== ============= ======
</TABLE>
Pro forma net earnings (loss) per share are presented to reflect the
provision for income taxes for periods Anadarko was a partnership.
At December 31, 1997, options to purchase 397,000 shares of common
stock at $23 per share 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. At December 31, 1998, options to purchase
1,283,600 shares of common stock at a weighted average exercise price of $12.27
per share and 412,000 warrants at a weighted average exercise price of $8.83
were not included in the computation of diluted earnings per share because the
options' and warrants' exercise price was greater than the average market price
of the common shares. The options, which expire on March 10, 2004, and the
warrants, which expire on June 01, 2003, were still outstanding at December 31,
1998.
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 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
$871,968 has been recognized as of December 31,1997 and 1998, respectively.
Other assets consist of (i) organizational costs incurred for the
organization of Bayard and (ii) debt issuance costs incurred on the term loan.
Amortization expense for organization costs is recognized over five years and
debt issuance costs over the life of the loan, which approximates five years,
both on a straight-line basis. Amortization expense of $650,000, $1.4 million
and $63,000 has been recognized for the years ended December 31, 1998, 1997 and
1996, respectively.
F-11
<PAGE> 12
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 1998
and 1997 estimates for this retention were $2.9 million and $1.7 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. 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
and for the years ended December 31, 1997 and 1998, the Company recognized $0,
approximately $310,000 and $0 of deferred compensation and $0, approximately
$52,000 and $52,000 of compensation expense, respectively resulting in net
deferred compensation at December 31, 1997 and 1998 of $258,000 and $206,000,
respectively. 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 O to the financial statements as allowed by Financial Accounting Standard
No. 123 "Accounting for Stock-Based Compensation."
13. Organization Costs
In April 1998, the AICPA Accounting Standards Executive Committee
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 provides guidance on accounting for start-up
costs and organization costs. It requires costs associated with start-up
activities and organization costs be expensed as incurred. SOP 98-5 is effective
for fiscal years beginning after December 15, 1998, with the initial application
of this SOP being reported as a cumulative effect of accounting change. Upon
adoption of SOP 98-5, the Company will recognize approximately $596,000 as a
cumulative effective of accounting change, net of tax of $365,000 at 38%.
NOTE D -- 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.
F-12
<PAGE> 13
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
warrants had an estimated fair market value of $294,000 at the agreement closing
date and were recorded as an increase in property and equipment and additional
paid in capital.
On October 16, 1997, the Company completed the acquisition of Bonray
("Bonray Acquisition"), subject to certain working capital adjustments, for
3,015,000 shares of common stock, which equates to $11.86 per share based on the
appraisals of the fair market value of the property and equipment acquired of
$34,976,000.
The Bonray Acquisition was accounted for as a purchase. The following
is an 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 results of operations as if
Trend, Ward and Bonray had been acquired January 1, 1996 and January 1, 1997,
respectively:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1997
(in thousands)
<S> <C> <C>
Revenues............................................. $ 47,952 $ 80,670
========= ========
Net income (loss).................................... $ (1,848) $ 256
========= ========
Net income (loss) per common share, basic............ $ (.33) $ .03
========= ========
Net income (loss) per common share, diluted.......... $ (.32) $ .02
========= ========
</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"). The purchase was accomplished through the issuance of $100
million of the Company's 11% Senior Notes due 2005 (the "Senior Notes
Offering"). The Company received net proceeds of approximately $97 million, and
used the additional proceeds for general corporate purposes, including capital
expenditures for acquisitions of
F-13
<PAGE> 14
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
additional drilling rigs and related equipment and the refurbishment of rigs.
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. 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.
NOTE E -- PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1997 1998
(in thousands)
<S> <C> <C>
Drilling rigs and components................................. $ 173,674 $ 310,361
Automobiles, trucks, and trailers............................ 2,041 4,916
Buildings and property....................................... 461 2,061
Furniture, fixtures, and other............................... 532 751
--------- ---------
176,708 318,089
Less accumulated depreciation ............................... 21,035 32,773
--------- ---------
$ 155,673 $ 285,316
========= =========
</TABLE>
NOTE F -- CHANGE IN ESTIMATED LIVES
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 G -- 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, 1998,
the Company has net operating loss carry forwards of approximately $54.9
million, of which $418,000, $11.6 million and $42.9 million will expire in 2011,
2012 and 2013, respectively, if unused.
Income tax expense (benefit) for the years ended December 31, is
summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
(in thousands)
<S> <C> <C> <C>
Current......................................... $ -- $ -- $ --
Deferred........................................ 17 1,428 (2,880)
------ ------ -------
$ 17 $1,428 $(2,880)
====== ====== =======
</TABLE>
Components of net deferred income tax liabilities at December 31, are
as follows:
F-14
<PAGE> 15
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(in thousands)
<S> <C> <C>
Deferred tax assets (liabilities)
Operating loss carryforwards.......................... $ 760 $ 20,867
Property and equipment ............................... (14,314) (31,315)
--------- ---------
Net deferred tax liabilities....................... $ (13,554) $ (10,448)
========= =========
</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>
1996 1997 1998
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory rate ............. $ 146 $ 1,069 $ (2,782)
State income taxes ................................................. -- 201 (522)
Amortization of goodwill ........................................... -- 142 331
Other items ........................................................ 16 93
Exclusion of partnership income taxes .............................. (129) -- --
======= ======= ========
$ 17 $ 1,428 $ (2,880)
======= ======= ========
</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 allowance.
NOTE H -- 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"). In May 1997, the Company
amended and increased the availability under the Loan Agreements. The Term Loan
provided 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 provided 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 the issuance of 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. Amounts outstanding under
the Revolving Loan (none at December 31, 1997 or 1998) bear interest based on
Fleet National Bank's prime rate plus 1.5% (approximately 10% and 9.25% at
December 31, 1997 and 1998, respectively) and mature in April 2000. A portion of
the proceeds from the Initial Public Offering was used to repay all outstanding
amounts under the Revolving Loan Agreement. The Company periodically 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, if
terminated prior to May 1, 1999, and 1% of the facility, if terminated on or
after May 1, 1999.
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. These
assets include 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
collateralized 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
F-15
<PAGE> 16
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Amounts outstanding under the Term Loan of approximately $27.1 million
and $15.5 million at December 31, 1997 and 1998, respectively, bore interest, at
the election of the Company, at floating rates equal to Chase Manhattan Bank's
prime rate plus 2.0% (approximately 10% and 9.75% at December 31, 1997 and 1998,
respectively) or LIBOR plus 4.25% (approximately 10% and 9.89% at December 31,
1997 and 1998, respectively). The Term Loan requires equal monthly payments of
principal, together with accrued interest, in amounts sufficient to repay
borrowings at maturity on March 31, 2002. The Loan Agreements were
collateralized by substantially all of the assets of the Company, including
drilling rigs, equipment and drilling contracts, and contained 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 was obligated to pay certain
fees, including an annual commitment fee in an amount equal to 0.5% of the
unused portion of the commitment.
The Company incurred the Term Loan to finance the purchase of certain
land drilling rigs and equipment and to provide working capital. On May 14,
1998, in connection with the Company's corporate reorganization into a holding
company structure, (i) the Company prepaid $6.2 million of the Term Loan,
obtained a release of all collateral for the Term Loan, except 12 drilling rigs
and related equipment, and transferred to Bayard Drilling, L.P., the Company's
wholly owned operating subsidiary ("Bayard Drilling"), substantially all of its
assets, subject to such liens, and (ii) Bayard Drilling and Bayard Drilling,
L.L.C., another wholly owned subsidiary of the Company ("Bayard L.L.C."), agreed
to guarantee the Term Loan. Prior to such prepayment and collateral release, the
Term Loan was secured by substantially all of the assets of Bayard and Trend. In
connection with the Senior Notes Offering, the Term Loan was further amended to
add Bonray as a guarantor of the Company's obligations.
The Term Loan Agreement requires the Company and its subsidiaries to
maintain collateral security with a value based on the appraised fair market
value and orderly liquidation value of the Company's drilling rigs and
associated rig equipment, equivalent to the outstanding balance of the Term
Loan. The Company must also adhere to specified cash flow, leverage and
liquidity ratios and minimum net worth and liquidity requirements. For example,
the Term Loan Agreement restricts the ability of the Company and its
subsidiaries to pay dividends, make investments and capital expenditures and
incur indebtedness and liens. The Term Loan Agreement also required 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.
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 are senior in right of
payment to all subordinated indebtedness of such Guarantor.
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
bore 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. As a result of the debt discount on Energy
Spectrum's Subordinated Notes, the effective interest rate approximated 14%. 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
F-16
<PAGE> 17
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 "K" for further
discussion on the discount that was recorded related to this subordinate debt.
In April 1998, the Company redeemed in full the $2.5 million principal amount of
subordinated notes issued to Energy Spectrum Partners LP together with accrued
interest of $47,740.
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 additional drilling rigs and related 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.
The Company also has issued three amortizing term notes (the "Top Drive
Notes") totaling approximately $2.2 million outstanding at December 31, 1998.
This debt bears interest at 9.5% per annum and is collateralized by certain
equipment (top drives) of the Company and letters of credit in amounts totaling
approximately $700,000. The debt represented by the Top Drive Notes matures in
July, October and November of 2000. The note agreement relating to the Top Drive
Notes does not contain any restrictive financial covenants but contains a cross
default to the Term Loan Agreement and the Revolving Loan Agreement.
The Company recorded an extraordinary loss of $4.0 million (net of
income tax effect of $1.3 million) in the fourth quarter of 1997 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. For the year ended December 31, 1998, the Company recorded an
extraordinary loss in the amount of $338,000, net of income taxes of
approximately $244,000 from the early extinguishment of certain subordinate debt
in the amount of approximately $2.5 million, and from the payment on term notes
in the amount of $6.2 million using proceeds from the Company's initial public
offering.
At December 31, 1998, the aggregate yearly maturities of long-term
obligations are as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31
1999.............................................. $ 6,050,000
2000.............................................. 5,723,000
2001.............................................. 4,767,000
2002.............................................. 1,193,000
2003.............................................. 0
Thereafter ....................................... 100,000,000
-------------
$ 117,733,000
=============
</TABLE>
F-17
<PAGE> 18
NOTE I -- 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 for such services
received in 1996.
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 January 1998, the Company engaged Energy Spectrum Advisors Inc. to
provide financial advisory and investment banking services in connection with a
possible restructuring or refinancing of the Company's existing funded debt. As
compensation for such services, the Company agreed to pay Energy Spectrum
Advisors Inc. an initial fee of $50,000 and an additional fee of $25,000 per
month through the term of the engagement. The engagement letter expired on May
31, 1998 but was extended to June 30, 1998. The Company paid a total of $175,000
in fees to Energy Spectrum Advisors Inc. in connection with this arrangement. 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 financing 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 during 1997 and 1998.
The Company purchased drilling equipment and supplies from an affiliate
totaling $2,862,000 in 1996. 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.. One of these rigs was
refurbished and placed into service during 1998. The remaining five rigs will
require additional refurbishment prior to being placed 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 1998, the Company utilized these affiliates in
consideration for such trucking services of approximately $1.7 million and
$39,000, respectively.
Since December 13, 1996, APLP has 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 approximately $236,000 as of December 31, 1997.
F-18
<PAGE> 19
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company has engaged Geronimo Trucking Company, an affiliate of
Board member Lew O. Ward, to provide trucking services related to the movement
of the Company's rigs on numerous occasions. During 1997 and 1998, the Company
paid Geronimo approximately $338,000 and $916,000, respectively.
Interest expense incurred during 1997 included approximately $680,000
to current or former affiliates.
NOTE J -- SIGNIFICANT CUSTOMERS
The Company's customers include independent oil and gas producers and
major oil companies. During the year ended December 31, 1998, the three largest
customers for the Company's contract drilling services were Chesapeake, Sonat
and TransTexas, which accounted for approximately 16%, 9% and 8% of total
revenues, respectively. For the year ended December 31, 1998, less than 1% of
revenues were generated from current affiliated customers. During the year ended
December 31, 1997, the three largest customers for the Company's contract
drilling services were Chesapeake, Union Pacific Resources Corporation and
Sonat, which accounted for approximately 32%, 12% and 8% of total revenues,
respectively. During the year ended December 31, 1997, approximately 30% of
revenues were generated from current or former affiliated customers. Except for
six rigs under long term contracts with Chesapeake, dayrates billed to
affiliated customers in 1997 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.
NOTE K -- 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
On December 10, 1996, the Company granted the issuer of the Term Loan
(Note "H") 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 an 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.
In February 1997, the Company sold 100,000 shares of Common Stock at
$2.50 per share to the President of the Company. These shares 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 "O".
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.
F-19
<PAGE> 20
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 were
exercisable at a price of $.01 per share and the Series B Warrants are
exercisable at $7.50 per share. Both Series of 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 was approximately $429,000. The
amortization of this discount has been included in interest expense for 1997 and
the first quarter of 1998, with the remaining discount included in the
extraordinary loss recorded in 1998 .
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 "O". 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 James
E. Brown, Edward S. Jacob and David E. Grose, each executive officers. These
options issued pursuant to the 1997 Stock Option and Stock Award Plan, permit
the purchase of 200,000, 50,000 and 50,000 shares of Common Stock, respectively,
at an exercise price of $5, $5 and $10 per share, respectively. Messrs. Brown
and Grose have not exercised any of these options, and all of their options
remain outstanding at the date of this document. Mr. Jacob exercised options for
10,000 shares during 1998. Mr. Jacob received an additional 6,500 shares during
1999 in conjunciton with his severance in exchange for certain waivers and
satisfaction of all obligations of the Company to Mr. Jacob under the 1997 Stock
Option and Stock Award Plan or any other agreement. .
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.
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.
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.
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.
During 1998, the Company granted options to employees to purchase
15,000 shares of Common Stock at a weighted average exercise price of $12.23 per
share and granted options to executive officers to purchase 353,000 shares of
Common Stock at a weighted average exercise price of $6.02 per share. None of
such options had been exercised, and all of such options remained outstanding at
December 31, 1998.
NOTE L -- COMMITMENTS AND CONTINGENCIES
The Company has entered into two-year employment agreements with three
executive officers, of which two have expired by their own term, which provide
for the payment of the remaining term of each agreement upon a
F-20
<PAGE> 21
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
change of control. As of December 31, 1998, benefits under such agreements,
assuming a change of control, would aggregate approximately $52,500.
As of December 31, 1998, the Company had no construction commitments
for rig refurbishment.
NOTE M -- LITIGATION
A purported class action lawsuit is pending against the Company,
certain directors and officers of the Company, the managing underwriters of the
Initial Public Offering, and certain current and former stockholders of the
Company, alleging violations of federal securities laws in connection with the
Initial Public Offering. The lawsuit, Yuan v. Bayard Drilling Technologies,
Inc., et al. ("Yuan"), was filed on February 3, 1998 in the United States
District Court for the Western District of Oklahoma. The principal plaintiff in
Yuan is Tom Yuan. The defendants in this case include Bayard, 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 Bayard 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 complaint 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 complaint 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 flow. Plaintiffs are seeking rescission and damages.
Two other suits, Khan v. Bayard Drilling Technologies, Inc., et al.
("Khan") and Burkett v. Bayard Drilling Technologies, Inc., et al. ("Burkett"),
which were filed in District Court in and for Oklahoma County, State of Oklahoma
on January 14, 1998 and February 2, 1998, respectively, and alleged essentially
the same claims as Yuan, were dismissed without prejudice in May 1998 on a joint
application filed by all parties. The plaintiffs in Khan and Burkett, along with
others, have been appointed as lead plaintiffs in the Yuan federal court suit,
now styled to include the other lead plaintiffs, as Yuan, et al., and an amended
consolidated complaint was filed on July 30, 1998. A motion to dismiss the
claims in this lawsuit has been filed by Bayard and the other defendants and is
currently pending before the court.
Bayard is also involved in 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 two
claims filed against Bayard and Marathon Oil Company on November 13, 1998 and
February 17, 1999 in the District Court of Washita County in the State of
Oklahoma. Eldred L. and Patricia A. Schneberger and Irene F. and James H.
Howard, the plaintiffs in these lawsuits, seek remedies including an order of
abatement and actual, consequential and punitive damages for losses allegedly
incurred in connection with a drilling project that utilized one of Bayard's
rigs. These lawsuits are in preliminary stages with initial discovery
commencing, thus the Company is unable to estimate the potential for liability
on these claims.
The Company believes the allegations in the lawsuits referenced above
are without merit and is defending vigorously the claims brought against it. The
Company is unable, however, to predict the outcome of these lawsuits or the
costs to be incurred in connection with their defense and there can be no
assurance that this litigation will be resolved in the Company's favor. An
adverse result or prolonged litigation could have a material adverse effect on
the Company's financial position or results of operations.
F-21
<PAGE> 22
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N -- 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 20% 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 $504,635 through
December 31, 1998.
NOTE O -- 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, 1998 was based on the Company's
estimate of the fair market value on the date of the grant. Through December 31,
1998, 1,283,600 options and 100,000 shares of restricted stock (denoted below)
were issued under the Plan, 289,020 of which were exercisable at December 31,
1998, at a weighted average exercise price of $15.41.
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................................... 644,600 $19.17
Forfeited................................. 2,500 $23.00
Exercised ................................ -- --
-----------
Outstanding at
January 1, 1998.............................. 842,100 $15.75
Granted................................... 463,500 $ 6.29
Forfeited................................. 12,000 $23.00
Exercised ................................ 10,000 $ 5.00
-----------
December 31, 1998............................ 1,283,600 $12.27
</TABLE>
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
ASSUMPTION 1998 1997 1996
---------- ---- ---- ----
<S> <C> <C> <C>
Expected Term: 5.00 6.00 6.00
Expected Volatility: 38.88% 42.49% 40.00%
Expected Dividend Yield: 0% 0% 0%
Risk-Free Interest Rate: 5.49% 6.01% 6.00%
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE WGTD. AVG.
EXERCISE PRICES AT 12/31/98 CONTR. LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.50 to $4.99 100,000 4.00 $2.50 40,000 $2.50
$5.00 to $10.00 742,100 4.88 $5.50 111,720 $5.76
$10.01 to $23.00 541,500 5.64 $21.54 177,300 $21.48
---------------- ----------- ---- ------ ------- ------
$5.00 to $23.00 1,383,600 4.84 $11.56 329,020 $14.52
</TABLE>
F-22
<PAGE> 23
BAYARD DRILLING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company applies APB Opinion 25 in accounting for the Plan. APB No.
25 requires that expense be recorded for any difference between the option price
and market value on the measurement date. Accordingly, because the exercise
price of all options equaled or exceeded the market price at date of grant, no
compensation cost has been recognized in 1998, 1997 or 1996. Had compensation
been determined on the basis of fair value pursuant to FASB Statement No. 123,
net income (loss) and earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1997 1998
------ -------- -------
<S> <C> <C> <C>
Net income (loss): (in thousands, except per share data)
As reported $ 267 $ (2,086) $ (5,582)
Pro forma (net of effective tax of 38%) 261 (2,677) (5,692)
Earnings per share, basic and fully diluted:
As reported, basic .05 (.23) (.31)
Pro forma, basic .05 (.30) (.31)
As reported, diluted .05 (.18) (.31)
Pro forma, diluted .05 (.23) (.31)
</TABLE>
NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for fiscal 1998 are as
follows ($ in thousands except per share data):
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ ------------
1998 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales........................................ $ 23,962 $20,215 $ 20,625 $ 14,270
Gross profit (loss) (a).......................... 5,986 4,262 3,733 (3,470)
Net income (loss) before extraordinary
item......................................... 1,757 739 (1,453) (6,287)
Net income (loss) per share:
Basis........................................ .10 .04 (.08) (.35)
Diluted...................................... .10 .04 (.08) (.35)
</TABLE>
(a) Total revenue excluding interest and other income, less total costs and
expenses excluding depreciation and amortization expense.
F-23
