-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LbX+zsGSb7xNY/juCFRMvq+n6CHw2fE/YpYiux6AHtj+aIOzz5QFFABOqaQ5lnmL jfce/THjNvuwPsvAxCt1Sw== 0000950134-98-006093.txt : 19980723 0000950134-98-006093.hdr.sgml : 19980723 ACCESSION NUMBER: 0000950134-98-006093 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19980722 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAYARD DRILLING TECHNOLOGIES INC CENTRAL INDEX KEY: 0001044478 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 731508021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-59623 FILM NUMBER: 98669932 BUSINESS ADDRESS: STREET 1: 4005 NW EXPRESSWAY STREET 2: SUITE 5502 CITY: OKLAHOMA CITY STATE: OK ZIP: 73116 BUSINESS PHONE: 4058409550 MAIL ADDRESS: STREET 1: 4005 NW EXPRESSWAY STREET 2: SUITE 5502 CITY: OKLAHOMA CITY STATE: OK ZIP: 73116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BONRAY DRILLING CORP CENTRAL INDEX KEY: 0000351693 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 731086424 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-59623-01 FILM NUMBER: 98669933 BUSINESS ADDRESS: STREET 1: 4701 N E 23RD ST STREET 2: P O BOX 50128 CITY: OKLAHOMA CITY STATE: OK ZIP: 73121 BUSINESS PHONE: 4054244327 MAIL ADDRESS: STREET 1: 4701 NE 23RD STREET STREET 2: P O BOX 50128 CITY: OKLAHOMA CITY STATE: OK ZIP: 73140 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAYARD DRILLING LP CENTRAL INDEX KEY: 0001066315 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 731532348 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-59623-02 FILM NUMBER: 98669934 BUSINESS ADDRESS: STREET 1: 4005 NORTHWEST EXPRESSWAY STREET 2: SUITE 550E CITY: OKLAHOMA CITY STATE: OK ZIP: 73116 BUSINESS PHONE: 4058409550 MAIL ADDRESS: STREET 1: 4005 NORTHWEST EXPRESSWAY STREET 2: SUITE 550E CITY: OKLAHOMA CITY STATE: OK ZIP: 73116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAYARD DRILLING LLC CENTRAL INDEX KEY: 0001066316 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 731519377 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-59623-03 FILM NUMBER: 98669935 BUSINESS ADDRESS: STREET 1: 4005 NORTHWEST EXPRESSWAY STREET 2: SUITE 550E CITY: OKLAHOMA CITY STATE: OK ZIP: 73116 BUSINESS PHONE: 4058409550 MAIL ADDRESS: STREET 1: 4005 NORTHWEST EXPRESSWAY STREET 2: SUITE 550E CITY: OKLAHOMA CITY STATE: OK ZIP: 73116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TREND DRILLING CO CENTRAL INDEX KEY: 0001066317 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 731141066 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-59623-04 FILM NUMBER: 98669936 BUSINESS ADDRESS: STREET 1: 4005 NORTHWEST EXPRESSWAY STREET 2: SUITE 550E CITY: OKLAHOMA CITY STATE: OK ZIP: 73116 BUSINESS PHONE: 4058409550 MAIL ADDRESS: STREET 1: 4005 NORTHWEST EXPRESSWAY STREET 2: SUITE 550E CITY: OKLAHOMA CITY STATE: OK ZIP: 73116 S-4 1 FORM S-4 1 As filed with the Securities and Exchange Commission on July 22, 1998 Registration No. 333-______ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- BAYARD DRILLING TECHNOLOGIES, INC. BAYARD DRILLING, L.L.C. BAYARD DRILLING, L.P. BONRAY DRILLING CORPORATION TREND DRILLING CO. (Exact names of Registrants as specified in their charters) DELAWARE 1381 73-1508021 DELAWARE 1381 73-1519377 DELAWARE 1381 73-1532348 DELAWARE 1381 73-1086424 OKLAHOMA 1381 73-1141066 (States or other jurisdictions of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
4005 NORTHWEST EXPRESSWAY, SUITE 550E OKLAHOMA CITY, OKLAHOMA 73116 (405) 840-9550 (Address, including zip code, and telephone number, including area code, of Registrants' principal executive offices) --------------------- JAMES E. BROWN PRESIDENT AND CHIEF EXECUTIVE OFFICER BAYARD DRILLING TECHNOLOGIES, INC. 4005 NORTHWEST EXPRESSWAY, SUITE 550E OKLAHOMA CITY, OKLAHOMA 73116 (405) 840-9550 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- COPIES TO: GEOFFREY L. NEWTON BAKER & BOTTS, L.L.P. 2001 ROSS AVENUE DALLAS, TEXAS 75201 (214) 953-6500 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ]_________________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] ________________ CALCULATION OF REGISTRATION FEE
==================================================================================================================== TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION REGISTERED REGISTERED NOTE(1) PRICE(1) FEE - -------------------------------------------------------------------------------------------------------------------- 11% Senior Notes due June 30, 2005, Series B . . . . . . . . . $100,000,000 100% $100,000,000 $29,500 - -------------------------------------------------------------------------------------------------------------------- Guarantees (2) . . . . . . . . . N/A N/A N/A N/A ====================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f) under the Securities Act of 1933, as amended. (2) Each of Bayard Drilling, L.L.C., a Delaware limited liability company, Bayard Drilling, L.P., a Delaware limited partnership, Bonray Drilling Corporation, a Delaware corporation, and Trend Drilling Co., an Oklahoma corporation, (each of which is a direct or indirect wholly owned subsidiary of Bayard Drilling Technologies, Inc.) is registering a guarantee of the obligations of Bayard Drilling Technologies, Inc. in respect of the Senior Notes being registered hereby. Pursuant to Rule 457(n) under the Securities Act of 1933, as amended, no registration fee is required with respect to such guarantees. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY __, 1998 PROSPECTUS BAYARD DRILLING TECHNOLOGIES, INC. OFFER TO EXCHANGE ITS 11% SENIOR NOTES DUE 2005, SERIES B FOR ANY AND ALL OF ITS OUTSTANDING 11% SENIOR NOTES DUE 2005, SERIES A THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. Bayard Drilling Technologies, a Delaware corporation, ("Bayard" or the "Company"), hereby offers (the "Exchange Offer"), upon the terms and conditions set forth in this Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount of its 11% Senior Notes due June 30, 2005, Series B (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which this Prospectus is a part, for each $1,000 principal amount of its outstanding 11% Senior Notes due June 30, 2005, Series A (the "Old Notes"), of which $100,000,000 principal amount is outstanding. The form and terms of the Exchange Notes are the same as the form and terms of the Old Notes (which they are intended to replace) except that the Exchange Notes will bear a Series B designation and have been registered under the Securities Act and, therefore, will not bear legends restricting their transfer. See "The Exchange Offer." The Exchange Notes will evidence the same debt as the Old Notes (which they are intended to replace) and will be issued under and be entitled to the benefits of the Indenture (the "Indenture") dated June 26, 1998 among the Company, the Guarantors (as hereinafter defined) and U.S. Trust Company of Texas, N.A., as Trustee (the "Trustee"), governing the Old Notes. See "The Exchange Offer" and "Description of Exchange Notes." The Exchange Notes will mature on June 30, 2005. Interest on the Exchange Notes will be payable semi-annually on June 30 and December 31 of each year, commencing on December 31, 1998. The Company will not be required to make any mandatory sinking fund or redemption payments with respect to the Exchange Notes. The Exchange Notes will not be redeemable prior to June 30, 2003, on or after which the Exchange Notes will be redeemable, in whole or in part, at the option of the Company, at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as hereinafter defined), if any, thereon to the date of redemption. In addition, at any time on or before June 30, 2001, the Company may redeem up to 35% of the original aggregate principal amount of the Exchange Notes with the net proceeds of a Qualified Equity Offering (as hereinafter defined) at a redemption price equal to 111% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption, provided that at least $65 million in aggregate principal amount of Exchange Notes remains outstanding immediately after the occurrence of such redemption. See "Description of Exchange Notes -- Optional Redemption." Upon a Change of Control (as hereinafter defined) each holder of the Exchange Notes will have the right to require the Company to repurchase all or any part of such holder's Exchange Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. See "Description of Exchange Notes -- Change of Control." (Cover text continued on next page) SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE EXCHANGE OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1998 3 The Old Notes were issued by the Company in an offering (the "Old Notes Offering") consummated on June 26, 1998. The Company used $75 million of the proceeds from the sale of the Old Notes to finance the acquisition (the "TransTexas Acquisition") of 25 drilling rigs and certain related equipment and other assets from TransTexas Gas Corporation ("TransTexas"), which occurred concurrently with the Old Notes Offering. The remainder of the net proceeds to the Company from the Old Notes Offering have been, or will be, used for general corporate purposes. The Exchange Notes will be senior unsecured obligations of the Company and will rank pari passu in right of payment with all existing and future senior indebtedness and other senior obligations of the Company, and senior in right of payment to all future subordinated indebtedness of the Company. The Company is a holding company and conducts substantially all of its operations through its wholly owned subsidiaries. The Exchange Notes will be guaranteed (the "Guarantees") by the present and future domestic Subsidiaries (as hereinafter defined) of the Company (the "Guarantors"). The Guarantees will be senior unsecured obligations of each Guarantor and will rank pari passu in right of payment with all senior indebtedness and other senior obligations of such Guarantor. The holders of secured indebtedness of the Company and the Guarantors will have claims with respect to the assets constituting collateral for such indebtedness that are prior to claims of holders of the Exchange Notes. See "Description of Exchange Notes." As of June 15, 1998, on a pro forma basis after giving effect to the TransTexas Acquisition (as hereinafter defined) and the Old Notes Offering, the Company had approximately $121.1 million of outstanding senior indebtedness, of which $21.1 million is secured by certain assets of the Subsidiaries. The Company will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York time, on , 1998, unless extended by the Company in its sole discretion to no later than 30th business day (or, with the Initial Purchasers' consent, to no later than the 40th business day) after the registration statement to which this Prospectus relates is declared effective (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the Expiration Date. The Exchange Offer is subject to certain customary conditions. The Old Notes were sold by the Company on June 26, 1998 to the Initial Purchasers (as hereinafter defined) in the Old Notes Offering, which was a transaction effected without registration under the Securities Act in reliance upon an exemption under the Securities Act. The Initial Purchasers subsequently placed the Old Notes in the United States with qualified institutional buyers in reliance upon Rule 144A under the Securities Act and outside the United States with non-U.S. persons in reliance on Regulation S under the Securities Act. Accordingly, the Old Notes may not be reoffered, resold or otherwise transferred unless registered under the Securities Act or unless an applicable exemption from the registration requirements of the Securities Act is available. The Exchange Notes are being offered hereunder in order to satisfy the obligations of the Company under the Registration Rights Agreement (the "Exchange Offer Registration Rights Agreement") entered into by the Company in connection with the Old Notes Offering. See "The Exchange Offer." Based on no-action letters issued by the staff of the Securities and Exchange Commission (the "Commission") to third parties, the Company believes the Exchange Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by any holder thereof (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and such holder has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. See "The Exchange Offer -- Purpose and Effect of the Exchange Offer" and "-- Resale of the Exchange Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Notwithstanding the foregoing, any purchaser of Old Notes who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing the Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make ii 4 this Prospectus available to any Participating Broker-Dealer for use in connection with any such resale. See "Plan of Distribution." There has not previously been any public market for the Old Notes or the Exchange Notes. Although the Initial Purchasers have informed the Company that they intend to make a market in the Exchange Notes, they are not obligated to do so, and any such market-making activities with respect to the Exchange Notes may be interrupted or discontinued at any time without notice. The Company does not intend to list the Exchange Notes on any securities exchange or to seek approval for quotation through any automated quotation system. Any Old Notes not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the rights and will be subject to the limitations applicable thereto under the Indenture. Following consummation of the Exchange Offer, the holders of Old Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company generally will have no further obligation to such holders to provide for registration under the Securities Act of the Old Notes held by them. To the extent that Old Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes could be adversely affected. See "Risk Factors -- Exchange Offer Procedures" and "Exchange Offer -- Consequences of Failure to Exchange." The Exchange Notes will be available initially only in book-entry form. The Company expects that the Exchange Notes issued pursuant to this Exchange Offer will be issued in the form of one or more Global Notes (as hereinafter defined), which will be deposited with, or on behalf of, The Depository Trust Company ("DTC" or the "Depositary") and registered in its name or in the name of Cede & Co., its nominee. Beneficial interests in a Global Note representing the Exchange Notes will be shown on, and transfers thereof will be effected through, records maintained by the Depositary and its participants. After the initial issuance of the Global Notes, Exchange Notes in certificated form will be issued in exchange for a Global Note only on the terms set forth in the Indenture. See "Description of Exchange Notes -- Book Entry, Delivery, Form and Transfer." THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER. This Prospectus, together with the Letter of Transmittal, is being sent to all registered holders of Old Notes as of , 1998. The Company will not receive any cash proceeds from the issuance of the Exchange Notes offered hereby. No dealer-manager is being used in connection with this Exchange Offer. The Company will pay all expenses incurred by it incident to the Exchange Offer. See "Use of Proceeds" and "Plan of Distribution." The Exchange Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of the Old Notes in any jurisdiction in which the making of the Exchange Offer or acceptance thereof would not be in compliance with the laws of such jurisdiction or would otherwise not be in compliance with any provision of any applicable security law. iii 5 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact included in this Prospectus, including without limitation certain statements under the captions "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," may constitute forward-looking statements. Forward-looking statements can often, but not always, be identified by terminology such as "anticipate," "believe," "estimate," "intend" and "expect" and similar expressions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this Prospectus, including without limitation in conjunction with the forward-looking statements included in this Prospectus and in the section of this Prospectus entitled "Risk Factors" under the headings "Cyclical Conditions; Recent Weakening of Demand for Drilling Services," "Substantial Leverage," "Holding Company Structure," "Ranking of the Exchange Notes," "Restrictions Imposed by Lenders," "Dependence on Oil and Gas Industry," "Concentration of Customer Base," "Limited Operating History," "Management of Growth; Risks of Acquisition Strategy," "Shortage of Qualified and Experienced Labor," "Competition," "TransTexas Drilling Alliance," "Class Action Litigation," "Operating Hazards and Uninsured Risks," "Shortage of Drilling Equipment and Supplies," "Capital Requirements and Liquidity," "Reliance on Key Personnel," "Control by Existing Management and Stockholders; Voting Agreement among Certain Stockholders," "Inability to Purchase Exchange Notes Upon a Change of Control," "Governmental Regulation and Environmental Matters," "Risks Associated with Footage and Turnkey Drilling," "Lack of Public Market for the Notes," "Fraudulent Conveyance Considerations" and "Exchange Offer Procedures; Consequences of Failure to Exchange." All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. The Company disclaims any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. iv 6 AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 (the "Exchange Offer Registration Statement," which term shall encompass all amendments, exhibits and schedules thereto) pursuant to the Securities Act, and the rules and regulations promulgated thereunder, covering the Exchange Notes being offered hereby. This Prospectus does not contain all of the information set forth in the Exchange Offer Registration Statement. For further information with respect to the Company and the Exchange Offer, reference is made to the Exchange Offer Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Exchange Offer Registration Statement, reference is made to the exhibit for a more complete description of the document or matter involved, and each such statement shall be deemed qualified in its entirety by such reference. In connection with the Company's initial public offering of 11,040,000 shares of its common stock, par value $0.01 per share ("Common Stock"), consummated in November 1997 (the "Initial Public Offering"), the Company became subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. The Exchange Offer Registration Statement and such other reports, proxy statements and other information filed by the Company with the Commission can be inspected at, and copies may be obtained at prescribed rates from, the public reference facilities maintained by the Commission at its principal offices located at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549, as well as at the Commission's regional offices located at Seven World Trade Center, New York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The Exchange Offer Registration Statement and such other reports, proxy statements and other information may also be obtained from the web site that the Commission maintains at http://www.sec.gov. Reports, proxy statements and other information concerning the Company can also be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York 10016, where the Common Stock is listed. The Company will furnish periodic reports to the Trustee, which will make them available upon request to the holders of the Exchange Notes. To permit compliance with Rule 144A in connection with resales of Old Notes, the Company will furnish upon the request of the holder of an Old Note and prospective purchaser designated by such holder the information required to be delivered under Rule 144A(d)(4) under the Securities Act if at the time of such request the Company is not a reporting company under Section 13 or 15(d) of the Exchange Act or exempt from reporting pursuant to Rule 12g3-2(b) thereunder. v 7 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Unless otherwise indicated or the context otherwise requires, the terms "Bayard" and the "Company" include Bayard Drilling Technologies, Inc. and its predecessors and subsidiaries. All capitalized terms used in this Prospectus with respect to the Old Notes or the Exchange Notes (collectively, the "Notes") and not otherwise defined herein have the meanings set forth under "Description of Exchange Notes -- Certain Definitions." Unless otherwise indicated, the information contained herein (including the historical and pro forma financial information) relating to periods prior to June 26, 1998, the date of the TransTexas Acquisition, does not give effect to the TransTexas Acquisition. The 1997 pro forma financial results presented herein reflect operating results attributable to all acquisitions completed by the Company during 1997. THE COMPANY The Company is a leading provider of contract land drilling services to major and independent oil and gas companies. As of June 15, 1998, pro forma for the TransTexas Acquisition, the Company's rig fleet consisted of 88 rigs, of which 73 were being marketed and 15 were available for refurbishment. For the three months ended March 31, 1998, and the months of April and May, 1998, the Company experienced overall utilization rates of approximately 85%, 78% and 70%, respectively, for its marketed rigs (excluding the 25 drilling rigs (21 of which are operational and four of which require refurbishment) acquired in the TransTexas Acquisition (the "TransTexas Rigs")). See "-- Recent Operating Performance." The Company's fleet consists primarily of rigs capable of deep drilling applications (well depths of 15,000 feet or greater). The Company believes that deep drilling targets are more attractive to oil and gas companies due to new technologies, including (i) three-dimensional seismic techniques, (ii) increasingly accurate down hole measurement devices and (iii) improved guidance systems and directional drilling motors for horizontal and directional wells. Of the Company's 88 rigs, 69 are capable of drilling to depths of 15,000 feet or greater and 43 are capable of drilling to depths of 20,000 feet or greater. The Company's large percentage of diesel electric silicon controlled rectifier ("SCR") rigs, comprising 31 of its 88 rigs, positions the Company's fleet as one of the most technically advanced in the industry. The Company was formed in December 1996 as the successor to Anadarko Drilling Company ("Anadarko"), which owned ten rigs. Through June 15, 1998, pro forma for the TransTexas Acquisition, the Company had acquired 78 additional rigs (net of sales). Many of the acquired rigs were put into service in the later months of 1997 and therefore did not contribute significantly to operating results in 1997. For the quarter ended March 31, 1998, the Company reported revenues of $24 million, EBITDA of $6 million and net income of $1.8 million. For the year ended December 31, 1997, pro forma for the acquisitions completed in that year, the Company reported revenue of $81.4 million, EBITDA of $18.2 million and net income of $3.7 million. Because the TransTexas Rigs were utilized solely for TransTexas' internal purposes, the 1997 pro forma data included in this Prospectus does not give effect to the TransTexas Acquisition. CORE OPERATING AREAS The Company's rig fleet is currently concentrated in two core operating regions--the Mid-Continent region and the Gulf Coast region. With the completion of the TransTexas Acquisition the Company added a third core operating region in South Texas. The Company is among the largest rig suppliers in each of these regions. 1 8 MID-CONTINENT REGION The Mid-Continent region is comprised principally of Oklahoma, North Texas and the Texas Panhandle. At June 15, 1998, the Company had 38 rigs marketed in the Mid-Continent region and was the most active drilling contractor in the region. The Company's rigs operated in the Mid-Continent region are generally capable of drilling to depths of 10,000 feet or greater and are marketed by the Company to meet the specific well depths and mobility needs of producers in that region. At June 5, 1998, 153 rigs were being utilized in this region, making it the most active domestic onshore drilling market at that time. This area is characterized by well-defined target formations and long-lived natural gas reserves. GULF COAST REGION The Gulf Coast region is comprised of the onshore Gulf of Mexico areas in Texas, Louisiana, Mississippi and Alabama. At June 15, 1998, the Company had 14 rigs marketed in the Gulf Coast region, including 13 diesel electric SCR rigs. The Company believes that its high quality equipment, including diesel electric SCR rigs, powerful mud pumps and high horsepower drawworks, give the Company a competitive advantage in attracting premium jobs with customers engaged in multi-well drilling programs in this region. At June 5, 1998, 110 rigs were being utilized in this region, making it the fourth most active domestic onshore drilling market at that time. The Gulf Coast region is characterized by significant drilling activity in deep, technically challenging formations for which the Company's SCR and deep mechanical rigs are particularly well suited. While recent results in certain areas of the Gulf Coast have been disappointing to producers, most notably the Austin Chalk formation in Louisiana and the Pinnacle Reef in Texas, significant exploration and development activity is ongoing. SOUTH TEXAS REGION The South Texas region is comprised of the southern portion of onshore Texas. At June 15, 1998, pro forma for the TransTexas Acquisition, the Company had 21 rigs available to be marketed in the South Texas region (of which nine rigs were being utilized by TransTexas) and four rigs available to be refurbished as market conditions warrant. The TransTexas Rigs have been utilized historically only to meet the internal drilling requirements of TransTexas. With the completion of the TransTexas Acquisition, the Company intends to begin to actively market the acquired rigs not being utilized by TransTexas under the Alliance Agreement (as hereinafter defined). At June 5, 1998, 119 rigs were being utilized in this region, making it the third most active domestic onshore drilling market at that time. The South Texas region is predominately a gas producing region, and, accordingly, its drilling activity levels are less sensitive to declining oil prices. The Company believes that the TransTexas Rigs operating in this region are well suited for the mobility, drilling flexibility and hydraulic efficiency required for this region's drilling applications. 2 9 RIG FLEET The following table sets forth, as of June 15, 1998, certain information with respect to the drilling rigs owned by the Company and the rigs acquired in the TransTexas Acquisition. This table includes information for (i) the 52 rigs marketed by the Company at June 15, 1998, (ii) the 11 rigs available to be refurbished as market conditions warrant and (iii) the 25 rigs acquired by the Company in the TransTexas Acquisition. See "Business--Drilling Equipment and Supplies."
DEPTH CAPACITY (FEET) --------------------------------------------------- 7,000 10,000 15,000 20,000 TO TO TO OR 9,999 14,999 19,999 GREATER TOTAL Rigs Owned at June 15, 1998: Gulf Coast Region: SCR .......................................... 0 0 0 13 13 Mechanical ................................... 0 0 1 0 1 --------- --------- --------- --------- --------- Total ........................................ 0 0 1 13 14 Mid-Continent Region: SCR .......................................... 0 0 3 5 8 Mechanical ................................... 1 14 8 7 30 --------- --------- --------- --------- --------- Total ........................................ 1 14 11 12 38 Available for Refurbishment: SCR .......................................... 0 0 4 6 10 Mechanical ................................... 0 1 0 0 1 --------- --------- --------- --------- --------- Total ........................................ 0 1 4 6 11 RIGS ACQUIRED FROM TRANSTEXAS: South Texas Region: Mechanical ................................... 0 2 7 12 21 Available for Refurbishment: Mechanical ................................... 0 1 3 0 4 Total Rigs (Including TransTexas Rigs) .. 1 18 26 43 88 ========= ========= ========= ========= =========
BUSINESS STRATEGY The Company believes that growth in earnings and cash flow can be achieved by pursuing the following business strategy: OPERATING A TECHNOLOGICALLY ADVANCED RIG FLEET The Company has assembled its existing rig fleet, and will pursue further acquisitions, with the goal of operating one of the most technologically sophisticated land drilling fleets in the United States. Many of the Company's rigs include engines, pumps and drilling mud systems that represent the best drilling technology available and that the Company believes offer greater efficiencies for customers than many of the rigs available from its competitors. For example, by deploying its diesel electric SCR rigs with two or three high horsepower pumps and top drive drilling systems in challenging deep and horizontal drilling situations, the Company believes that it can reduce its customers' overall drilling costs, thus securing and enhancing its relationships with some of the most active operators in the domestic market. The Company is committed to making the capital investments required to maintain and, in appropriate circumstances, increase the technological sophistication and operational efficiencies of its fleet. DEVELOPING DEEP DRILLING CAPABILITIES The Company believes there is greater demand for rigs capable of drilling deeper, more complex wells, including 1,500 horsepower and larger rigs, and has focused, and will continue to focus, on acquiring rigs with these capabilities. Of the 25 TransTexas Rigs, 12 are 1,500 horsepower or larger rigs and an additional 10 are 1,000 horsepower or larger rigs. At June 15, 1998, pro forma for the TransTexas Acquisition, 78% of the Company's rig fleet 3 10 had deep drilling capability (15,000 feet or greater). Management believes that demand and utilization rates for these types of rigs, particularly SCR rigs, will remain higher than for rigs with lesser depth capacities due to their greater operational flexibility and efficiency. FOCUSING ON CORE MARKETS The Company believes that its strong asset position and operating expertise in the Mid-Continent and Gulf Coast regions enable it to achieve operating efficiencies and to provide premium service to its customers in these markets. The Company is the largest provider of drilling rigs in Oklahoma and is among the largest operators of deep rigs in the onshore Gulf Coast region. The TransTexas Acquisition will make the Company one of the largest suppliers of drilling rigs in the South Texas region and positions the Company to mobilize additional rigs in that region as market conditions warrant. DEVELOPING AND MAINTAINING RELATIONSHIPS WITH OPERATORS In order to maximize the utilization rate of its rig fleet and to minimize exposure to market downturns, the Company seeks to maintain and build relationships with operators committed to active domestic drilling programs. The Company's largest current customers include Apache Corporation, Chesapeake Energy Corporation ("Chesapeake"), Enron Oil and Gas Company, Marathon Oil Company, Sonat Exploration Company ("Sonat") and Union Pacific Resources Corporation ("UPR"). Each of these companies was among the most active onshore operators in the United States during the last three years. As a result of the Alliance Agreement (as hereinafter defined), the Company will make up to 15 rigs available to TransTexas to meet its drilling requirements, if any, in an area that includes, among others, the South Texas and Gulf Coast regions. During the three months ended March 31, 1998, the three largest customers for the Company's contract drilling services were Chesapeake, UPR and Sonat, which accounted for approximately 17%, 12% and 10% of total revenues, respectively. ACQUIRING AND REFURBISHING ADDITIONAL RIGS AND RELATED EQUIPMENT The Company intends to pursue selective acquisitions of additional rigs and related equipment, including top drive drilling systems. Additionally, the Company has experience in the acquisition of component parts from which rigs can be assembled or refurbished and intends to continue to seek similar opportunities for the expansion and enhancement of its rig fleet by such means. Since its formation and through June 26, 1998, the date of the TransTexas Acquisition, the Company had acquired 78 additional rigs (net of sales). THE TRANSTEXAS ACQUISITION The TransTexas Acquisition was consummated on June 26, 1998, concurrently with the closing of the Old Notes Offering. In the TransTexas Acquisition, the Company acquired certain assets of TransTexas, including (i) 25 drilling rigs (21 of which are operational and include drill pipe and four of which require refurbishment) and related equipment (including approximately 325,000 feet of surplus drill pipe), (ii) a drilling support facility located in Laredo, Texas and related maintenance and repair equipment and (iii) trucks and equipment used for rig hauling activities. All of the TransTexas Rigs are mechanical rigs capable of drilling to depths of 12,000 feet or greater, with 12 of the rigs capable of drilling to depths of 20,000 feet or greater. The Company will pay cash consideration of $75 million in the TransTexas Acquisition and intends to offer positions to approximately 200 TransTexas employees currently involved in its drilling operations. In connection with the TransTexas Acquisition, the Company and TransTexas entered into a drilling alliance agreement (the "Alliance Agreement"). The Alliance Agreement provides that, for a period of 30 months, if TransTexas 4 11 engages in any land drilling activities in Alabama, Louisiana, Mississippi, Oklahoma, New Mexico and Texas (the "Alliance Area"), TransTexas will engage the Company to provide up to 15 rigs for wells on which TransTexas serves as operator. Immediately following the consummation of the TransTexas Acquisition, eight of the TransTexas Rigs were being utilized by TransTexas. Although the Company expects TransTexas to continue to utilize certain of the TransTexas Rigs during the term of the Alliance Agreement, there can be no assurance that TransTexas will do so and, therefore, there can be no assurance as to the number of TransTexas Rigs (or other drilling rigs) that the Company will ultimately provide to TransTexas under the Alliance Agreement or of the timing or receipt of revenues therefrom. RECENT OPERATING PERFORMANCE The Company reported net income for the three months ended March 31, 1998 of $1.8 million on revenues of $24 million compared with a loss of $84,000 on revenues of $4.1 million for the three months ended March 31, 1997. EBITDA increased to $6 million for the first quarter of 1998 from $869,000 in the first quarter of 1997. These increases are due to the growth in the Company's rig fleet from 11 marketed rigs at March 31, 1997 to 51 marketed rigs at March 31, 1998. Of the 52 rigs being marketed by the Company at June 15, 1998, 14 were located in the Gulf Coast region and 38 in the Mid-Continent region. In the Gulf Coast region, the Company had nine rigs under contract and five rigs available for work. In the Mid-Continent region, the Company had 27 rigs under contract, 10 rigs available, and one rig undergoing repairs. For the first quarter of 1998, the Company experienced a decline in average rig utilization to approximately 85% from its 1997 average rig utilization of 93%. In April and May 1998, the Company's average rig utilization rate declined further to approximately 78% and 70%, respectively. In the Mid-Continent region, the Company experienced utilization rates of 88% during the first quarter of 1998, 83% during April 1998 and 80% during May 1998. The Company was the most active drilling contractor in the Mid-Continent region during the first quarter of 1998. The Gulf Coast market weakened during the first five months of 1998, producing utilization rates of 80% during the first quarter of 1998, 64% during April 1998 and 41% during May 1998, during which time the Company has been attempting to transition rigs from Chesapeake and UPR to other operators. Since December 1997, Chesapeake has released five rigs and UPR has released three rigs in the Gulf Coast region. On June 15, 1998, Chesapeake and UPR were utilizing five and three rigs in the Gulf Coast region, respectively. However, there can be no assurance that Chesapeake, UPR or other customers of the Company will not release additional rigs in the future. The Company's operating results are substantially affected by industry conditions such as the levels and volatility of market prices of oil and gas. In recent months, the market price for oil has declined significantly, resulting in a decrease in demand for rigs targeting oil reserves. Over the same period, gas prices have declined to a lesser extent than oil prices, as has the demand for gas drilling rigs. However, there can be no assurance that gas prices and related demand for gas drilling rigs will not decline significantly in the future. In the first quarter of 1998, approximately 93% of the Company's revenues and 97% of its operating income were generated from natural gas drilling activities. See "Risk Factors -- Cyclical Conditions; Weakening of Demand for Drilling Services." 5 12 THE OLD NOTES OFFERING OLD NOTES . . . . . . . . . . . . . . . The Old Notes were sold by the Company on June 26, 1998 to Donaldson Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., BT Alex. Brown and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated (the "Initial Purchasers"), pursuant to a Purchase Agreement (the "Purchase Agreement") dated June 19, 1998. The Initial Purchasers subsequently resold the Old Notes in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the United States to non-U.S. persons in reliance on Regulation S under the Securities Act. EXCHANGE OFFER REGISTRATION RIGHTS AGREEMENT . . . . . . . . . . . . . . . Pursuant to the Purchase Agreement, the Company and the Purchasers entered into a Registration Rights Agreement dated June 19, 1998 (the "Exchange Offer Registration Rights Agreement") which grants the holders of the Old Notes certain exchange and registration rights. The Exchange Offer is intended to satisfy such exchange rights, which terminate upon the consummation of the Exchange Offer.
THE EXCHANGE OFFER SECURITIES OFFERED . . . . . . . . . . $100,000,000 principal amount of 11% Senior Notes due 2005, Series B (the "Exchange Notes"). THE EXCHANGE OFFER . . . . . . . . . . $1,000 principal amount of the Exchange Notes in exchange for each $1,000 principal amount of Old Notes. As of the date hereof, $100,000,000 aggregate principal amount of Old Notes are outstanding. The Company will issue the Exchange Notes to holders on or promptly after the Expiration Date. See "The Exchange Offer." Based on an interpretation by the staff of the Commission set forth in Exxon Capital Holdings Corp., SEC No-Action Letter, available April 13, 1989, and similar no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such holder does not intend to participate and has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes.
6 13 Each Participating Broker-Dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities (other than a resale of an unsold allotment from the original sale of Old Notes). The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any Participating Broker-Dealer for use in connection with any such resale. See "Plan of Distribution." Any holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the Exchange Notes cannot rely on the position of the staff of the Commission enunciated in the relevant no- action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder is not indemnified by the Company. See "The Exchange Offer -- Resale of the Exchange Notes." EXPIRATION DATE . . . . . . . . . . . . 5:00 p.m., New York time, on , 1998 unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. ACCRUED INTEREST ON THE NOTES . . . . . Each Exchange Note will bear interest from the most recent date to which interest has been paid or duly provided for on the Old Note surrendered in exchange for such Exchange Note or, if no interest has been paid or duly provided for on such Old Note, from June 26, 1998. Interest on the Exchange Notes is payable on June 30 and December 31 of each year, commencing on December 31, 1998. Holders of Old Notes whose Old Notes are accepted for exchange will not receive accrued interest on such Old Notes for any period from and after the last date to which interest has been paid or duly provided for on the Old Notes prior to the original issue date of the Exchange Notes or, if no such interest has been paid or duly provided for, will not receive any accrued interest on such Old Notes, and will be deemed to have waived the right to receive any interest on such Old Notes accrued from and after June 26, 1998. See "The Exchange Offer -- Interest on the Exchange Notes."
7 14 CONDITIONS TO THE EXCHANGE OFFER . . . The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. See "The Exchange Offer -- Conditions." PROCEDURES FOR TENDERING OLD NOTES . . Each holder of Old Notes wishing to accept the Exchange Offer must complete, sign and date the accompanying Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Old Notes and any other required documentation to U.S. Trust Company of Texas, N.A., as exchange agent (the "Exchange Agent"), at the address set forth in the Letter of Transmittal. By executing the Letter of Transmittal, each holder will represent to the Company that, among other things, the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the holder, that neither the holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Notes and that neither the holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act. See "The Exchange Offer -- Purpose and Effect of the Exchange Offer" and "The Exchange Offer -- Procedures for Tendering." UNTENDERED OLD NOTES; CONSEQUENCES OF FAILURE TO EXCHANGE . . . . . . . . . . Following the consummation of the Exchange Offer, holders of Old Notes eligible to participate but who do not tender their Old Notes will not have any further exchange rights and such Old Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Old Notes could be adversely affected. The Old Notes that are not exchanged pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Old Notes may be resold only (i) to the Company, (ii) pursuant to an effective registration statement under the Securities Act, (iii) pursuant to Rule 144A or Rule 144 under the Securities Act, (iv) outside the United States to a foreign person pursuant to the requirements of Rule 904 under the Securities Act, or (v) pursuant to some other exemption under the Securities Act (and based upon an opinion of counsel, if the Company so requests). See "The Exchange Offer -- Consequences of Failure to Exchange."
8 15 SHELF REGISTRATION STATEMENT . . . . . In the event that (i) the Exchange Offer is not permitted by applicable law or Commission policy or (ii) in certain circumstances the holder notifies the Company that it is unable to participate in the Exchange Offer or is unable to use this Prospectus, the Company will cause to be filed with the Commission, no later than 45 days after the date that the Company determines the Exchange Offer is not permitted or, if earlier, the date the Company receives such notice from a holder (the "Filing Deadline"), a shelf registration statement (the "Shelf Registration Statement"). If required, the Company will use its reasonable best efforts to cause the Shelf Registration Statement to be declared effective on or before the 180th day after the Filing Deadline. The Company has agreed to maintain the effectiveness of the Shelf Registration Statement, under certain circumstances, for a maximum of two years following the effective date of the Shelf Registration Statement. SPECIAL PROCEDURES FOR BENEFICIAL Any beneficial owner whose Old Notes are registered in the name OWNERS . . . . . . . . . . . . . . . . of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. The Company will keep the Exchange Offer open for not less than 20 business days in order to provide for the transfer of registered ownership. See "The Exchange Offer -- Procedures for Tendering." GUARANTEED DELIVERY PROCEDURES . . . . Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not immediately available or who cannot deliver their Old Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date must tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures." WITHDRAWAL RIGHTS . . . . . . . . . . . Tenders may be withdrawn at any time prior to 5:00 p.m., New York time, on the Expiration Date. See "The Exchange Offer -- Withdrawal of Tenders."
9 16 ACCEPTANCE OF OLD NOTES AND DELIVERY OF EXCHANGE NOTES . . . . . . . . . . . . The Company will accept for exchange, subject to the conditions described under "The Exchange Offer -- Conditions," any and all Old Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." USE OF PROCEEDS . . . . . . . . . . . . There will be no cash proceeds to the Company from the exchange pursuant to the Exchange Offer. See "Use of Proceeds." EXCHANGE AGENT . . . . . . . . . . . . U.S. Trust Company of Texas, N.A. The Exchange Agent also serves as trustee under the Indenture.
THE EXCHANGE NOTES GENERAL . . . . . . . . . . . . . . . . The form and terms of the Exchange Notes are the same as the form and terms of the Old Notes (which they are intended to replace) except that (i) the Exchange Notes bear a Series B designation and (ii) the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof. Additionally, the holders of Exchange Notes will not be entitled to certain rights under the Exchange Offer Registration Rights Agreement, including the provisions providing for Liquidated Damages in certain circumstances, which rights will terminate when the Exchange Offer is consummated. See "The Exchange Offer -- Purpose and Effect of the Exchange Offer." The Exchange Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of the Indenture. See "Description of Exchange Notes." The Old Notes and the Exchange Notes are referred to herein collectively as the "Notes." SECURITIES OFFERED . . . . . . . . . . . $100,000,000 principal amount of the Company's 11% Senior Notes due 2005, Series B. MATURITY DATE . . . . . . . . . . . . . . June 30, 2005. INTEREST . . . . . . . . . . . . . . . . Interest on the Exchange Notes will accrue at a rate of 11% per annum and will be payable semi-annually in cash in arrears on June 30 and December 31 of each year, commencing December 31, 1998.
10 17 GUARANTEES . . . . . . . . . . . . . . . The Company is a holding company which conducts operations through its wholly owned subsidiaries. The Exchange Notes will be unconditionally guaranteed, jointly and severally, by each of the Guarantors. The Guarantees will be senior unsecured obligations of each Guarantor and will rank pari passu in right of payment with all other indebtedness and senior obligations of such Guarantor that are not subordinated by their terms to other indebtedness of such Guarantor. In addition, the Guarantees will be effectively subordinated to secured indebtedness of the Guarantors, including guarantees of indebtedness under an $18.2 million term loan (the "Term Loan") among the Company, The CIT Group/Equipment Financing, Inc. ("CIT") and Fleet Capital Corporation ("Fleet"), and a $10 million revolving loan facility (the "Revolving Loan") between Fleet and the Company (collectively, the "Loan Agreements"), which is secured by certain assets of the Guarantors. See "Description of Exchange Notes--Guarantees of Exchange Notes." RANKING OF THE EXCHANGE NOTES . . . . . . The Exchange Notes will be senior unsecured obligations of the Company, ranking pari passu in right of payment with all existing and future senior indebtedness and other senior obligations of the Company and senior in right of payment to all future subordinated indebtedness of the Company. The holders of secured indebtedness of the Company (including indebtedness secured by certain assets of the Subsidiaries under the Company's Loan Agreements) will have claims with respect to the assets constituting collateral for such indebtedness that are prior to claims of holders of the Exchange Notes and the Trustee. As of June 15, 1998, on a pro forma basis after giving effect to the issuance of the Notes and the completion of the TransTexas Acquisition, the Company had approximately $121.1 million of outstanding senior indebtedness, of which $21.1 million is secured by certain assets of the Subsidiaries. See "Description of Exchange Notes--Guarantees of Exchange Notes" and "--General." OPTIONAL REDEMPTION . . . . . . . . . . . The Exchange Notes will be redeemable, at the Company's option, in whole or in part from time to time on or after June 30, 2003, at the redemption prices set forth herein, plus accrued and unpaid interest to the redemption date. In the event the Company consummates one or more Qualified Equity Offerings on or prior to June 30, 2001, the Company at its option may use all or a portion of the net cash proceeds from such Qualified Equity Offerings to redeem up to 35% of the aggregate principal amount of the Exchange Notes at a redemption price equal to 111% of the aggregate principal amount thereof, together with accrued and unpaid interest to the date of redemption, provided that at least $65 million of the aggregate principal amount of Exchange Notes remains outstanding immediately after such redemption. See "Description of Exchange Notes--Optional Redemption."
11 18 CHANGE OF CONTROL . . . . . . . . . . . . Upon a Change of Control, each holder of Exchange Notes will have the right to require the Company to repurchase all or any part of such holder's Exchange Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of Exchange Notes--Change of Control." CERTAIN COVENANTS . . . . . . . . . . . . The Indenture contains certain covenants, including, but not limited to, covenants limiting the Company and its Subsidiaries with respect to the following: (i) transactions with affiliates, (ii) dividend and other restricted payments, (iii) the incurrence of additional indebtedness by the Company and the Subsidiaries and the issuance of preferred stock, (iv) dividend and other payment restrictions affecting the Subsidiaries, (v) asset sales, (vi) sale and lease-back transactions, (vii) liens, (viii) the issuance of additional guarantees by the Guarantors, (ix) changes in business and (x) mergers and consolidations. See "Description of Exchange Notes--Certain Covenants" and "--Consolidation, Merger, Conveyance, Lease or Transfer."
RISK FACTORS See "Risk Factors," beginning on page 15 hereof, for a discussion of certain factors that should be considered by investors in connection with the Exchange Offer. 12 19 SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA The following table sets forth summary historical financial and operating data for the Company for each of the years in the three year period ended December 31, 1997, for the three months ended March 31, 1997 and 1998, and as of December 31, 1997 and March 31, 1998. The financial results for the period ended and as of December 31, 1997 include the results of the Company's consolidated subsidiaries, Trend, beginning May 1, 1997, Ward, beginning May 30, 1997, and Bonray, beginning October 16, 1997. The Company's historical results with respect to periods prior to December 31, 1996 reflect the operations of its predecessor, Anadarko. The pro forma consolidated operating data for the year ended December 31, 1997 gives effect to the Trend Acquisition, the Ward Acquisition and the Bonray Acquisition (each as hereinafter defined) and the reduction of interest expense resulting from payment of certain Subordinated Notes from proceeds of the Initial Public Offering, all of which occurred at various dates in 1997, as if such transactions occurred at January 1, 1997. The 1997 pro forma data set forth below does not give pro forma effect to the TransTexas Acquisition because the TransTexas Rigs were utilized by TransTexas solely for internal purposes and generated no revenues. The consolidated financial data for the three months ended March 31, 1997 and 1998 is derived from the unaudited financial statements of the Company. In the opinion of management, the financial data for the three months ended March 31, 1997 and 1998 reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such data. The following information should be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations, the historical financial statements of the Company, including the notes thereto, and the Pro Forma Consolidated Financial Data, including the notes thereto, included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------ ------------------------ 1995 1996 1997 1997 1997 1998 HISTORICAL PRO FORMA HISTORICAL (IN THOUSANDS) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenues ....................... $ 7,708 $ 9,853 $ 55,747 $ 81,373 $ 4,111 $ 23,962 Operating expenses: Drilling and other ................. 6,122 7,699 40,705 59,704 3,047 17,221 Depreciation and amortization ...... 791 1,126 7,943 11,576 876 3,169 General and administrative ......... 880 658 1,868 3,440 195 755 --------- --------- --------- --------- --------- --------- Total operating expenses ....... 7,793 9,483 50,516 74,720 4,118 21,145 --------- --------- --------- --------- --------- --------- Operating income (loss) .............. (85) 370 5,231 $ 6,653 (7) 2,817 ========= Interest expense and financing cost .. (3) (11) (3,065) -- (145) (367) Other income (expense) ............... (134) 71 1,178 -- 17 582 --------- --------- --------- --------- --------- --------- Income (loss) before income taxes .... (222) 430 3,344 -- (135) 3,032 Income tax expense(1) ................ -- 163 1,428 -- 51 1,275 --------- --------- --------- --------- --------- --------- Net income (loss) before extraordinary loss ........... $ (222) $ 267 $ 1,916 -- $ (84) $ 1,757 ========= ========= ========= ========= ========= ========= CASH FLOW DATA: Operating activities ................. $ 310 $ (462) $ (1,308) -- $ 3,043 $ 6,975 Investing activities ................. (1,710) (10,441) (86,470) -- (14,441) (26,676) Financing activities ................. 1,400 15,866 132,117 -- 8,476 (1,863)
DECEMBER 31, 1997 MARCH 31, 1998 ------------ ------------------------------ HISTORICAL HISTORICAL AS ADJUSTED(2) (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash and investments................................................ $ 50,182 $ 28,262 $ 41,701 Working capital, excluding current portion of long-term debt........ 56,404 33,662 47,101 Property, plant and equipment, net.................................. 155,673 179,807 254,807 Total assets........................................................ 240,488 246,594 338,283 Long-term debt, including current portion........................... 32,610 30,698 122,387 Total stockholders' equity.......................................... 178,462 180,232 180,232
13 20
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------- ----------------------- 1995 1996 1997 1997 1998 HISTORICAL HISTORICAL (UNAUDITED) (IN THOUSANDS, EXCEPT RIG AND DAY RATE DATA) OTHER FINANCIAL DATA: EBITDA(3)................................... $ 706 $ 1,496 $13,174 $ 869 $ 5,986 Capital expenditures........................ 2,088 10,578 86,980 13,711 27,094 Ratio of EBITDA to interest expense......... 235.3x 136.0x 4.3x 6.0x 16.3x Ratio of earnings to fixed charges(4)....... 18.2x 1.7x 3.9x PRO FORMA AS ADJUSTED DATA: (2) EBITDA(3)................................... $18,229 Cash interest expense....................... 12,659 $ 3,003 Ratio of EBITDA to cash interest expense.... 1.4x 2.0x Ratio of net debt to EBITDA (5)............. 4.4x NM DRILLING RIG ACTIVITY DATA: Total rigs at end of period................. 8 17 63 11 63 Marketed rigs at end of period.............. 8 8 49 11 51 Average utilization rate of drilling rigs available for service(6).................. 86% 88% 93% 99% 85% Average day rate(7)......................... $ 4,298 $ 4,731 $ 5,393 $ 4,618 $ 5,957
(1) Since the Company's predecessor was a nontaxable entity, income tax expense is presented on a pro forma basis (assuming a 38% statutory rate) for the year ended December 31, 1996. (2) Reflects each of the following transactions as if they occurred on the first day of the relevant period: (i) the repayment by the Company of 25% ($6.2 million) of the outstanding principal amount of the Term Loan, (ii) the repayment and retirement of the $2.52 million principal amount of Subordinated Notes previously held by Energy Spectrum (as hereinafter defined) and (iii) the issuance of the Notes. While interest expense related to the Notes is reflected, no adjustment has been made to reflect potential revenues deriving from the operation of the TransTexas Rigs. The Company used $75 million of the net proceeds of the Old Notes Offering to fund the purchase price of the TransTexas Acquisition. (3) EBITDA represents operating income before depreciation and amortization. EBITDA is frequently used by securities analysts and is presented herein to provide additional information about the Company's operations. EBITDA is not a measurement presented in accordance with generally accepted accounting principles. EBITDA should not be considered in isolation or as a substitute for net income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (4) The ratio of earnings to fixed charges has been computed by dividing earnings available for fixed charges (earnings before income taxes plus fixed charges less capitalized interest) by fixed charges (interest expense plus capitalized interest and the portion of operating lease rental expense that represents the interest factor). (5) Net debt is defined as total debt less cash and cash equivalents. (6) Rig utilization rates are calculated on a weighted average basis assuming 365 days availability for all rigs available for service. Rigs acquired have been treated as added to the rig fleet as of the date of acquisition. Rigs under contract that generate revenues during moves between locations or during mobilization/ demobilization are also considered to be utilized. Rigs that are owned but not being marketed, including rigs being refurbished, are not considered in determining the utilization rate. (7) Represents total contract drilling revenues (excluding mobilization, cost reimbursements and fuel), divided by the total number of days the Company's drilling rig fleet operated during the period, divided by the average number of rigs in operation. 14 21 RISK FACTORS An investment in the Exchange Notes offered hereby involves a high degree of risk. Prospective investors should carefully consider and evaluate the following factors relating to the Company and the Exchange Notes, together with the information and financial data set forth elsewhere in this Prospectus, prior to participating in the Exchange Offer. CYCLICAL CONDITIONS; RECENT WEAKENING OF DEMAND FOR DRILLING SERVICES Historically, the contract drilling industry has been cyclical, with significant volatility in profitability and rig values. This industry cyclicality has been due to changes in the level of domestic oil and gas exploration and development activity and the available supply of drilling rigs. The market for contract land drilling services has generally been depressed since 1982, when oil and gas prices began to weaken following a period of significant increase in new drilling rig capacity. Since that time and except during occasional upturns, there have been substantially more drilling rigs available than necessary to meet demand in most operating and geographic segments of the domestic drilling industry, including the geographic areas in which the Company operates. Although the Company believes that improved technologies and stable oil and gas prices contributed to increased activity in the exploration and production sector during 1997, there has been a general decline in oil and, to a lesser extent, gas prices in recent months and there can be no assurance that such decline will not continue. The recent decline in oil and gas prices has caused demand for the Company's drilling services, and therefore the Company's rig utilization rates, to decrease in recent periods. The Company's 1997 average rig utilization rate was approximately 93%. For the three months ended March 31, 1998, however, the Company's average rig utilization rate declined to approximately 85%. In April and May 1998, the Company's average rig utilization rate declined to approximately 78% and 70%, respectively. The Company believes that this decrease in utilization is due to an overall weakening of demand for land drilling services in its two core markets and, more specifically, by releases of rigs by Chesapeake and UPR, its two largest customers. The generally reduced demand for land drilling services in the first quarter of 1998 is believed by the Company to be attributable to the lower prices received for oil and gas production, and to widespread uncertainty among potential customers as to the future level and trend of oil and gas prices. Oil prices have continued to decline in the second quarter and in June reached their lowest level since 1986. The average revenues per rig day worked received by the Company under its most recently awarded day rate drilling contracts in its core domestic markets have reflected an average decline of approximately 15% in the Gulf Coast region, and have remained relatively stable in the Mid-Continent region, from that received under prior day rate contracts for the same or comparable rigs. If these industry conditions persist or worsen, they could have a material adverse effect on the Company's financial condition and results of operations. The Company cannot predict the future level of demand for its contract drilling services and resulting rig utilization rates, future conditions in the contract drilling industry or future contract drilling rates. SUBSTANTIAL LEVERAGE The Company has a substantial amount of indebtedness. As of March 31, 1998, on a pro forma basis after giving effect to the Old Notes Offering, the TransTexas Acquisition, the repayment and retirement of the Subordinated Notes (which occurred in April 1998) and the repayment of $6.2 million of the principal amount outstanding under the Term Loan (which occurred in May 1998), the Company would have had approximately $122.4 million of consolidated indebtedness and a ratio of debt to total capitalization of 40%. See "Capitalization." The Indenture permits the Company to incur additional indebtedness under certain conditions, and the Company expects that it may incur additional indebtedness to the extent it is permitted to do so. The degree to which the Company is leveraged could have important consequences to the Company and the holders of the Notes, including the following: (i) funds available for the Company's operations or capital expenditures will be reduced as a result of the dedication of a substantial portion of the Company's net cash flow from operations to the payment of principal of and interest on the indebtedness (including the Notes), (ii) the Company's ability to obtain additional financing may be impaired, (iii) the Company may be more vulnerable to economic downturns and more limited in its ability to withstand competitive pressures than competitors that are not as highly leveraged, (iv) financial 15 22 and other restrictive covenants which are imposed on the Company as a result of its indebtedness (including by the Indenture) could limit the Company's operating and financial flexibility and, if violated, create an event of default resulting in material adverse effects on the Company, (v) certain of the Company's borrowings, primarily under the Loan Agreements, will be at variable rates of interest which could cause the Company to be vulnerable to increases in interest rates and (vi) the Company's ability to pursue acquisitions and other business opportunities may be impaired. The ability of the Company to make principal and interest payments under long-term indebtedness (including the Exchange Notes) and bank loans will be dependent upon the Company's future performance, which is subject to financial, economic and other factors, some of which are beyond its control. There can be no assurance that the current level of operating results of the Company will continue or improve. HOLDING COMPANY STRUCTURE The Company is a holding company and substantially all of its operations are conducted through its subsidiaries. As a result, the Company expects that funds necessary to meet its debt service obligations will be provided primarily by distributions or advances from the subsidiaries. All of the current subsidiaries of the Company will execute Guarantees. If the Guarantees were not enforced for any reason, the Company's cash flow and, consequently, its ability to service its indebtedness, including the Exchange Notes, would be dependent on its ability to gain access to the cash flow of the Guarantors (whether through loans, dividends, distributions or otherwise) and would be subject to any legal, contractual or other restrictions that could hinder or prevent the Company from doing so. The Guarantors are separate and distinct legal entities from the Company and, except under the terms of the Guarantees, have no obligation, contingent or otherwise, to pay any amounts due in respect of the Notes or to make any amounts available for the payment thereof. In addition, many jurisdictions recognize suretyship defenses available to guarantors such as the Guarantors which could create an impediment to the enforcement of the Guarantees. Although the Guarantors will generally waive all such defenses, there can be no assurance that such waivers will be enforceable. In general, if the Guarantees were not enforced for any reason, the Exchange Notes would be effectively subordinated to all indebtedness and other obligations of the Guarantors to other third parties. With respect to any future Unrestricted Subsidiary (as hereinafter defined) of the Company, the holders of the Exchange Notes will have no direct claim against the assets of such future subsidiary and such future subsidiary will have no obligation in respect of the payment of the principal amount of or interest on the Exchange Notes. Any claim that the Company might have by virtue of its status as a stockholder of such subsidiary would be effectively subordinated to the claims of every creditor of such subsidiary, including trade creditors and the holders of subordinated indebtedness of such subsidiary. Any intercompany obligations that such future subsidiary owed to the Company could also be subordinated or treated as equity claims under the laws of the applicable jurisdiction. See "--Fraudulent Conveyance Considerations" and "Description of Exchange Notes." RANKING OF THE EXCHANGE NOTES The Exchange Notes will be senior unsecured obligations of the Company, will rank pari passu in right of payment with all existing and future senior indebtedness and other obligations of the Company and will rank senior in right of payment to any future subordinated indebtedness of the Company. The Company's obligations under the Exchange Notes will be jointly and severally guaranteed by the Guarantors. Currently, 12 rigs owned by certain of the Subsidiaries and certain equipment and drilling contracts related to such rigs, substantially all of the Subsidiaries' accounts receivable and other intangibles, certain property owned by the Company in El Reno, Oklahoma and certain other assets are pledged as security for other indebtedness, including under the Loan Agreements. As of June 15, 1998, the Company had $18.2 million of indebtedness outstanding under the Term Loan, $2.9 million of other secured indebtedness and no indebtedness outstanding under the Revolving Loan. The Guarantors have guaranteed the obligations under the Loan Agreements. Accordingly, the lenders under the Loan Agreements and other secured debt of the Company have claims with respect to the rigs and other assets constituting collateral for any indebtedness thereunder and the assets of any subsidiary guaranteeing such indebtedness, which will be satisfied to the extent of their collateral prior to the unsecured claims of holders of the Exchange Notes. In the event of a default on the Exchange 16 23 Notes or a bankruptcy, liquidation or reorganization of the Company, such assets will be available to satisfy obligations with respect to the indebtedness secured thereby before any payment therefrom could be made on the Exchange Notes. In addition, the Exchange Notes are effectively subordinated to the claims of all of the creditors, including trade creditors and tort claimants, of the Company's subsidiaries that are not Guarantors and to all secured creditors of the Guarantors. In the event of an insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up of the business of any subsidiary of the Company that is not a Guarantor, creditors of such subsidiary generally will have the right to be paid in full before any distribution will be made to the Company or the holders of the Exchange Notes. In addition, certain financing arrangements that the Company's subsidiaries are party to may impose restrictions on the ability of the Company to gain access to the cash flow or assets of its subsidiaries. See "--Restrictions Imposed by Lenders," "Description of Certain Indebtedness" and "Description of Exchange Notes--General." RESTRICTIONS IMPOSED BY LENDERS The instruments governing the indebtedness of the Company impose significant operating and financial restrictions on the Company. Such limitations will affect, and in many respects significantly restrict or prohibit, among other things, the ability of the Company to pay dividends, make investments, incur additional indebtedness, repay indebtedness prior to its stated maturity, sell assets or engage in mergers and acquisitions. These restrictions could limit the ability of the Company to effect future financings, make needed capital expenditures, withstand a future downturn in the Company's business or the economy in general, or otherwise conduct necessary corporate activities. The Loan Agreements also contain a number of financial covenants that require the Company to meet certain financial ratios and tests and provide that a "change of control" will constitute an event of default. A failure to comply with the obligations contained in the Loan Agreements or the Indenture, if not cured or waived, could permit acceleration of the related indebtedness and acceleration of indebtedness under other instruments that contain cross-acceleration or cross-default provisions. If the Company were obligated to repay all or a significant portion of its indebtedness, there can be no assurance that the Company would have sufficient cash to do so or that the Company could successfully refinance such indebtedness. Other indebtedness of the Company that may be incurred in the future may contain financial or other covenants more restrictive than those applicable to the Loan Agreements or the Exchange Notes. In addition, the obligations of the Company under the Loan Agreements will be secured by certain assets of the Guarantors and the Indenture will permit other senior indebtedness to be secured. In the case of an event of default under the Loan Agreements or such other secured indebtedness, the lenders thereunder would be entitled to exercise the remedies available to a secured lender under applicable law. See "Description of Exchange Notes--Certain Covenants." DEPENDENCE ON OIL AND GAS INDUSTRY The Company's revenues, cash flows and earnings are substantially dependent upon, and affected by, the level of domestic oil and gas exploration and development activity. Such activity and the resulting level of demand for contract land drilling and related services are directly influenced by many factors over which the Company has no control. Such factors include, among others, the market prices of oil and gas, market expectations about future prices, the volatility of such prices, the cost of producing and delivering oil and gas, government regulations and trade restrictions, local and international political and economic conditions, levels of production by, and other activities of, the Organization of Petroleum Exporting Countries and other oil and gas producers, the development of alternate energy sources and the long-term effects of worldwide energy conservation measures. As a result of significant recent decreases in oil prices, substantial uncertainty exists as to the future level of oil and gas exploration and development activity. There can be no assurance that the current level of oil and gas exploration and development activity will be maintained or that demand for the Company's contract drilling services will reflect the level of such activity. CONCENTRATION OF CUSTOMER BASE During the three months ended March 31, 1998, the three largest customers for the Company's contract drilling services were Chesapeake, UPR and Sonat, which accounted for approximately 17%, 12% and 10% of total revenues, respectively. Additionally, as a result of the Alliance Agreement, TransTexas became a significant customer of the Company. Under the Alliance Agreement, TransTexas may utilize up to 15 of the Company's rigs. Immediately 17 24 following the consummation of the TransTexas Acquisition on June 26, 1998, TransTexas was utilizing eight of the Company's rigs under the Alliance Agreement. Chesapeake has reduced its drilling program in the Gulf Coast region, an area in which it utilizes a number of the Company's rigs. Since late November 1997, Chesapeake has released six rigs under contract with the Company that it was using in the Gulf Coast region. As of June 15, 1998, Chesapeake continued to utilize five of the Company's rigs; however, there can be no assurance that Chesapeake or any of the Company's other principal customers (including TransTexas) will employ the Company's services in the future or that the loss of any of such customers or adverse developments affecting the ability of such customers to pay for the Company's services would not have a material adverse effect on the Company's financial condition and results of operations. LIMITED OPERATING HISTORY The Company was founded in December 1996 as the successor to Anadarko, which had operated as a contract land drilling rig service company since 1982 in Oklahoma. Although Anadarko was owned by and provided drilling services to AnSon Partners Limited Partnership (together with its affiliates, "APLP") prior to December 1996, Anadarko had also provided drilling services to 23 different third party customers between 1982 and December 1996. Prior to December 1996, however, the Company had not operated as an independent entity. Although the President and Chief Executive Officer of the Company had been employed by Anadarko for 14 years and several other key employees of the Company had been with Anadarko for extended periods, much of the Company's management group has been assembled recently. Despite the extensive experience and qualifications of many of the recently added individual managers, there can be no assurance that the management group will be able to manage the stand-alone entity as a cohesive team or to implement effectively the Company's business strategy. The pro forma financial results presented herein include the operating results of drilling rigs which were not under the Company's control and may not be indicative of the Company's future operating results. MANAGEMENT OF GROWTH; RISKS OF ACQUISITION STRATEGY The Company has experienced rapid and substantial growth since its formation as a result of acquisitions. The Company anticipates the further expansion of the Company's drilling fleet through additional selective acquisitions. Certain risks are inherent in an acquisition strategy, such as increasing leverage and debt service requirements and combining disparate company cultures, which could adversely affect the Company's operating results. Continued growth and the process of integrating such acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of management's attention and the Company's financial and other resources. No assurance can be given that the Company will be able to continue to identify suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on satisfactory terms or successfully acquire identified targets. There can be no assurance that the Company will be able to successfully manage and integrate the acquired businesses and assets into its existing operations or that it will be able to successfully maintain the market share attributable to operable drilling rigs acquired by the Company. If the Company is unable to manage its growth and successfully integrate the acquired businesses into the Company's existing operations, or if the Company encounters unexpected costs or liabilities in the acquired businesses, the Company's results of operations or financial condition could be materially adversely affected. See "Business -- Business Strategy." Competition in the market for drilling rigs caused substantial increases in the acquisition prices paid for rigs in 1997. Continued competition and price escalation could adversely affect the Company's growth strategy if it is unable to purchase additional drilling rigs or related equipment on favorable terms. There can be no assurance that the Company will be able to compete successfully in the future for acquisitions of available drilling rigs or related equipment, or that such competition will not have a material adverse effect on the Company's business, financial condition and results of operations. SHORTAGE OF QUALIFIED AND EXPERIENCED LABOR Increases in both onshore and offshore domestic oil and gas exploration and production since 1995 and resultant increases in contract drilling activity have at times created, and may in the future create, a shortage of qualified 18 25 drilling rig personnel in the industry. If the Company is unable to attract and retain sufficient qualified operating personnel, its ability to market and operate its drilling rigs will be restricted. In addition, labor shortages could result in wage increases, which could reduce the Company's operating margins and have a material adverse effect on the Company's financial condition and results of operations. COMPETITION The contract drilling industry is a highly competitive and fragmented business characterized by high capital and maintenance costs. As a result, even though the Company has the fifth largest active land drilling rig fleet in the United States, the Company believes such fleet represents a market share of approximately 6% of the domestic land drilling industry. Drilling contracts are usually awarded through a competitive bid process and, while the Company believes that operators consider factors such as quality of service, type and location of equipment, or the ability to provide ancillary services, price and rig availability are the primary factors in determining which contractor is awarded a job. Certain of the Company's competitors have greater financial and human resources than the Company, which may enable them to better withstand periods of low rig utilization, to compete more effectively on the basis of price and technology, to build new rigs or acquire existing rigs and to provide rigs more quickly than the Company in periods of high rig utilization. There can be no assurance that the Company will be able to compete successfully against its competitors in the future or that the level of competition will allow the Company to obtain adequate margins from its drilling services. TRANSTEXAS DRILLING ALLIANCE In connection with the TransTexas Acquisition, the Company and TransTexas entered into the Alliance Agreement, which provides that, for a period of 30 months, if TransTexas engages in any land drilling activities in the Alliance Area, TransTexas will engage the Company to provide up to 15 rigs for wells on which TransTexas serves as operator. Although immediately following the consummation of the TransTexas Acquisition on June 26, 1998, TransTexas was utilizing eight of the Company's rigs under the Alliance Agreement, the Alliance Agreement does not guarantee any minimum utilization of the TransTexas Rigs (or other drilling rigs) and there can be no assurance as to the level of TransTexas' drilling requirements during the term of the Alliance Agreement or that any of the TransTexas Rigs not employed under the Alliance Agreement can be effectively marketed to other customers of the Company. If TransTexas or any of the Company's other significant customers determine to reduce drilling activity for any reason, the Company's financial condition and results of operations could be materially and adversely affected. Under the Alliance Agreement, all drilling rigs will be provided on pre- agreed terms under separate drilling contracts to be entered into by the parties. Although the Company believes that, as of the date hereof, the pre- agreed day rates provided for under the Alliance Agreement approximate prevailing market rates in the South Texas region, there can be no assurance that such rates will continue to be competitive throughout the term of the Alliance Agreement. Pursuant to the terms of the purchase agreement entered into in connection with the TransTexas Acquisition (the "TransTexas Purchase Agreement"), at the time of the closing of the TransTexas Acquisition, TransTexas entered into an escrow agreement and placed into escrow $2 million (the "TransTexas Security Arrangement") to secure the obligations of TransTexas under any drilling contracts entered into pursuant to the Alliance Agreement. Although the Company will have recourse to the TransTexas Security Arrangement, such arrangement is not intended to and will not cover all credit or collection risks that may arise in connection with the performance of the Alliance Agreement and related drilling contracts. Any failure on the part of TransTexas or any of the Company's other significant customers to pay all amounts due for drilling services provided by the Company (whether as a result of financial difficulties experienced by such customers or for any other reason) could have a material adverse effect on the Company and its business, financial condition or results of operations. CLASS ACTION LITIGATION A purported class action lawsuit is currently pending against the Company, certain directors and officers of the Company, the managing underwriters of the Initial Public Offering, and certain current and former stockholders of 19 26 the Company, alleging violations of federal and state securities laws in connection with the Initial Public Offering. The lawsuit alleges, among other things, that the registration statement and prospectus for the Initial Public Offering contained materially false and misleading information and omitted to disclose material facts. The Company believes the allegations in the lawsuit are without merit and is defending vigorously the claims brought against it. The Company is required under certain circumstances to indemnify the named directors, officers, underwriters and selling stockholders against losses incurred as a result of such lawsuits and to advance to such parties ongoing legal expenses incurred in connection with the defense. The Company expects to continue to incur legal expenses on its behalf and on behalf of such officers, directors, underwriters and selling stockholders in connection with this litigation. In addition, defending this litigation has and will likely continue to result in the diversion of management's attention from the day-to-day operations of the Company's business. The Company is unable to predict the outcome of this lawsuit or the costs to be incurred in connection with its defense and there can be no assurance that this litigation will be resolved in the Company's favor. An adverse result or prolonged litigation could have a material adverse effect on the Company's financial position or results of operations. See "Business--Legal Proceedings." OPERATING HAZARDS AND UNINSURED RISKS The Company's operations are subject to many hazards inherent in the land drilling business, including, for example, blowouts, cratering, fires, explosions, loss of well control, loss of hole, damaged or lost drill strings and damage or loss from inclement weather. These hazards could cause personal injury or death, serious damage to or destruction of property and equipment, suspension of drilling operations, or substantial damage to the environment, including damage to producing formations and surrounding areas. Generally, drilling contracts provide for the division of responsibilities between a drilling company and its customer, and the Company seeks to obtain indemnification from its customers by contract for certain of these risks. To the extent not transferred to customers by contract, the Company seeks protection against certain of these risks through insurance. Although the Company believes that it is adequately insured for public liability and property damage to others and injury or death to persons in accordance with industry standards with respect to its operations, no assurance can be given that such insurance will be sufficient to protect the Company against liability for all consequences of well disasters, personal injury, extensive fire damage or damage to the environment. No assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable or that any particular types of coverage will be available. The occurrence of events, including any of the above-mentioned risks and hazards, that are not fully insured or the failure of a customer to meet its indemnification obligations could subject the Company to significant liability and could have a material adverse effect on the Company's financial condition and results of operations. See "Business--Operating Hazards and Insurance." SHORTAGE OF DRILLING EQUIPMENT AND SUPPLIES There is a general shortage of certain drilling equipment and supplies used in the Company's business. Because, until recent years, the land drilling industry was characterized by an oversupply of land rigs, rig manufacturers have generally focused on the production of more expensive offshore rigs and rig equipment. As a result, most rig manufacturers are not currently building new land rigs and those manufacturers that are building new land rigs and components charge premium prices (approximately $13 million for a new 2,000 horsepower rig) and require that orders be placed at least 120 days in advance of requested delivery. The limited availability of new rigs and equipment has caused land rig owners and operators, including the Company, to maintain and enhance their fleets primarily through acquisitions and refurbishments using previously manufactured rig components and equipment. As the land drilling industry continues to refurbish rigs using existing components and equipment, the available supply of such components and equipment continues to deplete. There can be no assurance that a continued shortage of such equipment and supplies will not result in a material increase in the costs incurred by the Company to refurbish and maintain its rigs. The Company requires a substantial amount of drill pipe in order to achieve the drilling depths required by its customers. A shortage of drill pipe exists in the contract drilling industry in the United States. This shortage has caused the price of drill pipe to increase significantly over the past 24 months and has required orders for new drill pipe to be placed at least one year in advance of expected use. While the Company believes it currently has sufficient drill pipe 20 27 for its existing rigs, in the event the shortage continues, the Company may be unable to obtain the drill pipe required to expand its contract drilling operations. CAPITAL REQUIREMENTS AND LIQUIDITY The oil and gas contract drilling industry is capital intensive. The Company's cash flow from operations and the continued availability of credit are subject to a number of variables, including the Company's utilization rate, operating margins and ability to maintain costs and obtain contracts in a competitive industry. There can be no assurance that the Company's cash flow from operations, proceeds from the Old Notes Offering and the Initial Public Offering and present borrowing capacity will be sufficient to fund its anticipated capital expenditures and working capital requirements. The Company may from time to time seek additional financing, either in the form of bank borrowings, sales of the Company's debt or equity securities or otherwise. Except for the Notes and the Company's loan agreements with its lenders, the Company has no agreements for any such financing and there can be no assurance as to the availability or terms of any such financing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Liquidity" and "Description of Certain Indebtedness." To the extent the Company's capital resources and cash flow from operations are at any time insufficient to fund its activities or repay its indebtedness as due, the Company will need to raise additional funds through public or private financings or additional borrowings. No assurance can be given as to the Company's ability to obtain any such capital resources. If the Company is at any time not able to obtain the necessary capital resources, its financial condition and results of operations could be materially adversely affected. RELIANCE ON KEY PERSONNEL The success of the Company's business is highly dependent upon the services, efforts and abilities of James E. Brown, the Company's President and Chief Executive Officer and certain other officers and key employees, particularly Edward S. Jacob, III, the Company's Executive Vice President--Operations & Marketing, David E. Grose, III, the Company's Vice President and Chief Financial Officer, and Ron Tyson, the Company's Construction Manager. The business of the Company could be materially and adversely affected by the loss of any of these individuals. The Company does not maintain key man life insurance on the lives of any of its executive officers or key employees. The Company has employment agreements with Messrs. Brown, Jacob and Grose. See "Management--Executive Compensation." CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS; VOTING AGREEMENT AMONG CERTAIN STOCKHOLDERS The Company's directors, executive officers and holders of more than 5% of the Common Stock beneficially own approximately 27.7% of the outstanding shares of Common Stock. In addition, holders of approximately 25.0% of the outstanding shares of Common Stock are parties to a stockholders and voting agreement (the "Stockholders and Voting Agreement") with the Company that provides for, among other things, the nomination of certain individuals for election to the Board of Directors of the Company (the "Board"). Pursuant to the Stockholders and Voting Agreement, each of APLP and Energy Spectrum Partners LP ("Energy Spectrum") are entitled to nominate one person for election to the Board, subject to maintaining certain ownership thresholds. Each of APLP, Energy Spectrum, a group of individuals consisting of Mike Liddell, Mark Liddell and Charles E. Davidson (the "DLB Group"), and Carl B. Anderson, III are obligated to vote all of their shares of Common Stock for the election of such nominees. Accordingly, if all stockholders who are party to the Stockholders and Voting Agreement were to act in concert, they would be able to nominate up to two members of the Board and exercise significant influence over the Company's affairs. The Stockholders and Voting Agreement also requires that any transferee of stock from a party thereto (other than sales into the public market) be bound by the terms thereof as a condition precedent to such transfer. See "Principal Stockholders" and "Certain Relationships and Related Transactions--Stockholders and Voting Agreement." INABILITY TO PURCHASE EXCHANGE NOTES UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control (as defined in the Indenture), the Company will be required to offer to repurchase all of the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued 21 28 and unpaid interest and Liquidated Damages, if any, to the repurchase date. There can be no assurance that the Company would have sufficient resources to repurchase the Notes upon the occurrence of a Change of Control. The failure to repurchase all of the Notes tendered to the Company would constitute an event of default under the Indenture. Furthermore, the repurchase of the Notes by the Company upon a Change of Control might result in a default on the part of the Company in respect of other indebtedness of the Company, as a result of the financial effect of such repurchase on the Company or otherwise. The change of control repurchase feature of the Notes may have anti-takeover effects and may delay, defer or prevent a merger, tender offer or other takeover attempt. See "Description of Exchange Notes." GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS The domestic oil and gas industry is affected from time to time in varying degrees by political developments and federal, state and local laws and regulations. In particular, oil and gas production, operations and economics are or have been affected by price controls, taxes and other laws relating to the oil and gas industry, by changes in such laws and by changes in administrative regulations. Except for the handling of solid wastes directly generated from the operation and maintenance of the Company's drilling rigs, such as waste oils and wash water, it is the Company's practice to require its customers to contractually assume responsibility for compliance with environmental regulations. However, the Company's operations are vulnerable to certain risks arising from the numerous environmental health and safety laws and regulations. These laws and regulations may restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling activities, require reporting of the storage, use or release of certain chemicals and hazardous substances, require removal or cleanup of contamination under certain circumstances, and impose substantial civil liabilities or criminal penalties. Environmental laws and regulations may impose strict liability, rendering a person liable for environmental damage without regard to negligence or fault, and could expose the Company to liability for the conduct of, or conditions caused by, others, or for acts of the Company that were in compliance with all applicable laws at the time such acts were performed. Moreover, there has been a trend in recent years toward stricter standards in environmental, health and safety legislation and regulation which is likely to continue. The Company has made and will continue to make expenditures to comply with governmental regulations, including environmental, health and safety requirements. As part of the Bonray Acquisition, the Company acquired an equipment yard which may require certain expenditures or remedial actions for the removal or cleanup of contamination. In exchange for a $1 million cash payment to the Company at closing, the Company did not require DLB to indemnify the Company with respect to such expenditures or remedial actions. While the Company has not determined whether and to what extent such expenditures or remedial actions may be necessary or advisable, based on the presently available information, the Company does not believe that such expenditures will exceed $1 million. There can be no assurance, however, that the Company will not incur material liability with respect to this property or any of the Company's other properties or operations. The Company cannot predict how existing laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on the Company's business, financial condition or results of operations. Because the requirements imposed by such laws and regulations are subject to change, the Company is unable to forecast the ultimate cost of compliance with such requirements. The modification of existing laws and regulations or the adoption of new laws or regulations curtailing exploratory or development drilling for oil and gas for economic, political, environmental or other reasons could have a material adverse effect on the Company by limiting drilling opportunities. See "Business--Government Regulation and Environmental Matters." RISKS ASSOCIATED WITH FOOTAGE AND TURNKEY DRILLING The Company in the past has performed drilling services under footage and turnkey contracts and may enter into such arrangements in the future. Revenues from footage contracts accounted for approximately 2% of total revenues during the year ended December 31, 1997 and the Company had no turnkey contracts during such period. As of June 15, 1998, the Company was operating five rigs under footage contracts. The Company expects that the number of its rigs operating under footage contracts will increase in the future unless the market for drilling rigs improves. Under footage contracts, the Company is paid a fixed amount for each foot drilled, regardless of the time required or 22 29 the problems encountered in drilling the well. Under turnkey drilling contracts, the Company contracts to drill a well to an agreed depth under specified conditions for a fixed price, regardless of the time required or the problems encountered in drilling the well. In addition, the Company provides technical expertise and engineering services, as well as most of the equipment required for the well, and is compensated only when the contract terms have been satisfied. On a turnkey well, the Company often subcontracts for related services and manages the drilling process. The risks to the Company under footage and turnkey contracts are substantially greater than under daywork contracts because the Company assumes most of the risks associated with drilling operations that in a daywork contract are generally assumed by the operator, including risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors' services, supplies, cost escalation and personnel. While the Company's current strategy is to operate primarily under daywork contracts, management continually analyzes market conditions, customer requirements, rig demand and the experience of its personnel to determine how to most profitably contract its fleet. If the Company were to encounter less favorable conditions within its industry, competitive pressures and customer demands might require it to consider entering into a larger number of footage and turnkey drilling contracts. Accordingly, there can be no assurance that the Company will not suffer a loss that is not insured as a result of entering into such contracts, and any such uninsured loss could have a material adverse effect on the Company's financial position and results of operations. See "Business--Contract Drilling Operations." LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES The Exchange Notes will constitute a new class of securities with no established trading market. The Company does not intend to list the Exchange Notes on any national securities exchange or to seek the admission thereof for trading on any automated dealer quotation system. The Company has been advised by the Initial Purchasers that they intend to make a market in the Exchange Notes; however, the Initial Purchasers are not obligated to do so and any such market-making activities may be discontinued at any time without notice. No assurance can be given as to the liquidity of any trading market for the Exchange Notes. If a market for the Exchange Notes were to develop, the Exchange Notes could trade at prices that may be higher or lower than their principal amount, depending upon many factors, including prevailing interest rates, the Company's operating results and the markets for similar securities. Historically, the market for non-investment grade debt such as the Exchange Notes has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Exchange Notes. There can be no assurance that, if a market for the Exchange Notes were to develop, such a market will not be subject to similar disruptions. See "Description of Exchange Notes," and "Notice to Investors." FRAUDULENT CONVEYANCE CONSIDERATIONS The Company believes that the indebtedness represented by the Notes has been incurred for proper purposes and in good faith, and that, based on present forecasts, asset valuations and other financial information, after the consummation of the Old Notes Offering and the Exchange Offer, the Company will be solvent, will have sufficient capital for carrying on its business and will be able to pay its debts as they mature. Notwithstanding the Company's belief, however, if a court of competent jurisdiction in a suit by an unpaid creditor or a representative of creditors (such as a trustee in bankruptcy or a debtor- in-possession) were to find that, at the time of the incurrence of such indebtedness, the Company was insolvent, was rendered insolvent by reason of such incurrence, was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, or intended to hinder, delay or defraud its creditors, and the indebtedness was incurred for less than reasonably equivalent value, then such court could, among other things, (i) void all or a portion of the Company's obligations to the holders of the Exchange Notes, the effect of which would be that the holders of the Exchange Notes may not be repaid in full and/or (ii) subordinate the Company's obligations under the Exchange Notes to other existing and future indebtedness of the Company to a greater extent than would otherwise be the case, the effect of which would be to entitle such other creditors to be paid in full before any payment could be made on the Exchange Notes. The Company's obligations under the Exchange Notes will be guaranteed, jointly and severally, by each of the Guarantors. The Company believes that indebtedness represented by the Guarantees has been incurred by the Guarantors for proper purposes and in good faith, and that, based on present forecasts, asset valuations and other 23 30 financial information, after the consummation of the Old Notes Offering and the Exchange Offer, each of the Guarantors will be solvent, will have sufficient capital for carrying on its business and will be able to pay its debts as they mature. Notwithstanding the Company's belief, however, if a court of competent jurisdiction in a suit by an unpaid creditor or a representative of creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to find that, at the time of the incurrence of such indebtedness, the Guarantors were insolvent, were rendered insolvent by reason of such incurrence, were engaged in a business or transaction for which their remaining assets constituted unreasonably small capital, intended to incur, or believed that they would incur, debts beyond their ability to pay such debts as they matured, or intended to hinder, delay or defraud their creditors, and that the indebtedness was incurred for less than reasonably equivalent value, then such court could, among other things, (i) void all or a portion of such Guarantors' obligations to the holders of the Exchange Notes, the effect of which would be that the holders of the Exchange Notes may not be repaid in full and/or (ii) subordinate such Guarantors' obligations under the Exchange Notes to other existing and future indebtedness of such Guarantors to a greater extent than would otherwise be the case, the effect of which would be to entitle such other creditors to be paid in full before any payment could be made on the Exchange Notes. Among other things, a legal challenge to a guarantee on fraudulent conveyance grounds may focus on the benefits, if any, realized by the Guarantors as a result of the issuance by the Company of the Exchange Notes. EXCHANGE OFFER PROCEDURES; CONSEQUENCES OF FAILURE TO EXCHANGE Issuance of the Exchange Notes in exchange for the Old Notes pursuant to the Exchange Offer will be made only after a timely receipt by the Company of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Old Notes desiring to tender such Old Notes in exchange for Exchange Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to the tenders of Old Notes for exchange. Old Notes that are not tendered or are tendered but not accepted will, following the consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof and, upon consummation of the Exchange Offer, registration rights under the Exchange Offer Registration Rights Agreement generally will terminate. In addition, any holder of Old Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transactions. Each Participating Broker-Dealer that receives Exchange Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes could be adversely affected. See "The Exchange Offer." 24 31 THE COMPANY The Company was formed in December 1996 as a Delaware corporation through a series of affiliated entity transactions in which the Company became the successor to Anadarko, the contract drilling subsidiary of privately held APLP. In connection with the formation of the Company (i) APLP contributed ten drilling rigs, including two rigs requiring refurbishment, for shares of Common Stock, (ii) Roy T. Oliver and related entities exchanged six additional drilling rigs for shares of Common Stock, (iii) Energy Spectrum contributed cash for shares of Common Stock and (iv) Chesapeake entered into drilling contracts with two-year terms for six of the Company's rigs in consideration for an option to purchase shares of Common Stock (together, the "Formation Transactions"). Since the Formation Transactions, the Company has expanded its business and enhanced its original fleet through the transactions described below. o Trend Acquisition. In May 1997, the Company completed the acquisition of Trend Drilling Co. and its 14 rigs ("Trend") for $18 million in cash and 250,000 shares of Common Stock (the "Trend Acquisition"). o Ward Acquisition. Also in May 1997, the Company acquired the assets of Ward Drilling Company, Inc. including six rigs ("Ward") for $8 million in cash, 400,000 shares of Common Stock and warrants to purchase an additional 200,000 shares of Common Stock (the "Ward Acquisition"). o Bonray Acquisition. In October 1997, the Company acquired Bonray Drilling Corporation ("Bonray") from DLB Oil & Gas, Inc. ("DLB") for 3,015,000 shares of Common Stock (the "Bonray Acquisition"). In the Bonray Acquisition, the Company acquired 13 rigs, including seven rigs with depth capacities of 15,000 feet or greater and two diesel electric SCR rigs. o Oliver Acquisition. In January 1998, the Company purchased six additional rigs from R.T. Oliver Drilling, Inc. for approximately $14 million in cash (the "Oliver Acquisition"). The Company expects to refurbish and purchase complementary equipment, including drill pipe, for these rigs as market conditions warrant. o Individual Rig Acquisitions. In addition to the Trend, Ward, Bonray and Oliver Acquisitions, through March 31, 1998, the Company invested $5.5 million to acquire six rigs in five transactions involving purchases of individual rigs or rig components (the "Individual Rig Acquisitions" and, together with the Formation Transactions, the Trend, Ward, Bonray and Oliver Acquisitions, the "Consolidation Transactions"). In addition, the Company has purchased one rig for approximately $54,000 and has two rigs which may be assembled from inventoried components. In August 1997, the Company sold one rig. o Initial Public Offering. In November 1997, the Company completed the Initial Public Offering of 11,040,000 shares of Common Stock. Of the total shares sold in the Initial Public Offering, the Company sold 4,229,050 shares of Common Stock and received net proceeds of $89.5 million. Through March 31, 1998, the Company used $34.3 million of such proceeds to purchase machinery and equipment. o Refurbishment. The Consolidation Transactions included a number of rigs in need of refurbishment. From January 1, 1997 through March 31, 1998, the Company completed refurbishment of 14 rigs at an average cost of approximately $2.7 million per rig (including drill pipe). These rigs were placed in service at various dates between January 1, 1997 and March 31, 1998. At March 31, 1998, the Company had 12 additional rigs in various stages of refurbishment. The Company has recently revised its schedule for rig refurbishment as a result of changes in market conditions that have caused an industry-wide decrease in rig utilization. The Company placed one of its construction project rigs into service during May 1998 and anticipates refurbishing and placing the remaining eleven rigs into service as market conditions warrant. o Holding Company Reorganization. Prior to the consummation of the Old Notes Offering, the Company completed a reorganization of its corporate structure and obtained the release of certain collateral for its secured indebtedness. In the reorganization of the corporate structure, Bayard and its subsidiaries Trend, Bayard Drilling, L.L.C. and Bonray transferred substantially all of their drilling rigs, associated equipment 25 32 and other assets to a wholly owned partnership, Bayard Drilling, L.P. ("Bayard Drilling"), subject to the transferors' secured indebtedness, in exchange for the assumption by Bayard Drilling of associated liabilities and the issuance by Bayard Drilling of partnership interests. Concurrently with the transfers, (i) the Company's secured lenders under the Loan Agreements released from liens securing the Term Loan all assets except 12 drilling rigs and associated equipment and released from liens securing the Revolving Loan all drilling rigs and drilling contracts, except the 12 rigs remaining as collateral under the Term Loan and the drilling contracts associated with those 12 rigs, (ii) Bayard Drilling and its general partner Bayard Drilling, L.L.C. ("Bayard LLC") issued guarantees in favor of the lenders and (iii) the Company repaid approximately $6.2 million of its indebtedness to CIT and Fleet under the Term Loan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Liquidity" and "Description of Certain Indebtedness." o TransTexas Acquisition. In June 1998, the Company acquired 25 rigs and related equipment from TransTexas for $75 million in cash. See "The TransTexas Acquisition." The Company's principal executive offices are located at 4005 Northwest Expressway, Suite 550E, Oklahoma City, Oklahoma 73116, and its telephone number at such offices is (405) 840-9550. 26 33 THE TRANSTEXAS ACQUISITION Concurrently with the consummation of the Old Notes Offering on June 26, 1998, the Company completed the TransTexas Acquisition, resulting in the acquisition by Bayard Drilling of 25 rigs and related equipment for aggregate cash consideration of $75 million. On May 26, 1998, Bayard Drilling entered into the TransTexas Purchase Agreement providing for the purchase from TransTexas of certain assets, including (i) 25 drilling rigs and related equipment (including approximately 745,000 feet of drill pipe), (ii) a drilling support facility located in Laredo, Texas and related maintenance and repair equipment, (iii) trucks and equipment used for rig hauling activities, (iv) certain rental equipment used in the drilling business and (v) certain office equipment, permits and licenses and other assets used in connection with the drilling operations conducted by TransTexas. All of the acquired rigs are mechanical rigs capable of drilling to depths of 12,000 feet or greater, with 12 of the rigs capable of drilling to depths of 20,000 feet or greater. Since the TransTexas Acquisition, the Company has hired approximately 300 persons formerly employed in TransTexas' drilling and trucking operations. The TransTexas Purchase Agreement contains a covenant prohibiting TransTexas and its affiliates, for a period of 30 months, from (i) providing any land drilling services for hire in the Alliance Area or (ii) hiring or attempting to hire any employee of Bayard Drilling or any of its affiliates. The TransTexas Purchase Agreement contains customary provisions relating to indemnification for certain liabilities. Under the TransTexas Purchase Agreement, TransTexas has agreed to indemnify Bayard Drilling against (i) debts, liabilities and obligations arising prior to the closing date in connection with its land drilling operations and (ii) liabilities for breaches on the part of TransTexas of its representations and warranties. Likewise, Bayard Drilling has agreed to indemnify TransTexas against (i) debts, liabilities and obligations arising after the closing date in connection with its land drilling operations (to the extent that TransTexas has not made representations and warranties regarding such matters to Bayard Drilling) and (ii) liabilities on the part of Bayard Drilling for breaches of its representations and warranties. In connection with the TransTexas Acquisition, Bayard Drilling and TransTexas entered into the Alliance Agreement. The Alliance Agreement provides that, for a period of 30 months, if TransTexas engages in any land drilling activities in the Alliance Area, TransTexas will engage Bayard Drilling to provide up to 15 of the TransTexas Rigs (or any reasonably equivalent drilling rigs designated by Bayard Drilling) for wells on which TransTexas serves as operator. Under the Alliance Agreement, all drilling rigs will be provided by Bayard Drilling to TransTexas on pre-agreed terms under separate drilling contracts to be entered into by the parties. The dayrates set forth in such drilling contracts shall be revised (i) on a quarterly basis to reflect any actual increases or decreases in the compensation paid to employees (including benefit costs) of Bayard Drilling and (ii) on the fifteenth month anniversary of the Alliance Agreement by mutual agreement of Bayard Drilling and TransTexas (or, if the parties fail to agree, by decision of an arbitrator as required to ensure that the drilling contracts reflect commercially reasonable arrangements). The Company believes that, as of the date of the Alliance Agreement, the day rates provided for under the Alliance Agreement approximated prevailing market rates in the South Texas region. However, there can be no assurance that such rates will continue to be competitive throughout the term of the Alliance Agreement. Bayard Drilling will not be required to provide any drilling rig to TransTexas (i) if TransTexas in good faith requires the commencement of drilling activities at any proposed drilling site less than 20 days after notice to Bayard Drilling and Bayard Drilling determines that it is not able to provide a rig on the accelerated schedule or (ii) if no drilling rig of a type requested by TransTexas is available within a 125 mile radius of the proposed drilling site (unless TransTexas agrees to bear all moving costs associated with transporting the rig to the well site). If Bayard Drilling is not able to provide drilling rigs to TransTexas under the circumstances set forth in clauses (i) and (ii) above, TransTexas may obtain a drilling rig for such well site from a third party other than Bayard Drilling. 27 34 The term of the Alliance Agreement will be 30 months from June 26, 1998, unless it is sooner terminated by (i) Bayard Drilling if TransTexas fails to make any payment as and when required under any drilling contract, (ii) either party upon 30 days' prior written notice if there is a material breach by the other party of any obligation under the Alliance Agreement or the drilling contracts, taken as a whole, which has a material adverse effect on the performance of the breaching party under such agreements or (iii) either party upon the insolvency or bankruptcy of the other party. Immediately following the consummation of the TransTexas Acquisition, eight of the TransTexas Rigs were being utilized by TransTexas under the Alliance Agreement. Although the Company expects TransTexas to continue to utilize certain of the TransTexas Rigs during the term of the Alliance Agreement, there can be no assurance that TransTexas will do so and, therefore, no assurance can be given as to the number of TransTexas Rigs (or other drilling rigs) that Bayard Drilling will ultimately provide to TransTexas under the Alliance Agreement or of the timing or receipt of revenues therefrom. USE OF PROCEEDS The Company will not receive any cash proceeds from the issuance of the Exchange Notes offered hereby. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Exchange Offer Registration Rights Agreement. The Old Notes surrendered in Exchange for the Exchange Notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the Exchange Notes will not result in any increase in the outstanding debt of the Company. The net proceeds of the sale of the Old Notes were approximately $96.8 million, after deducting the discount to the Initial Purchasers and estimated expenses of the Old Notes Offering. The Company used $75 million of such proceeds to fund the TransTexas Acquisition. All remaining proceeds have been or will be used for general corporate purposes, possibly including acquisitions of additional drilling rigs and related equipment. 28 35 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1998 on an historical and as adjusted basis. The information presented below on an as adjusted basis reflects each of the following transactions as if they occurred on March 31, 1998: (i) the repayment by the Company of $6.2 million of the outstanding principal amount of the Term Loan, (ii) the repayment and retirement of the $2.52 million principal amount of Subordinated Notes previously held by Energy Spectrum, (iii) the Old Notes Offering and (iv) the TransTexas Acquisition. The table should be read in conjunction with "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Pro Forma Consolidated Financial Data of the Company and related notes included elsewhere in this Prospectus.
MARCH 31, 1998 ------------------------- HISTORICAL AS ADJUSTED (IN THOUSANDS) Cash and investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,262 $ 41,701 ========= ========== Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . $ 7,450 $ 7,450 --------- ---------- Long-term debt: Term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,137 14,937 (1) Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,111 -- (1) Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 100,000 --------- ---------- Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . 23,248 114,937 --------- ---------- Stockholders' equity: Preferred Stock, par value $0.01 per share; no shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- Common Stock, par value $0.01 per share; 18,183,945 shares outstanding(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 182 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 180,413 180,413 Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . (363) (363) --------- ---------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 180,232 180,232 --------- ---------- Total capitalization . . . . . . . . . . . . . . . . . . . . . . . $ 210,930 $ 302,619 ========= ==========
(1) In April 1998, the Company repaid and retired the $2.52 million principal amount of Subordinated Notes held by Energy Spectrum. On May 14, 1998, the Company used a portion of the remaining proceeds of the Initial Public Offering to repay $6.2 million of the amount outstanding under the Term Loan. As of June 15, 1998, no borrowings were outstanding under the Revolving Loan, approximately $18.2 million was outstanding under the Term Loan and approximately $2.9 million was outstanding on three amortizing term notes secured by certain of the Company's top drives (the "Top Drive Notes"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Liquidity" and "Certain Relationships and Related Transactions--Chesapeake Transactions." (2) Does not include (i) 815,100 shares of Common Stock subject to issuance pursuant to outstanding options awarded under the Company's 1997 Stock Option and Stock Award Plan (the "Employee Stock Plan") (30,500 of which relate to options awarded after March 31, 1998), (ii) 100,000 shares of Common Stock subject to issuance pursuant to options awarded under the Company's 1997 Non- Employee Directors' Stock Option Plan (the "Director Stock Plan") (25,000 of which relate to options awarded after March 31, 1998) or (iii) 297,000 shares of Common Stock subject to issuance pursuant to outstanding warrants issued by the Company. See "Management--1997 Stock Option and Stock Award Plan," "--1997 Non- Employee Directors' Stock Option Plan" and "Certain Relationships and Related Transactions." 29 36 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The historical financial data presented in the table below for the period ended and as of December 31, 1997 are derived from the audited financial statements of the Company and include the results of the Company's consolidated subsidiaries, Trend, beginning May 1, 1997, Ward, beginning May 30, 1997, and Bonray, beginning October 16, 1997. The historical financial data presented in the table below for and at the end of each of the years in the three-year period ended December 31, 1996 are derived from the audited financial statements of the Company and relate to the operations of Anadarko, the predecessor of the Company, and include, generally, the financial results of the operation of eight rigs. The historical financial data presented in the table below for the year ended December 31, 1993 and at the end of the three month periods ended March 31, 1997 and 1998 are derived from the unaudited consolidated financial statements of the Company. In the opinion of management of the Company, such unaudited consolidated condensed financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial data for such periods. The results for the three months ended March 31, 1998 are not necessarily indicative of the results to be achieved for the full year. The data presented below should be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements of the Company, including the notes thereto, included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------------- ---------------------- 1993 1994 1995 1996 1997 1997 1998 (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of Operations Data: Revenues: Contract drilling .................. $ 8,349 $ 9,910 $ 7,405 $ 9,793 $ 55,747 $ 4,111 $ 23,962 Other .............................. -- -- 303 60 -- -- -- --------- --------- --------- --------- --------- --------- --------- Total revenues ................. 8,349 9,910 7,708 9,853 55,747 4,111 23,962 --------- --------- --------- --------- --------- --------- --------- Operating expense: Drilling ........................... 7,690 8,572 6,075 7,653 40,705 3,047 17,221 Depreciation, depletion and amortization ..................... 1,374 1,557 791 1,126 7,943 876 3,169 General and administrative ......... 819 786 880 658 1,868 195 755 Other .............................. -- -- 47 46 -- -- -- --------- --------- --------- --------- --------- --------- --------- Total operating costs .......... 9,883 10,915 7,793 9,483 50,516 4,118 21,145 --------- --------- --------- --------- --------- --------- --------- Operating income (loss) .............. (1,534) (1,005) (85) 370 5,231 (7) 2,817 --------- --------- --------- --------- --------- --------- --------- Other income and (expense): Interest expense and financing cost ............................. (30) (18) (3) (11) (3,065) (145) (367) Interest income .................... -- -- -- -- 597 17 496 Gain (loss) on sale of assets ...... -- 366 (131) 54 544 -- 52 Other income (expense) ............. 24 -- (3) 17 37 -- 34 --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes .............................. (1,540) (657) (222) 430 3,344 (135) 3,032 Income tax expense(1) ................ -- -- -- 163 1,428 51 1,275 --------- --------- --------- --------- --------- --------- --------- Net income (loss) before extraordinary loss ................. $ (1,540) $ (657) $ (222) $ 267 $ 1,916 $ (84) $ 1,757 ========= ========= ========= ========= ========= ========= ========= Earnings (loss) per share before extraordinary loss: Basic .............................. $ (.04) $ .05 $ .21 $ (.01) $ .10 ========= ========= ========= ========= ========= Diluted ............................ $ (.04) $ .05 $ .17 $ (.01) $ .10 ========= ========= ========= ========= ========= Cash Flow Data: Operating activities ................. $ (51) $ 445 $ 310 $ (462) $ (1,308) $ 3,043 $ 6,975 Investing activities ................. (1,671) (454) (1,710) (10,441) (86,470) (14,441) (26,676) Financing activities ................. 1,722 9 1,400 15,866 132,117 8,476 (1,863)
30 37
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------------- ---------------------- 1993 1994 1995 1996 1997 1997 1998 (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Total assets ..................... $ 6,791 $ 6,149 $ 8,054 $ 34,673 $ 240,488 $ 48,091 $ 246,594 Working capital (deficit), excluding current portion of long-term debt ................. 711 802 12 4,974 56,404 (20) 33,662 Total long-term debt, including current portion ................ 365 -- -- 7,000 32,610 15,537 30,698 Total stockholders' equity ....... (913) (54) (276) 26,251 178,462 26,185 180,232 OTHER FINANCIAL DATA: EBITDA(2) ........................ $ (160) $ 552 $ 706 $ 1,496 $ 13,174 $ 869 $ 5,986 Capital expenditures ............. 1,671 1,183 2,088 10,578 86,980 13,711 27,094 Ratio of EBITDA to interest expense ........................ 30.7x 235.3x 136.0x 4.3x 6.0x 16.3x Ratio of earnings to fixed charges(3) ..................... 18.2x 1.7x 3.9x DRILLING RIG ACTIVITY DATA (UNAUDITED): Total rigs at end of period ...... 8 7 8 17 63 11 63 Marketed rigs at end of period ... 8 7 8 8 49 11 51 Average utilization rate of drilling rigs available for service(4) ..................... 71% 84% 86% 88% 93% 99% 85% Average day rate(5) .............. $ 4,332 $ 4,148 $ 4,298 $ 4,731 $ 5,393 $ 4,618 $ 5,957
============ (1) Since the Company's predecessor was a nontaxable entity, income tax expense is presented on a pro forma basis (assuming a 38% statutory rate) for the year ended December 31, 1996. (2) EBITDA represents operating income (loss) before depreciation and amortization. EBITDA is frequently used by securities analysts and is presented herein to provide additional information about the Company's operations. EBITDA is not a measurement presented in accordance with generally accepted accounting principles. EBITDA should not be considered in isolation or as a substitute for net income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (3) The ratio of earnings to fixed charges has been computed by dividing earnings available for fixed charges (earnings before income taxes plus fixed charges less capitalized interest) by fixed charges (interest expense plus capitalized interest and the portion of operating lease rental expense that represents the interest factor). (4) Rig utilization rates are calculated on a weighted average basis assuming 365 days availability for all rigs available for service. Rigs acquired have been treated as added to the rig fleet as of the date of acquisition. Rigs under contract that generate revenues during moves between locations or during mobilization/ demobilization are also considered to be utilized. Rigs that are owned but not being marketed, including rigs being refurbished, are not considered in determining the utilization rate. (5) Represents total contract drilling revenues (excluding mobilization, cost reimbursements and fuel), divided by the total number of days the Company's drilling rig fleet operated during the period, divided by the average number of rigs in operation. 31 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company and notes thereto included elsewhere in this Prospectus. GENERAL The Company's operations have been significantly affected by an acquisition program which has transformed the Company from a regional competitor with ten rigs in late 1996 to the fifth largest land drilling fleet in the United States, with a total of 88 rigs. The historical financial results presented herein do not include the effects of the TransTexas Acquisition (25 rigs) but do reflect the effects of the Formation Transactions (16 rigs), the Trend Acquisition (14 rigs), the Ward Acquisition (6 rigs), the Bonray Acquisition (13 rigs), the Oliver Acquisition (6 rigs), the Individual Rig Acquisitions (6 rigs) and the addition of three other rigs available for refurbishment (one of which was purchased for approximately $54,000 and two of which were assembled from inventoried components), for the periods following such transactions and events. In addition, the historical financial results include periods in which a number of rigs were being refurbished and did not contribute to revenues. Accordingly, the Company does not believe that the historical statements of operations presented herein are necessarily indicative of the Company's future operating results, particularly in light of the magnitude of its recent acquisitions and rig refurbishment projects. See "Business--Formation and Other Transactions." DOMESTIC LAND DRILLING INDUSTRY OVERVIEW Demand for the Company's contract land drilling services is substantially dependent upon, and affected by, the level of domestic oil and gas exploration and development activity. Industry sources estimate that from its peak in 1982, the supply of domestic rigs has fallen as a result of normal attrition, cannibalization of components to refurbish rigs, the inability of smaller competitors to raise capital needed to upgrade and modernize rigs and the export of rigs to international markets. As a result of these factors, the contract land drilling industry has been cyclical with significant volatility in profitability and rig values. The Company's operating margins are influenced by contract drilling rates, operating costs and drilling rig utilization. Although the Company believes that improved technologies, the long-term decline in the supply of rigs and stable oil and gas prices contributed to increased activity in the exploration and production sector during 1997, there has been a general decline in oil and, to a lesser extent, gas prices during 1998 and there can be no assurance that such decline will not continue. The recent decline in oil and gas prices has contributed to a decrease in the Company's rig utilization rates from 88% for the fourth quarter of 1997 to 85% for the first quarter of 1998, 78% for April 1998 and 70% for May 1998. There can be no assurance that oil and gas prices will not continue to decline or that any such decline would not have a material adverse effect on the Company's utilization rates. In addition, ongoing movement or reactivation of land drilling rigs (including the movement of rigs from outside the United States into domestic markets) or new construction of drilling rigs could increase rig supply and adversely affect contract drilling rates and utilization levels. The Company cannot predict the future level of demand for its contract drilling services, future conditions in the contract drilling industry or future contract drilling rates. FINANCIAL CONDITION AND LIQUIDITY Since December 1996, the Company has completed the Consolidation Transactions and in June 1998 consummated the TransTexas Acquisition. The Formation Transactions involved the issuance of an aggregate of 5,600,000 shares of Common Stock in consideration for the contribution to the Company of 16 rigs and $10 million in cash. At the time of the Formation Transactions, the Company entered into a $24 million term loan facility with CIT, principally for the refurbishment of certain of the Company's rigs. In May 1997, contemporaneously with the Trend Acquisition and in anticipation of the Ward Acquisition, the Company completed a financing transaction in which it (i) issued to Chesapeake and Energy Spectrum additional shares of Common Stock, and two series of warrants together 32 39 with subordinated notes due May 1, 2003 (the "Subordinated Notes") for $28.5 million in cash and (ii) increased the availability under its debt facilities from $24 million to $40.5 million (collectively, the "May Financing"). The Company's principal requirements for capital, in addition to the funding of ongoing contract drilling operations, have been capital expenditures, including the refurbishment of existing rigs and acquisitions. From December 1996 through March 31, 1998, the Company spent $20.7 million on the Trend Acquisition, $11.9 million on the Ward Acquisition, $35 million on the Bonray Acquisition, $14 million on the Oliver Acquisition, $5.5 million on the Individual Rig Acquisitions, and approximately $62 million on refurbishments and other related equipment purchases, including drill pipe. As a result, the Company's net property and equipment increased from $27 million at December 31, 1996 to $155.7 million at December 31, 1997 and $179.8 million at March 31, 1998. The Company's principal sources of liquidity have been the issuance of Common Stock, warrants to purchase Common Stock, the Subordinated Notes and borrowings under Loan Agreements. See "Description of Certain Indebtedness." The most significant change in the Company's balance sheet from December 31, 1996 to March 31, 1998 was a $152.8 million increase in net property and equipment. During this same period, long-term debt, net of current maturities, increased by $17.2 million and stockholders' equity increased by $154 million. These changes are a direct result of the acquisition and financing transactions, including the Initial Public Offering, described herein. From December 31, 1996 to March 31, 1998, the Company's working capital position increased by $22.1 million to $26.2 million. This was primarily the result of the increase in cash resulting from proceeds of the Initial Public Offering. OPERATING ACTIVITIES During the year ended December 31, 1996, the Company required $462,000 of cash to fund operating activities. This was the result of $1.5 million of cash provided by operations, partially offset by changes in working capital items that required $2 million of cash. Cash required for changes in working capital items included (i) increase in accounts receivable of $2.1 million, (ii) increase in other assets totaling $185,000 and (iii) decrease of $383,000 in accounts payable, which were partially offset by an increase of $663,000 of other current liabilities. During the year ended December 31, 1997, net cash used in operating activities totaled $1.3 million. The Company generated cash from operations of $10.8 million and working capital changes used $12.1 million. During the three months ended March 31, 1998, net cash provided from operating activities totaled $6.9 million. The Company generated cash from operations of $6.1 million and working capital changes provided $813,000. INVESTING ACTIVITIES During the year ended December 31, 1996, the Company invested $21.7 million in fixed assets, net of asset sales. The major components of these expenditures were $10.4 million of cash expenditures to acquire and refurbish five diesel electric SCR rigs and $9.8 million of Common Stock issued to acquire rigs in the Formation Transactions. During the year ended December 31, 1997, the Company invested $135 million in fixed assets, including the Trend Acquisition, the Ward Acquisition, the Bonray Acquisition and the Individual Rig Acquisitions. Rig refurbishments consisted of $51.5 million, and $10.6 million was invested in drill pipe and other drilling related equipment. The acquisitions of Trend, Ward, and Bonray were partially funded through the issuance of Common Stock valued at $42.3 million. During the three months ended March 31, 1998, the Company invested $27 million in fixed assets, including $11.1 million in the Oliver Acquisition. Rig refurbishments consisted of $25.1 million, and $1.6 million was invested in drill pipe and other drilling related equipment. 33 40 FINANCING ACTIVITIES During the year ended December 31, 1996, the Company raised $15.9 million from financing activities. The Company borrowed $7 million during the year under the Term Loan as described below. The Company also issued 3,600,000 shares of Common Stock for assets and cash and made debt payments totaling $900,000 during the year. During the year ended December 31, 1997, the Company obtained $132.1 million from financing activities, including net borrowings under the Loan Agreements totaling $25.8 million and $107.1 million from the issuance of Common Stock. The proceeds from these transactions were used to fund the Company's working capital requirements and capital expenditures as discussed above. During the three months ended March 31, 1998, the Company's payments under the Loan Agreements totaled $1.8 million. RECENT EVENTS AND FUTURE ACTIVITIES The Company has recently revised its schedule for rig refurbishment as a result of changes in market conditions that have caused an industry-wide decrease in rig utilization. The Company placed one of its construction project rigs into service during May 1998 and anticipates refurbishing and placing the remaining such rigs into service as market conditions warrant. In April 1998, the Company redeemed in full the $2.52 million principal amount of Subordinated Notes issued to Energy Spectrum together with accrued interest of $47,740. In connection therewith, Energy Spectrum waived its rights to require the Company to redeem the Subordinated Notes at 110% of par value. This redemption, coupled with the redemption of $18 million principal amount of Subordinated Notes from Chesapeake at the time of the Initial Public Offering, leaves no Subordinated Notes outstanding. In June 1998, the Company consummated the Old Notes Offering, resulting in net proceeds to the Company of approximately $96.8 million, after deducting discounts to the Initial Purchasers and estimated expenses of the Old Notes Offering. Concurrently with the Old Notes Offering, the Company consummated the purchase of the drilling business of TransTexas, utilizing $75 million of the net proceeds from the sale of the Old Notes. See "--The TransTexas Acquisition." The Company believes that the balance of the proceeds from the Initial Public Offering and the Old Notes Offering, cash flow from operations and, to the extent available, borrowings under the Revolving Loan Agreement will be sufficient to meet its anticipated capital requirements for 1998. As of July 17, 1998, the Company had approximately $17.8 million of borrowings outstanding under the Term Loan and no borrowings outstanding under the Revolving Loan, and cash or cash equivalents of approximately $33 million. Until shortly before the issuance of the Old Notes, Bayard and Trend were co-borrowers under a Revolving Loan Agreement (the "Old Revolving Loan Agreement") with Fleet that provided revolving credit loans, subject to a borrowing base comprised of a portion of the co-borrowers' accounts receivable, of up to $10 million ($2 million of which is available for letters of credit) for general corporate purposes. In connection with the reorganization of the Company's corporate structure in May 1998, Bayard entered into an amendment and restatement of the Old Revolving Loan Agreement (the "Revolving Loan Agreement") that resulted in a release of Trend as a co-borrower. Trend, Bayard LLC, Bayard Drilling and Bonray have guaranteed the Company's obligations under the Revolving Loan Agreement, which are also secured by the accounts receivable, 12 drilling rigs and certain other assets of Bayard, Trend, Bonray, Bayard LLC and Bayard Drilling. The Company has not borrowed under the Revolving Loan Agreement since November 1997, but has approximately $1.3 million of letters of credit outstanding thereunder. The Company believes it has adequate liquidity for its needs in the near term. The Company may terminate the Revolving Loan Agreement upon 60 days' prior written notice to Fleet and the payment of a termination fee of 2% of the facility. See "Description of Certain Indebtedness." 34 41 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1997 1998 ----------------------------------- ----------------------------------- GULF COAST MID-CONTINENT TOTAL GULF COAST MID-CONTINENT TOTAL (IN THOUSANDS, EXCEPT RIG AND PER DAY DATA) Rig days worked(1) ........... 561 270 831 1,006 2,750 3,756 Average revenues per day(2) .. $ 5,132 $ 4,563 $ 4,947 $ 8,026 $ 5,777 $ 6,380 Average costs per day(3) ..... 3,781 3,430 3,667 5,436 4,273 4,585 Average margin per day(4) .... 1,351 1,133 1,280 2,589 1,504 1,795 Drilling revenues ............ $ 2,879 $ 1,232 $ 4,111 $ 8,074 $ 15,888 $ 23,962 Drilling costs(5) ............ 2,121 926 3,047 5,469 11,752 17,221 Operating margin ............. 758 306 1,064 2,605 4,136 6,741 Utilization rate ............. 99% 100% 99% 80% 88% 85%
(1) Rig days worked represents the number of rigs being marketed by the Company multiplied by the number of days during which such rigs are being operated, mobilized, assembled or dismantled while under contract. Rig days are a common measurement of both utilization rates and fleet size. (2) Represents total contract drilling revenues (including mobilization revenues and reimbursement for fuel and other costs) divided by the total number of rig days worked by the Company's drilling rig fleet marketed during the period. (3) Represents direct operating costs divided by the total number of rig days worked by the Company's drilling fleet marketed during the period. (4) Represents the difference between average revenues per day and average costs per day. (5) Drilling costs exclude depreciation and amortization and general and administrative expenses. Drilling revenues increased approximately $19.8 million, or 483% to $23.9 million for the three months ended March 31, 1998, from $4.1 million for the three months ended March 31, 1997. Drilling revenues increased due to a 2,925 day, or 352%, increase in rig days worked, and a $1,433, or 29%, increase in the average revenue per day. The increase in days worked was a result of an increase in the average number of rigs owned and available for service. As of March 31, 1998, the Company had 51 rigs available for service. The increase in rigs available for service was principally the result of acquisitions consummated in 1997. Rig days worked consisted of 1,006 days worked in the Gulf Coast region and 2,750 days worked in the Mid-Continent region. Increases in revenues per day were a result of the increase in the dayrates and the average number of land drilling rigs being marketed by the Company, offset by a decrease in the utilization rate from 99% to 85%. Drilling costs increased by approximately $14.2 million, or 465%, to $17.2 million for the three months ended March 31, 1998, from $3 million for the three months ended March 31, 1997. The increase in drilling operating expenses was a direct result of the increase in the number of rigs owned and available for service and the corresponding 2,925 day increase in the days worked. The Company's operating margin increased by approximately $5.7 million, or 534%, to $6.7 million for the three months ended March 31, 1998, as compared to $1.1 million for the three months ended March 31, 1997. The increase in operating margin resulted from the increase in the average revenue per day and the increase in days worked. 35 42 Depreciation and amortization expense increased by $2.3 million, or 262%, to $3.2 million for the three months ended March 31, 1998, as compared to $876,000 for the three months ended March 31, 1997. The increase was primarily due to additional depreciation associated with the acquisitions consummated in 1997. General and administrative expense increased by $560,000, or 287%, to $755,000 for the three months ended March 31, 1998, from $195,000 for the same period of 1997 due primarily to increased payroll costs associated with new management and increased corporate staff and increased legal fees due to the Company's acquisition activities and public status. Interest expense was $367,000 for the three months ended March 31, 1998, as compared to $145,000 for the three months ended March 31, 1997. Other income increased for the three months ended March 31, 1998, as compared to the three months ended March 31, 1997, primarily due to interest income received on funds being invested in short-term investments. For the three months ended March 31, 1998, the income tax provision was $1.2 million, compared to $51,000 for the three months ended March 31, 1997. COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
1996 1997 ------------- ----------------------------------------- MID-CONTINENT GULF COAST MID-CONTINENT TOTAL (IN THOUSANDS, EXCEPT RIG AND PER DAY DATA) Rig days worked(1).................................... 2,029 3,672 5,807 9,479 Average revenues per day(2)........................... $4,826 $ 6,426 $ 5,536 $ 5,881 Average costs per day(3).............................. 3,772 5,031 3,828 4,294 Average margin per day(4)............................. 1,054 1,395 1,708 1,587 Drilling revenues..................................... $9,793 $23,598 $32,149 $55,747 Drilling costs(5)..................................... 7,653 18,474 22,231 40,705 Operating margin...................................... 2,140 5,124 9,918 15,042 Utilization rate...................................... 89% 98% 89% 93%
(1) Rig days worked represents the number of rigs being marketed by the Company multiplied by the number of days during which such rigs are being operated, mobilized, assembled or dismantled while under contract. Rig days are a common measurement of both utilization rates and fleet size. (2) Represents total contract drilling revenues (including mobilization revenues and reimbursement for fuel and other costs) divided by the total number of rig days worked by the Company's drilling rig fleet marketed during the period. (3) Represents direct operating costs divided by the total number of rig days worked by the Company's drilling fleet marketed during the period. (4) Represents the difference between average revenues per day and average costs per day. (5) Drilling costs exclude depreciation and amortization and general and administrative expenses. Drilling revenues increased approximately $46.0 million, or 469%, to $55.7 million for the year ended December 31, 1997, from $9.8 million for the year ended December 31, 1996. Drilling revenues increased due to a 7,450 day, or 367%, increase in rig days worked, and a $1,055, or 22%, increase in the average revenue per day. The increase in days worked was a result of an increase in the average number of rigs owned and available for service. As 36 43 of December 31, 1997, the Company had 49 rigs available for service. The increase in rigs available for service was principally the result of the acquisitions consummated during the year. Rig days worked consisted of 3,672 days worked in the Gulf Coast region and 5,807 days worked in the Mid-Continent region. Increases in revenues per day were a result of the overall increase in demand for land drilling rigs as reflected in the utilization rate increase from 89% to 93%. Drilling costs increased by approximately $33.1 million, or 432%, to $40.7 million for the year ended December 31, 1997, as compared to $7.7 million for the year ended December 31, 1996. The increase in drilling operating expenses was a direct result of the increase in the number of rigs owned and available for service and the corresponding 7,450 day increase in the days worked. Depreciation and amortization expense increased by $6.8 million, or 605%, to $7.9 million for the year ended December 31, 1997, as compared to $1.1 million for the year ended December 31, 1996. The increase was primarily due to additional depreciation associated with the acquisitions consummated during the year. General and administrative expense increased by $1.2 million, or 184%, to $1.9 million for the year ended December 31, 1997, from $658,000 for the same period of 1996 due primarily to increased payroll costs associated with new management and increased corporate staff and increased professional fees due to the Company's acquisition activities. Interest expense increased to $3.1 million for the year ended December 31, 1997 from $11,000 for the year ended 1996 due to increased debt outstanding during 1997. Other income increased for the year ended December 31, 1997 as compared to the year ended December 31, 1996, primarily due to gains on the sale of assets. COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995 YEAR ENDED DECEMBER 31, ---------------------------- 1995 1996 (IN THOUSANDS, EXCEPT RIG AND PER DAY DATA) Rig days worked(1) . . . . . . . . . . . . 1,489 2,029 Average revenues per day(2) . . . . . . . . $4,973 $4,826 Average costs per day(3) . . . . . . . . . 4,080 3,772 Average margin per day(4) . . . . . . . . . 893 1,054 Drilling revenues . . . . . . . . . . . . . 7,405 9,793 Drilling costs(5) . . . . . . . . . . . . . 6,075 7,653 Operating margin . . . . . . . . . . . . . 1,330 2,140 Utilization rate . . . . . . . . . . . . . 86% 88%
- ------------------ (1) Rig days worked represents the number of rigs being marketed by the Company multiplied by the number of days during which such rigs are being operated, mobilized, assembled or dismantled while under contract. Rig days are a common measurement of both utilization rates and fleet size. (2) Represents total contract drilling revenues (including mobilization revenues and reimbursement for fuel and other costs) divided by the total number of rig days worked by the Company's drilling rig fleet marketed during the period. 37 44 (3) Represents direct operating costs divided by the total number of rig days worked by the Company's drilling fleet marketed during the period. (4) Represents the difference between average revenues per day and average costs per day. (5) Drilling costs exclude depreciation and amortization and general and administrative expenses. Drilling revenues increased approximately $2.4 million, or 32%, to $9.8 million for the year ended December 31, 1996 from $7.4 million for the year ended December 31, 1995. This improvement was due to an increase in the number of rig days worked offset by a decrease in the average revenue per day. Rig utilization also improved from 86% to 89% in 1996, due to an overall improvement in the contract drilling market. Drilling costs increased by $1.6 million, or 26%, to $7.7 million for the year ended December 31, 1996, from $6.1 million for the year ended December 31, 1995. This increase was primarily due to increased utilization and, to a lesser extent, increased direct labor costs. Depreciation and amortization expenses increased by $335,000, or 42%, to $1.1 million for the year ended December 31, 1996 from $791,000 for the year ended December 31, 1995. The increase in depreciation expense was primarily attributable to acquisition and refurbishment costs. General and administrative expenses decreased by $222,000 to $658,000 for the year ended December 31, 1996, from $880,000 for the year ended December 31, 1995, due to the discontinued allocation of expenses associated with the predecessor company. Interest expense remained fairly constant for the year end December 31, 1996 primarily as a result of the outstanding debt level remaining fairly constant. Interest rates during these periods remained relatively unchanged. Other income increased $197,000 from 1995 to 1996, primarily as a result of a loss recorded in 1995 in connection with the sale of certain assets. The Company's income tax expense of $163,000 in 1996 was attributable to the Company's profitable operations. The Company had net income of $267,000 in 1996 as compared to a net loss of $222,000 in 1995. The Company's net loss in 1995 includes net losses from the sale of assets, for which there was no similar transaction in 1996. INFLATION AND CHANGING PRICES Contract drilling revenues do not necessarily track the changes in general inflation as they tend to respond to the level of activity on the part of the oil and gas industry in combination with the supply of equipment and the number of competing companies. Capital and operating costs are influenced to a larger extent by specific price changes in the oil and gas industry and to a lesser extent by changes in general inflation. 38 45 BUSINESS GENERAL The Company is a leading provider of contract land drilling services to major and independent oil and gas companies. As of June 15, 1998, pro forma for the TransTexas Acquisition, the Company's rig fleet consisted of 88 rigs, of which 73 were being marketed and 15 were available for refurbishment. For the three months ended March 31, 1998, and the months of April and May, 1998, the Company experienced overall utilization rates of approximately 85%, 78% and 70%, respectively, for its marketed rigs (excluding the TransTexas Rigs). The Company's fleet consists primarily of rigs capable of deep drilling applications (well depths of 15,000 feet or greater). The Company believes that deep drilling targets are more attractive to oil and gas companies due to new technologies, including (i) three-dimensional seismic techniques, (ii) increasingly accurate down hole measurement devices and (iii) improved guidance systems and directional drilling motors for horizontal and directional wells. Of the Company's 88 rigs, 69 are capable of drilling to depths of 15,000 feet or greater and 43 are capable of drilling to depths of 20,000 feet or greater. The Company's large percentage of SCR rigs, comprising 31 of its 88 rigs, positions the Company's fleet as one of the most technically advanced in the industry. The Company was formed in December 1996 as the successor to Anadarko, which owned ten rigs. Through June 15, 1998, pro forma for the TransTexas Acquisition, the Company had acquired 78 additional rigs (net of sales). Many of the acquired rigs were put into service in the later months of 1997 and therefore did not contribute significantly to operating results in 1997. CORE OPERATING AREAS The Company's rig fleet is currently concentrated in two core operating regions--the Mid-Continent region and the Gulf Coast region. With the completion of the TransTexas Acquisition the Company added a third core operating region in South Texas. The Company is among the largest rig suppliers in each of these regions. MID-CONTINENT REGION The Mid-Continent region is comprised principally of Oklahoma, North Texas and the Texas Panhandle. At June 15, 1998, the Company had 38 rigs marketed in the Mid-Continent region and was the most active drilling contractor in the region. The Company's rigs operated in the Mid-Continent region are generally capable of drilling to depths of 10,000 feet or greater and are marketed by the Company to meet the specific well depths and mobility needs of producers in that region. At June 5, 1998, 153 rigs were being utilized in this region, making it the most active domestic onshore drilling market at that time. This area is characterized by well-defined target formations and long-lived natural gas reserves. GULF COAST REGION The Gulf Coast region is comprised of the onshore Gulf of Mexico areas in Texas, Louisiana, Mississippi and Alabama. At June 15, 1998, the Company had 14 rigs marketed in the Gulf Coast region, including 13 diesel electric SCR rigs. The Company believes that its high quality equipment, including diesel electric SCR rigs, powerful mud pumps and high horsepower drawworks, give the Company a competitive advantage in attracting premium jobs with customers engaged in multi-well drilling programs in this region. At June 5, 1998, 110 rigs were being utilized in this region, making it the fourth most active domestic onshore drilling market at that time. The Gulf Coast region is characterized by significant drilling activity in deep, technically challenging formations for which the Company's SCR and deep mechanical rigs are particularly well suited. While recent results in certain areas of the Gulf Coast have been disappointing to producers, most notably the Austin Chalk formation in Louisiana and the Pinnacle Reef in Texas, significant exploration and development activity is ongoing. 39 46 SOUTH TEXAS REGION The South Texas region is comprised of the southern portion of onshore Texas. At June 15, 1998, pro forma for the TransTexas Acquisition, the Company had 21 rigs available to be marketed in the South Texas region (of which 8 rigs were being utilized by TransTexas) and four rigs available to be refurbished as market conditions warrant. The TransTexas Rigs have been utilized historically only to meet the internal drilling requirements of TransTexas. With the completion of the TransTexas Acquisition, the Company intends to begin to actively market the acquired rigs not being utilized by TransTexas under the Alliance Agreement. At June 5, 1998, 119 rigs were being utilized in this region, making it the third most active domestic onshore drilling market at that time. The South Texas region is predominately a gas producing region, and, accordingly, its drilling activity levels are less sensitive to declining oil prices. The Company believes that the TransTexas Rigs operating in this region are well suited for the mobility, drilling flexibility and hydraulic efficiency required for this region's drilling applications. BUSINESS STRATEGY The Company believes that growth in earnings and cash flow can be achieved by pursuing the following business strategy: OPERATING A TECHNOLOGICALLY ADVANCED RIG FLEET The Company has assembled its existing rig fleet, and will pursue further acquisitions, with the goal of operating one of the most technologically sophisticated land drilling fleets in the United States. Many of the Company's rigs include engines, pumps and drilling mud systems that represent the best drilling technology available and that the Company believes offer greater efficiencies for customers than many of the rigs available from its competitors. For example, by deploying its diesel electric SCR rigs with two or three high horsepower pumps and top drive drilling systems in challenging deep and horizontal drilling situations, the Company believes that it can reduce its customers' overall drilling costs, thus securing and enhancing its relationships with some of the most active operators in the domestic market. The Company is committed to making the capital investments required to maintain and, in appropriate circumstances, increase the technological sophistication and operational efficiencies of its fleet. DEVELOPING DEEP DRILLING CAPABILITIES The Company believes there is greater demand for rigs capable of drilling deeper, more complex wells, including 1,500 horsepower and larger rigs, and has focused, and will continue to focus, on acquiring rigs with these capabilities. Of the 25 TransTexas Rigs, 12 are 1,500 horsepower or larger rigs and an additional 10 are 1,000 horsepower or larger rigs. At June 15, 1998, pro forma for the TransTexas Acquisition, 78% of the Company's rig fleet had deep drilling capability (15,000 feet or greater). Management believes that demand and utilization rates for these types of rigs, particularly SCR rigs, will remain higher than for rigs with lesser depth capacities due to their greater operational flexibility and efficiency. FOCUSING ON CORE MARKETS The Company believes that its strong asset position and operating expertise in the Mid-Continent and Gulf Coast regions enable it to achieve operating efficiencies and to provide premium service to its customers in these markets. The Company is the largest provider of drilling rigs in Oklahoma and is among the largest operators of deep rigs in the onshore Gulf Coast region. The TransTexas Acquisition makes the Company one of the largest suppliers of drilling rigs in South Texas and positions the Company to mobilize additional rigs in that region as market conditions warrant. DEVELOPING AND MAINTAINING RELATIONSHIPS WITH OPERATORS In order to maximize the utilization rate of its rig fleet and to minimize exposure to market downturns, the Company seeks to maintain and build relationships with operators committed to active domestic drilling programs. The 40 47 Company's largest current customers include Apache Corporation, Chesapeake, Enron Oil and Gas Company, Marathon Oil Company, Sonat and UPR. Each of these companies was among the most active onshore operators in the United States during the last three years. As a result of the Alliance Agreement, the Company will make up to 15 rigs available to TransTexas to meet its drilling requirements, if any, in an area that includes, among others, the South Texas and Gulf Coast regions. During the three months ended March 31, 1998, the three largest customers for the Company's contract drilling services were Chesapeake, UPR and Sonat, which accounted for approximately 17%, 12% and 10% of total revenues, respectively. ACQUIRING AND REFURBISHING ADDITIONAL RIGS AND RELATED EQUIPMENT The Company intends to pursue selective acquisitions of additional rigs and related equipment, including top drive drilling systems. Additionally, the Company has experience in the acquisition of component parts from which rigs can be assembled or refurbished and intends to continue to seek similar opportunities for the expansion and enhancement of its rig fleet by such means. Since its formation and through June 26, 1998, the date of the TransTexas Acquisition, the Company has acquired 78 land rigs (net of sales) in eleven transactions. DRILLING EQUIPMENT AND SUPPLIES A land drilling rig consists of various components, including engines, drawworks, a derrick or mast, substructure, pumps to circulate drilling fluid, blowout preventers, drill pipe and related equipment. The actual drilling capacity of a rig may be more or less than its rated drilling capacity due to numerous factors, including the length of its drill pipe and the drilling conditions of any particular well. The intended well depth and the drill site conditions determine the rig, drill pipe length and other equipment needed to complete a well. The Company's rigs can be relocated to areas where demand, well specifications and day rates allow for maximization of gross operating margins and utilization. Generally, land rigs operate with crews of five to six persons. As of June 15, 1998, pro forma for the TransTexas Acquisition, the Company's fleet included 31 rigs that are diesel electric SCR rigs and 57 that are mechanical rigs. Mechanical rigs utilize diesel engines to produce power that is transferred to drilling equipment, such as drawworks and pumps, by way of a compound consisting of a series of chains, sprockets and pneumatic clutches. SCR rigs employ diesel engines that generate alternating current electricity which is converted and transferred into amps as alternating current or direct current electricity, which in turn drives electric motors powering the drilling equipment. The Company believes that SCR rigs offer a number of advantages over mechanical rigs. SCR rigs enable flexible power distribution to selected individual drilling equipment components, providing for more precise drilling control and efficient operation. SCR rigs are also quieter and safer because the diesel engines are typically located away from the rig floor and well bore, allowing for better communication among rig crews. SCR rigs are also more easily adapted to the use of top drive drilling systems which are typically electrically powered. The Company has developed a fleet that uses the advanced drilling technology of diesel electric SCR rigs to provide greater efficiencies to its customers, especially in deep drilling, horizontal and directional applications, and uses mechanical rigs primarily in areas such as the Mid-Continent region where operators target shallower well depths and require more frequent mobility. In addition to its SCR rigs, the Company has focused its acquisitions on rigs with efficient and flexible drilling mud systems as well as high horsepower drawworks and mud pumps, features which give the Company a competitive advantage in attracting premium jobs with customers engaged in multi-well horizontal drilling programs. The majority of the Company's rigs employ diesel engines manufactured by Caterpillar, Inc. as the rigs' main power sources. The Company believes that such engines are lighter and more fuel efficient than other available engines, thus saving the Company and its customers money in terms of lower trucking costs and reduced fuel consumption. Finally, the Company has begun equipping certain of its deep drilling rigs with top drive drilling systems. Top drives provide the Company's customers with greater control in transferring horsepower to the bit, precise orientation of drilling tools while drilling complex directional wells, and reduced incidence of stuck drill pipe in high risk areas. Moreover, top drives enable the contractor to drill in 90 foot sections (rather than conventional 45 foot sections), a capability which reduces connection time, and are safer for rig employees and equipment during tubular handling 41 48 operations and in well control situations. Currently, the Company has five rigs equipped with top drives and has ordered one additional top drive. RIG FLEET The following table identifies certain information as of June 15, 1998 regarding the rigs owned and operated by the Company and the rigs acquired in the TransTexas Acquisition.
HORSEPOWER RIG DEPTH ------------ NO. CAPACITY DRAWWORKS RIG TYPE(1) DRAWWORKS(2) TOTAL(3) STATUS GULF COAST REGION 21 30,000 Continental Emsco C-3 SCR 3,000 4,400 Available 11 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Working 12 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Working 14 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Working 15 25,000 Mid Continent U-1220-EB(4) SCR 2,500 3,600 Available 16 25,000 Mid Continent U-1220-EB(4) SCR 2,500 3,600 Available 17 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Working 18 25,000 Mid Continent U-1220-EB(4) SCR 2,500 3,600 Working 22 25,000 National 1320-UE(4) SCR 2,000 3,300 Working 23 25,000 Gardner Denver 1500-E(4) SCR 2,000 3,600 Available 40 25,000 National 1320-UE SCR 2,000 3,300 Available 69 25,000 Mid Continent U-1220-EB SCR 2,500 3,975 Working 20 20,000 Oilwell 840-E SCR 1,500 2,700 Working 4 18,000 Mid Continent U-712-A Mechanical 1,200 2,700 Working MID-CONTINENT REGION 10 25,000 Mid Continent U-1220-EB SCR 2,500 3,600 Working 52 25,000 National 1320-M Mechanical 2,000 2,700 Working 63 25,000 Gardner Denver 1500-E SCR 2,000 3,300 Available 7 20,000 Mid Continent U-914-C Mechanical 1,500 2,700 Available 19 20,000 Continental EMSCO C-1 SCR 1,500 2,700 Working 35 20,000 National 110-UE SCR 1,500 3,300 Available 36 20,000 National 110-M Mechanical 1,500 2,700 Working 46 20,000 BDW 1350 Mechanical 1,500 2,900 Working 59 20,000 Oilwell 860 Mechanical 1,500 2,700 Available 60 20,000 National 1320-M Mechanical 2,000 2,700 Working 61 20,000 National 110-M Mechanical 1,500 2,700 Available 62 20,000 Mid Continent U914 SCR 1,500 2,700 Available 5 16,000 Gardner Denver 800 Mechanical 1,000 2,900 Available 8 16,000 National 80-B Mechanical 1,000 1,650 Working 31 16,000 Gardner Denver 800-E SCR 1,000 2,200 Working 32 16,000 BDW 800 MI Mechanical 1,000 1,650 Working 33 16,000 Brewster N-46 Mechanical 1,000 2,000 Working 34 16,000 Ideco E-900 SCR 900 1,800 Working 39 16,000 Ideco E-900 SCR 900 2,350 Working 47 16,000 Ideco H-900 Mechanical 900 1,650 Working 51 16,000 Oilwell 760 Mechanical 1,000 1,650 Working 42 15,000 Gardner Denver 700 Mechanical 800 1,650 Working 44 15,000 Gardner Denver 700 Mechanical 800 1,650 Working 26 14,000 National 610 Mechanical 750 1,650 Working 29 13,000 Continental Emsco D-2 Mechanical 750 1,450 Working 38 13,000 Mid Continent U-36A Mechanical 600 1,650 Working 41 13,000 Mid Continent U-36A Mechanical 600 1,650 Available 9 12,000 Gardner Denver 500 Mechanical 650 2,250 Working 43 12,000 Superior 700 Mechanical 650 1,450 Working 45 12,000 Gardner Denver 500 Mechanical 650 1,450 Working 53 12,000 Unit U-40 Mechanical 850 1,650 Working 57 12,000 National 55 Mechanical 550 2,000 Working 58 12,000 Ideco 750 Mechanical 750 1,650 Repairing 28 11,000 BDW 650 Mechanical 650 1,350 Working 37 11,000 Gardner Denver 500 Mechanical 650 1,900 Working
42 49 30 10,000 Brewster N-42 Mechanical 550 1,725 Working 56 10,000 Cooper LTD 750 Mechanical 750 1,550 Available 55 7,500 Cooper LTD 550 Mechanical 550 1,400 Available AVAILABLE FOR REFURBISHMENT 24 25,000 National 1320-UE SCR 2,000 3,960 68 25,000 Continental Emsco C-2 SCR 2,000 3,975 50 20,000 BDW 1350 SCR 1,500 2,700 65 20,000 Oilwell E-2000 SCR 2,000 3,975 66 20,000 Oilwell 840-E SCR 1,500 3,975 67 20,000 Oilwell 840-E SCR 1,500 3,975 27 16,000 National 80-B SCR 1,000 50 48 16,000 SCR 1,000 2,280 49 16,000 SCR 1,000 2,280 64 16,000 Ideco E-1200 SCR 1,200 2,280 54 10,000 National 50-A Mechanical 450 900 TRANSTEXAS RIGS 86 25,000 National 1320 Mechanical 2,000 2,700 Working 80 20,000 National 110-M Mechanical 1,500 2,700 Working 81 20,000 National 110-M Mechanical 1,500 2,700 Available 82 20,000 National 110-M Mechanical 1,500 2,700 Working 83 20,000 National 110-M Mechanical 1,500 2,700 Available 84 20,000 National 110-M Mechanical 1,500 2,700 Working 85 20,000 National 110-M Mechanical 1,500 2,700 Working 87 20,000 National 110-M Mechanical 1,500 2,280 Available 88 20,000 National 110-M Mechanical 1,500 2,280 Available 89 20,000 Oilwell 860 Mechanical 1,500 3,380 Working 90 20,000 Gardner Denver 1100 Mechanical 1,500 2,280 Available 93 20,000 Gardner Denver 1100 Mechanical 1,500 2,700 Available 79 18,000 Ideco 1200 Mechanical 1,200 3,300 Working 74 16,000 BDW 800 Mechanical 1,000 2,700 Available 76 16,000 National 80-B Mechanical 1,000 3,800 Working 77 16,000 National 80-B Mechanical 1,000 2,700 Available 78 16,000 National 80-B Mechanical 1,000 2,550 Available 92 16,000 National 80-B Mechanical 1,000 3,450 Available 94 16,000 National 80-B Mechanical 1,000 2,900 Available 73 14,000 National 610 Mechanical 750 1,650 Working 70 12,000 Cabot 900 Mechanical 900 2,570 Available TRANSTEXAS RIGS AVAILABLE FOR REFURBISHMENT 72 16,000 Gardner Denver 800 Mechanical 1,000 3,100 75 16,000 National 80-B Mechanical 1,000 2,750 91 16,000 National 80-B Mechanical 1,000 2,600 71 12,000 Cabot 900 Mechanical 900 2,570
- ---------------------- (1) "SCR" denotes a diesel electric silicon controlled rectifier rig. "Mechanical" denotes a mechanical rig powered by diesel engines. (2) Drawworks horsepower represents the amount of input power required to achieve the maximum hoisting capability of the drawworks. (3) Total horsepower represents the maximum horsepower produced by a rig's diesel engines for consumption by the drilling equipment. (4) Five rigs in the Gulf Coast region are equipped with National PS350/500 top drives. Drilling rigs and related equipment deteriorate over time unless they are operated and maintained properly. The Company strives to keep its drilling rigs well maintained and technologically competitive. An active maintenance program during the life of a drilling rig permits the maintenance, replacement and upgrading of its components on an individual basis. Over the life of a typical drilling rig, major components, such as engines, pumps, drawworks and drill pipe, are replaced or rebuilt on a periodic basis as required while other components, such as the mast and substructure, can be utilized for extended periods of time with proper maintenance. In connection with the TransTexas Acquisition, the Company acquired 45 trucks which will be utilized to move the Company's drilling rigs and related equipment. The fleet includes various types of trucks, including pole, winch, 43 50 tandem and hauling vehicles. Additionally, the Company acquired approximately 60 lowboy and float trailers, three cranes and three forklifts. There is a general shortage of certain drilling equipment and supplies used in the Company's business. Because, until recent years, the land drilling industry was characterized by an oversupply of land rigs, rig manufacturers have generally focused on the production of more expensive offshore rigs and rig equipment. As a result, most rig manufacturers are not currently building new land rigs and those manufacturers that are building new land rigs and components charge premium prices (approximately $13 million for a new 2,000 horsepower rig) and require that orders be placed at least 120 days in advance of requested delivery. The limited availability of new rigs and equipment has caused land rig owners and operators, including the Company, to maintain and enhance their fleets primarily through acquisitions and refurbishments using previously manufactured rig components and equipment. As the land drilling industry continues to refurbish rigs using existing components and equipment, the available supply of such components and equipment continues to deplete. Additionally, a shortage of drill pipe in the contract drilling industry has caused the price of drill pipe to increase significantly over the past two years and has required orders for new drill pipe to be placed at least one year in advance of expected use. The Company has established arrangements to meet its current needs for certain necessary drilling equipment and supplies, including drill pipe, on satisfactory terms, but there can be no assurance that it will continue to be able to do so. Accordingly, there can be no assurance that the Company will not experience shortages of, or material price increases in, drilling equipment and supplies, including drill pipe, in the future. Any such shortages could delay and adversely affect the Company's ability to refurbish its construction project rigs and obtain contracts for its marketed rigs. CONTRACT DRILLING OPERATIONS The Company's drilling rigs are employed under individual contracts which extend either over a stated period of time or the time required to drill a well or a number of wells. Drilling contracts are obtained through either a competitive bidding process or as a result of direct negotiations with customers. Terms of the Company's drilling contracts vary based on factors such as the complexity and risk of operations, on-site drilling conditions, type of equipment used and the anticipated duration of the work to be performed. Contracts are typically entered into on a single well basis and obligate the Company to pay certain operating expenses, including wages of drilling personnel, maintenance expenses and costs for incidental rig supplies, equipment and local office facilities. Contracts generally are subject to termination by the customer on short notice, but are sometimes written on a firm basis for a specified number of wells or years. The Company has ongoing relationships with a number of customers that often engage a specific rig for the drilling of consecutive wells. At June 15, 1998, all of the Company's working rigs were operating under daywork contracts except for five rigs which were operating under footage contracts. In addition, the Company and its predecessors in the past have performed drilling services under turnkey contracts and the Company may do so again in the future. Revenues from daywork contracts accounted for approximately 98% and 97% of total drilling revenues (excluding mobilization revenues) during the year ended December 31, 1997 and the three months ended March 31, 1998, respectively, with the remainder from footage contracts. Daywork Contracts. Under daywork contracts, the Company provides a drilling rig with required personnel to the operator, who supervises the drilling of the well. The Company is paid based on a negotiated fixed rate per day while the rig is utilized. The rates for the Company's services depend on market and competitive conditions, the nature of the operations to be performed, the duration of the work, the equipment and services to be provided, the geographic area involved and other variables. Lower rates may be paid when the rig is in transit, or when drilling operations are interrupted or restricted by equipment breakdowns, actions of the customer or adverse weather conditions or other conditions beyond the control of the Company. In addition, daywork contracts typically provide for a lump sum fee for the mobilization and demobilization of the drilling rig. Daywork drilling contracts generally specify the type of equipment to be used, the size of the hole and the depth of the well. Under a daywork drilling contract, the customer bears a large portion of out-of-pocket costs of drilling and the Company generally bears no part of the usual capital risks associated with oil and gas exploration (such as time delays for various reasons, including stuck drill pipe and blowouts). 44 51 Footage and Turnkey Contracts. Under footage contracts, the Company is paid a fixed amount for each foot drilled, regardless of the time required or the problems encountered in drilling the well. The Company pays more of the out-of-pocket costs associated with footage contracts compared to daywork contracts. Under turnkey contracts, the Company contracts to drill a well to an agreed depth under specified conditions for a fixed price, regardless of the time required or the problems encountered in drilling the well. The Company provides technical expertise and engineering services, as well as most of the equipment required for the well, and is compensated when the contract terms have been satisfied. Turnkey contracts afford an opportunity to earn a higher return than would normally be available on daywork or footage contracts if the contract can be completed successfully without complications. The risks to the Company under footage and turnkey contracts are substantially greater than under daywork contracts because the Company assumes most of the risks associated with drilling operations generally assumed by the operator in a daywork contract, including risk of blowout, loss of hole, lost or damaged drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors' services, supplies, cost escalation and personnel. See "Risk Factors--Risks Associated with Footage and Turnkey Drilling." CUSTOMERS AND MARKETING The Company's customers include major oil companies and independent oil and gas producers. During the three months ended March 31, 1998, the three largest customers for the Company's contract drilling services were Chesapeake, UPR and Sonat, which accounted for approximately 17%, 12% and 10% of total revenues, respectively. Chesapeake recently announced that it was reducing its drilling program in the Gulf Coast region, an area in which it utilizes a number of the Company's rigs. In late 1997, Chesapeake released two rigs under contract with the Company and has subsequently released three additional rigs it was using in the Gulf Coast region. As of June 15, 1998, Chesapeake was utilizing five of the Company's rigs; however, there can be no assurance that Chesapeake or any of the Company's other principal customers will continue to employ the Company's services or that the loss of any of such customers or adverse developments affecting any of such customers would not have a material adverse effect on the Company's financial condition and results of operations. The Company enters into informal, nonbinding commitments with many of its customers to provide drilling rigs for future periods at agreed upon rates plus fuel and mobilization charges, if applicable, and escalation provisions. This practice is customary in the land drilling business during times of tightening rig supply. Although neither the Company nor the customer is legally required to honor these commitments, the Company strives to satisfy such commitments in order to maintain good customer relations. The Company's sales force consists of industry professionals with significant land drilling sales experience who utilize industry contacts and available public data to determine how to most appropriately market available rigs. Chesapeake Drilling Agreements. In December 1996 in connection with the Formation Transactions, Chesapeake and its operating subsidiary (collectively referred to in this discussion as "Chesapeake") entered into drilling contracts (the "Chesapeake Drilling Agreements") with the Company pursuant to which Chesapeake agreed to engage six of the Company's rigs for two-year terms. For the year ended December 31, 1997, the Company recognized aggregate revenues of $10.9 million from the Chesapeake Drilling Agreements. Under the terms of the Chesapeake Drilling Agreements, the standard day rates were subject to upward, but not downward, adjustment annually in November to the average then-current market rates for the areas of operation, less $100 per day. The Company and Chesapeake were required to consider such adjustment each November during the term of the particular Chesapeake Drilling Agreement and if no agreement could be timely reached as to the appropriate rate adjustment, the Company had the option to terminate the contract for such rig at the conclusion of operations at the well then being drilled. In December 1997, the Company and Chesapeake were unable to agree on an appropriate rate adjustment, so the Company exercised its option to terminate the Chesapeake Drilling Agreements. At June 15, 1998, three of the Company's six rigs formerly covered by the Chesapeake Drilling Agreements remained under contract with Chesapeake on a well-to-well basis. 45 52 COMPETITION The contract drilling industry is a highly competitive and fragmented business characterized by high capital and maintenance costs. As a result, even though the Company has the fifth largest active land drilling rig fleet in the United States, the Company believes that such fleet represents a market share of approximately 6% of the domestic land drilling industry. Drilling contracts are usually awarded through a competitive bid process and, while the Company believes that operators consider factors such as quality of service, type and location of equipment, or the ability to provide ancillary services, price and rig availability are the primary factors in determining which contractor is awarded a job. Certain of the Company's competitors have greater financial and human resources than the Company, which may enable them to better withstand periods of low rig utilization, to compete more effectively on the basis of price and technology, to build new rigs or acquire existing rigs and to provide rigs more quickly than the Company in periods of high rig utilization. Competition in the market for drilling rigs caused substantial increases in the acquisition prices paid for rigs in 1997. Continued competition and price escalation could adversely affect the Company's growth strategy if it is unable to purchase additional drilling rigs or related equipment on favorable terms. See "Risk Factors--Competition" and "--Management of Growth; Risks of Acquisition Strategy." OPERATING HAZARDS AND INSURANCE The Company's operations are subject to many hazards inherent in the land drilling business, including, for example, blowouts, cratering, fires, explosions, loss of well control, loss of hole, damaged or lost drill strings and damage or loss from inclement weather. These hazards could cause personal injury or death, serious damage to or destruction of property and equipment, suspension of drilling operations, or substantial damage to the environment, including damage to producing formations and surrounding areas. Generally, the Company seeks to obtain indemnification from its customers by contract for certain of these risks. To the extent not transferred to customers by contract, the Company seeks protection against certain of these risks through insurance, including property casualty insurance on its rigs and drilling equipment, commercial general liability and commercial contract indemnity, commercial umbrella and workers' compensation insurance. The Company's insurance coverage for property damage to its rigs and drilling equipment is based on the Company's estimate of the cost of comparable used equipment to replace the insured property. There is a deductible per occurrence on rigs and equipment of $500,000. The Company's third party liability insurance coverage under the general policy is $1 million per occurrence, with a self insured retention of $100,000 per occurrence. The commercial umbrella policy has a self insured retention of $10,000 per occurrence with coverage of $5 million per occurrence. The Company believes that it is adequately insured for public liability and property damage to others with respect to its operations. However, such insurance may not be sufficient to protect the Company against liability for all consequences of well disasters, extensive fire damage or damage to the environment. See "Risk Factors--Operating Hazards and Uninsured Risks." GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS GENERAL The Company's operations are affected from time to time in varying degrees by political developments and federal, state and local laws and regulations. In particular, oil and gas production, operations and economics are or have been affected by price controls, taxes and other laws relating to the oil and gas industry, by changes in such laws and by changes in administrative regulations. Although significant capital expenditures may be required to comply with such laws and regulations, to date, such compliance costs have not had a material adverse effect on the earnings or competitive position of the Company. In addition, the Company's operations are vulnerable to risks arising from the numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. 46 53 ENVIRONMENTAL REGULATION The Company's activities are subject to existing federal, state and local laws and regulations governing environmental quality, pollution control and the preservation of natural resources. Such laws and regulations concern, among other things, air emissions, the containment, disposal and recycling of waste materials, and reporting of the storage, use or release of certain chemicals or hazardous substances. Numerous federal and state environmental laws regulate drilling activities and impose liability for discharges of waste or spills, including those in coastal areas. The Company has conducted drilling activities in or near ecologically sensitive areas, such as wetlands and coastal environments, which are subject to additional regulatory requirements. State and federal legislation also provide special protections to animal and marine life that could be affected by the Company's activities. In general, under various applicable environmental programs, the Company may potentially be subject to regulatory enforcement action in the form of injunctions, cease and desist orders and administrative, civil and criminal penalties for violations of environmental laws. The Company may also be subject to liability for natural resource damages and other civil claims arising out of a pollution event. Except for the handling of solid wastes directly generated from the operation and maintenance of the Company's drilling rigs, such as waste oils and wash water, it is the Company's practice to require its customers to contractually assume responsibility for compliance with environmental regulations. Laws and regulations protecting the environment have become more stringent in recent years, and may, in certain circumstances, impose strict liability, rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. Such laws and regulations may expose the Company to liability for the conduct of or conditions caused by others, or for acts of the Company which were in compliance with all applicable laws at the time such acts were performed. The application of these requirements or adoption of new requirements could have a material adverse effect on the Company. Environmental regulations that affect the Company's customers also have an indirect impact on the Company. Increasingly stringent environmental regulation of the oil and gas industry has led to higher drilling costs and a more difficult and lengthy well permitting process. The primary environmental statutory and regulatory programs that affect the Company's operations include the following: Oil Pollution Act and Clean Water Act. The Oil Pollution Act of 1990 ("OPA") amends certain provisions of the federal Water Pollution Control Act of 1972, commonly referred to as the Clean Water Act ("CWA"), and other statutes as they pertain to the prevention of and response to spills or discharges of hazardous substances or oil into navigable waters. Under OPA, a person owning or operating a facility or equipment (including land drilling equipment) from which there is a discharge or threat of a discharge of oil into or upon navigable waters and adjoining shorelines is liable, regardless of fault, as a "responsible party" for removal costs and damages. Federal law imposes strict, joint and several liability on facility owners for containment and clean-up costs and certain other damages, including natural resource damages, arising from a spill. The United States Environmental Protection Agency ("EPA") is also authorized to seek preliminary and permanent injunctive relief and, in certain cases, criminal penalties and fines. State laws governing the control of water pollution also provide varying civil and criminal penalties and liabilities in the case of releases of petroleum or its derivatives into surface waters or into the ground. In the event that a discharge occurs at a well site at which the Company is conducting drilling or pressure pumping operations, the Company may be exposed to claims that it is liable under the CWA or similar state laws. Certain of the Company's operations are also subject to EPA regulations, including regulations that require the preparation and implementation of spill prevention control and countermeasure ("SPCC") plans to address the possible discharge of oil into navigable waters. Where so required, the Company has SPCC plans in place. Superfund. The Comprehensive Environmental, Response, Compensation, and Liability Act, as amended ("CERCLA"), also known as the "Superfund" Law, imposes liability, without regard to fault or the legality of the 47 54 original conduct, on certain classes of persons with respect to the release of a "hazardous substance" into the environment. These persons include (i) the current owner and operator of a facility from which hazardous substances are released, (ii) owners and operators of a facility at the time any hazardous substances were disposed, (iii) generators of hazardous substances who arranged for the disposal or treatment at or transportation to such facility of hazardous substances and (iv) transporters of hazardous substances to disposal or treatment facilities selected by them. The Company may be responsible under CERCLA for all or part of the costs to clean up sites at which hazardous substances have been released. To date, however, the Company has not been named a potentially responsible party under CERCLA or any similar state Superfund laws. Hazardous Waste Disposal. The Company's operations involve the generation or handling of materials that may be classified as hazardous waste and subject to the federal Resource Conservation and Recovery Act and comparable state statutes. The EPA and various state agencies have limited the disposal options for certain hazardous and nonhazardous wastes and is considering the adoption of stricter handling and disposal standards for nonhazardous wastes. As part of the Bonray Acquisition, the Company acquired an equipment yard which may require certain expenditures or remedial actions for the removal or cleanup of contamination. In exchange for a $1 million cash payment to the Company at closing, the Company did not require DLB to indemnify the Company with respect to such expenditures or remedial actions. While the Company has not determined whether and to what extent such expenditures or remedial actions may be necessary or advisable, based on the presently available information, the Company does not believe that such expenditures will exceed $1 million. Management believes that the Company and its operations are in material compliance with applicable environmental laws and regulations. HEALTH AND SAFETY MATTERS The Company's facilities and operations are also governed by laws and regulations, including the federal Occupational Safety and Health Act ("OSHA"), relating to worker health and workplace safety. As an example, the Occupational Safety and Health Administration has issued the Hazard Communication Standard ("HCS") requiring employers to identify the chemical hazards at their facilities and to educate employees about these hazards. HCS applies to all private-sector employers, including the oil and gas exploration and producing industry. HCS requires that employers assess their chemical hazards, obtain and maintain certain written descriptions of these hazards, develop a hazard communication program and train employees to work safely with the chemicals on site. Failure to comply with the requirements of the standard may result in administrative, civil and criminal penalties. The Company believes that appropriate precautions are taken to protect employees and others from harmful exposure to materials handled and managed at its facilities and that it operates in substantial compliance with all OSHA regulations. While it is not anticipated that the Company will be required in the near future to expend material amounts by reason of such health and safety laws and regulations, the Company is unable to predict the ultimate cost of compliance with these changing regulations. FACILITIES AND OTHER PROPERTY The Company leases approximately 7,500 square feet of office space for its principal executive offices in Oklahoma City, Oklahoma at a cost of approximately $7,000 per month and leases approximately 5,000 square feet of office and warehouse space and ten acres of land in El Reno, Oklahoma for $2,000 per month. In addition, the Company owns approximately ten acres of land in El Reno, Oklahoma and five acres of land in Weatherford, Oklahoma that it uses for rig storage and maintenance. The Company leases a facility in Houston, Texas that includes approximately 5,000 square feet of warehouse space and 1,300 square feet of office space. Rental payments on the Houston facility are approximately $1,400 per month. As part of the Bonray Acquisition, the Company acquired approximately 40 acres of land in Oklahoma City with facilities including 3,600 square feet of office space, an 8,000 square foot repair shop and three warehouses. In the TransTexas Acquisition, the Company acquired approximately 24 acres of land in Laredo, Texas with office and warehouse facilities totaling approximately 125,000 square feet. The Company considers all of its facilities to be in good operating condition and adequate for their present uses. 48 55 EMPLOYEES As of July 20, 1998, the Company had approximately 985 employees, of which approximately 150 were salaried and approximately 835 were employed on an hourly basis. This includes approximately 300 recently hired employees who were formerly involved in TransTexas' drilling and trucking operations. None of the Company's employees is represented by any collective bargaining unit. Management believes that the Company's relationship with its employees is good. LEGAL PROCEEDINGS A purported class action lawsuit is pending against the Company, certain directors and officers of the Company, the managing underwriters of the Initial Public Offering, and certain current and former stockholders of the Company, alleging violations of federal securities laws in connection with the Initial Public Offering. The lawsuit, Yuan v. Bayard Drilling Technologies, Inc., et al. ("Yuan"), was filed on February 3, 1998 in the United States District Court for the Western District of Oklahoma. The principal plaintiff in Yuan is Tom Yuan. The defendants in this case include the Company, Chesapeake, Energy Spectrum LLC, James E. Brown, David E. Grose, Carl B. Anderson, III, Merrill A. Miller, Jr., Sidney L. Tassin, Lew O. Ward, Mike Mullen, Roy T. Oliver, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers, Inc., Prudential Securities, Inc., Rauscher Pierce Refsnes, Inc. (a predecessor to Dain Rauscher Incorporated) and Raymond James & Associates, Inc. The plaintiffs in this lawsuit purport to sue on their own behalf and on behalf of all persons who purchased shares of Common Stock on or traceable to the Initial Public Offering. In the lawsuit, plaintiffs allege claims against all defendants under the Securities Act. The plaintiffs allege that the registration statement and prospectus for the Initial Public Offering contained materially false and misleading information and omitted to disclose material facts. In particular, the plaintiffs allege that such registration statement and prospectus failed to disclose financial difficulties of Chesapeake, the Company's largest customer, and the effects of such difficulties on Chesapeake's ability to continue to provide the Company with substantial drilling contracts. The petitions further allege that the Company failed to disclose pre-offering negotiations with R.T. Oliver Drilling, Inc., whom the plaintiffs allege was a related party, for the purchase of drilling rigs. In addition, the petitions allege that the Company failed to disclose that its growth strategy required costly refurbishment of older drilling rigs that would dramatically increase the Company's costs, which could not be sustained by internally generated cash flows. In each of these lawsuits, the plaintiffs are seeking rescission and damages. Two other suits, Khan v. Bayard Drilling Technologies, Inc., et al. ("Khan") and Burkett v. Bayard Drilling Technologies, Inc., et al. ("Burkett"), which were filed in District Court in and for Oklahoma County, State of Oklahoma on January 14, 1998 and February 2, 1998, respectively, and alleged essentially the same claims as Yuan, were dismissed without prejudice in May 1998 on a joint application filed by all parties. The plaintiffs in Khan and Burkett, along with others, have joined in Yuan's motion to be appointed as lead plaintiffs in the Yuan federal court suit. The Company is also involved in other litigation arising from time to time in the ordinary course of its business, including workers' compensation claims and disputes arising out of its drilling activities. Such disputes include a claim filed against Bayard and Sperry-Sun Drilling Services, Inc. on May 29, 1998 in the District Court of Oklahoma County in the State of Oklahoma. R.C. Taylor Companies, Inc., the plaintiff in that lawsuit, seeks actual and punitive damages for costs allegedly incurred in connection with a directional drilling project that utilized one of the Company's rigs. The Company believes the allegations in the lawsuits referenced above are without merit and is defending vigorously the claims brought against it. The Company is unable, however, to predict the outcome of these lawsuits or the costs to be incurred in connection with their defense and there can be no assurance that this litigation will be resolved in the Company's favor. An adverse result or prolonged litigation could have a material adverse effect on the Company's financial position or results of operations. 49 56 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the Company's directors and executive officers, including their respective ages.
NAME AGE POSITION James E. Brown . . . . . . . 46 Chairman of the Board, President and Chief Executive Officer Edward S. Jacob, III . . . . 45 Executive Vice President--Operations & Marketing David E. Grose, III . . . . . 45 Vice President and Chief Financial Officer Carl B. Anderson, III . . . . 42 Director Mark Liddell . . . . . . . . 43 Director Merrill A. Miller, Jr. . . . 47 Director Sidney L. Tassin . . . . . . 41 Director Lew O. Ward . . . . . . . . . 67 Director
James E. Brown is Chairman of the Board and has served as President and Chief Executive Officer and as a director of the Company since its formation in 1996. From 1992 until joining the Company in 1996, Mr. Brown served as President of Anadarko Drilling Company, an Oklahoma general partnership and the predecessor of the Company. From 1982 through 1992, Mr. Brown served as Chief Financial Officer of AnSon Gas Corporation and its predecessor entities. From 1979 through 1982, Mr. Brown served as Vice President, Treasurer and Controller of Blocker Energy Corporation. Prior thereto, Mr. Brown served as an accountant in various positions with Arthur Andersen & Co. Edward S. Jacob, III has served as Executive Vice President--Operations & Marketing since April 1997 and prior thereto served as Vice President of Operations and Marketing for the Company since its formation in 1996. From 1983 until joining the Company, Mr. Jacob was employed by Helmerich & Payne International Drilling Co., serving as U.S. Marketing Manager from 1990 through 1996. Mr. Jacob is a Director of the International Association of Drilling Contractors ("IADC"), serving on its Contracts and Marketing Committee, and is a former IADC Chapter Chairman. David E. Grose, III has served as Vice President and Chief Financial Officer of the Company since July 1997. Prior to joining the Company, Mr. Grose was affiliated with Alexander Energy Corporation from its inception in March 1980, serving from 1987 through 1996 as a director and Vice President, Treasurer and Chief Financial Officer. In August 1996, National Energy Group acquired Alexander Energy Corporation and Mr. Grose served as Vice President--Finance and Treasurer through February 1997. Carl B. Anderson, III has served as a director of the Company since its formation in December 1996. Since 1994, Mr. Anderson has served as Managing General Partner and Chief Executive Officer of APLP, a diversified energy company and parent of Anadarko, the Company's predecessor. From 1978 through 1994, Mr. Anderson served in various capacities for APLP. Mark Liddell has served as a director of the Company since November 1997. Mr. Liddell has served as a director of Gulfport Energy Corporation since July 1997 and as its President since April 1998. Mr. Liddell is also a director of Davidson Oil & Gas, Inc. From 1991 through April 1998, Mr. Liddell served in various capacities for DLB, including Director from 1995 to April 1998, President from October 1994 through April 1998 and Vice President from 1991 to 1994. From 1991 to May 1995, Mr. Liddell served as a director of TGX Corporation, a publicly traded oil and gas company, and from 1989 to 1990, Mr. Liddell served as a director of Kaneb Services, Inc., a publicly traded industrial services and pipeline transportation company. Merrill A. Miller, Jr. has served as a director of the Company since October 1997. Since February 1996, Mr. Miller has served in various capacities for National-Oilwell, Inc., a publicly traded oil field services company, including 50 57 President of its Products & Technology Group since May 1997, Vice President and General Manager of Drilling Systems since July 1996 and Vice President of Marketing, Drilling Systems from February 1996 through July 1996. Prior thereto, Mr. Miller served in various capacities for Anadarko, the Company's predecessor, from January 1995 through February 1996. From May 1980 through January 1995, Mr. Miller served in various capacities with Helmerich & Payne International Drilling Co., including Vice President of U.S. Operations. Sidney L. Tassin has served as a director of the Company since its formation in 1996. Since March 1996, Mr. Tassin has been the President of Energy Spectrum Capital LP, the general partner of Energy Spectrum, an equity fund that invests in the energy industry. From 1980 to 1994, Mr. Tassin was associated with MESA Inc., serving in various financial executive capacities, including Vice President--Finance from 1986 to 1988 and President of BTC Partners Inc., a financial and strategic consultant to MESA Inc., from 1988 to 1994. Lew O. Ward has served as a director of the Company since May 1997. Since 1981, Mr. Ward has served as Chairman and Chief Executive Officer of Ward Petroleum Corporation, an independent oil and gas company founded by Mr. Ward. Mr. Ward is a former Director and Area Vice President of the Independent Petroleum Association of America ("IPAA") and is the immediate past Chairman of the IPAA. BOARD OF DIRECTORS Board Composition. The Board is currently composed of six directors. Directors are elected for one-year terms at each annual meeting of stockholders. Three of the Company's current directors were elected pursuant to the terms of the Stockholders and Voting Agreement. See "Certain Relationships and Related Transactions-- Stockholders and Voting Agreement." Board Committees. The Company has established two standing committees of the Board: a Compensation Committee and an Audit Committee. The current members of the Compensation Committee are Carl B. Anderson, III, Merrill A. Miller, Jr. and Sidney L. Tassin. The Compensation Committee recommends to the Board the base salaries and incentive bonuses for the officers of the Company and is charged with administering the Employee Stock Plan and the Director Stock Plan. The current members of the Audit Committee are Merrill A. Miller, Jr., Sidney L. Tassin and Lew O. Ward. The Audit Committee reviews the functions of the Company's management and independent auditors pertaining to the Company's financial statements and performs such other related duties and functions as are deemed appropriate by the Audit Committee or the Board. The Board does not have a standing nominating committee or other committee performing similar functions. Director Compensation. Directors who are also employees of the Company are not compensated for service on the Board or on any committee of the Board. Non-employee directors of the Company receive an annual retainer of $10,000. Additionally, all directors of the Company are entitled to reimbursement for their reasonable out-of-pocket expenses in connection with their travel to and attendance at meetings of the Board or committees thereof. In October 1997, the Company adopted the Director Stock Plan pursuant to which each non-employee director is entitled to receive (i) upon such director's initial election to the Board, an option to purchase 15,000 shares of Common Stock and (ii) immediately following each annual meeting at which such director is reelected to the Board, an option to purchase 5,000 shares of Common Stock. Such non-employee directors are also entitled under the Director Stock Plan to elect to receive options to purchase Common Stock in lieu of their annual cash retainer and to receive certain other stock option awards. Directors who are also employees of the Company are not eligible to receive awards under the Director Stock Plan. See "--1997 Non-Employee Directors' Stock Option Plan." EXECUTIVE COMPENSATION Summary Compensation. The following table sets forth, for each completed fiscal year since the Company's formation, the compensation earned by the Company's Chief Executive Officer and its only other executive officer who received total annual salary and bonus in excess of $100,000 for 1997. 51 58 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------------- ---------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(1) OPTIONS James E. Brown..................... 1996 $ 9,167 -- $ 900 -- 200,000 President and Chief Executive 1997 111,816 $ 50,000 2,568 100,000 400,000 Officer Edward S. Jacob, III............... 1996 -- -- -- -- -- Vice President--Operations & 1997 105,733 25,000 5,429 -- 150,000 Marketing
- ------------------ (1) The dollar value of Mr. Brown's Restricted Stock Award is not set forth as the Company's Common Stock was not publicly traded at the time of grant, February 1997. Mr. Brown purchased such shares at a price of $2.50 per share, which shares vest at a rate of 20% per year beginning on December 10, 1997. No dividends will be paid on such shares of Restricted Stock. Option Grants. On December 10, 1996, the Company granted Mr. Brown an option (the "1996 Brown Option") to purchase 200,000 shares of Common Stock at an exercise price of $5 per share, becoming exercisable with respect to 20% of the underlying shares each anniversary of the grant date. The option terminates as to any unexercised portion on December 10, 2002. If the 1996 Brown Option was fully exercisable and exercised on December 31, 1997, on which the closing price of a share of Common Stock on the American Stock Exchange (the "AMEX") was $16 1/4, the realized value of the option would have been $2.25 million. The Company did not grant any options to purchase Common Stock to any other executive officer or other employee of the Company during the fiscal year ended December 31, 1996. The Company has not granted any stock appreciation rights. The Company adopted the Employee Stock Plan in April 1997 and made the terms thereof applicable to the 1996 Brown Option. Through December 31, 1997 and including the 1996 Brown Option, the Company had granted to James E. Brown, Edward S. Jacob, III, and David E. Grose, III options to purchase 200,000, 50,000 and 50,000 shares of Common Stock, respectively, at exercise prices of $5, $5 and $10 per share, respectively. Additionally, the Company has granted to Messrs. Brown, Jacob and Grose, options to purchase 200,000, 100,000 and 10,000 shares of Common Stock, respectively, at an exercise price of $23 per share (the Initial Public Offering price). Effective March 10, 1998, the Company granted Mr. Jacob an option to purchase an additional 40,000 shares of Common Stock at an exercise price of $14 per share. Except for options for 10,000 shares that were exercised by Mr. Jacob in April 1998, none of such options has been exercised, and all of such options remain outstanding, as of the date of this Prospectus. Each of the option agreements relating to stock options granted under the Employee Stock Plan provides for the vesting of 20% of the shares subject to the option each year beginning on the first anniversary of the date of grant. The option ceases to be exercisable on the earliest of (i) the sixth anniversary of the date of grant, (ii) the date of the employee's voluntary termination of employment with the Company or the Company's termination of the employee's employment for Due Cause (as defined in the employee's employment agreement) or (iii) the date that is 90 days after termination of the employee's employment by means of retirement, disability or death. In the event of a Change of Control (as defined in the Employee Stock Plan), the committee that is charged with administering the Employee Stock Plan (the "Committee") may accelerate the exercisability of the options or take certain other actions provided in the Employee Stock Plan. See "--1997 Stock Option and Stock Award Plan." The options are exercisable for cash, or in the Committee's discretion, in an acceptable equivalent, by the assignment of shares of Common Stock owned by the option holder or the surrender of another Incentive Award (as hereinafter defined). The Company and James E. Brown are parties to a restricted stock award agreement (the "Restricted Stock Award Agreement") pursuant to which Mr. Brown purchased 100,000 shares (the "Restricted Shares") of Common Stock at a price of $2.50 per share in February 1997. The Restricted Stock Award Agreement provides for vesting of the Restricted Shares at a rate of 20% per year beginning on December 10, 1997. Mr. Brown is required to remain continuously employed by the Company through each vesting date for the applicable portion of the Restricted Shares to vest and, prior to vesting, the Restricted Shares are not transferable. In the event of termination of Mr. Brown's employment due to a Change of Control (as defined in the Employee Stock Plan), all Restricted Shares will vest 52 59 immediately and all restrictions on transfer will terminate. If Mr. Brown's employment with the Company terminates for any other reason, all unvested Restricted Shares (the "Unvested Shares") will no longer be eligible for vesting but, under certain circumstances, will be eligible for purchase by the Company or Mr. Brown, as applicable. If Mr. Brown resigns or is terminated by the Company for Due Cause (as defined in the Restricted Stock Award Agreement), the Company may purchase the Unvested Shares from Mr. Brown for $2.50 per share. If the Company elects not to purchase the Unvested Shares from Mr. Brown, Mr. Brown will forfeit such Unvested Shares to the Company without any payment therefor. If the Company terminates Mr. Brown's employment for any reason other than Due Cause or if Mr. Brown's employment with the Company terminates due to the death or disability of Mr. Brown, Mr. Brown may keep the Unvested Shares by paying the Company an additional $5.00 per share. If Mr. Brown elects not to make such additional payment, the Company may purchase the Unvested Shares from Mr. Brown for $2.50 per share or allow Mr. Brown to keep the Unvested Shares. The following table sets forth information concerning stock options granted to the Company's executive officers during the fiscal year ended December 31, 1997 under the Employee Stock Plan. OPTION/SAR GRANTS IN LAST FISCAL YEAR
% OF TOTAL NUMBER OF OPTIONS PRESENT SHARES GRANTED VALUE OF UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION EACH GRANT NAME OPTIONS GRANTED FISCAL YEAR PRICE($/SH) DATE OF OPTION(1) James E. Brown . . . . . . 200,000 12.500% $23.00 11/04/03 $2,024,000 Edward S. Jacob, III . . . 50,000 3.125% $ 5.00 01/01/03 $ 104,500 Edward S. Jacob, III . . . 100,000 6.250% $23.00 11/04/03 $1,012,000 David E. Grose, III . . . . 50,000 3.125% $10.00 06/18/03 $ 179,500 David E. Grose, III . . . . 10,000 .625% $23.00 11/04/03 $ 101,200
(1) The fair value of each option granted is estimated using the Black- Scholes model. This model includes, among others, a variable of stock volatility. As the Company has not established a significant trading history, the volatility used in the model was .40 for options granted through June 30, 1997 and .43 for options granted since July 1, 1997 based on volatility of the stock price of a similar entity that has been publicly traded for several years. Dividend yield was estimated to remain at zero with risk free interest rates ranging between 5.72 and 6.31 percent. As there is no prior experience available to use in estimating an expected life for the options, an average of the time between the vesting and expiration dates of the options was used in determining the expected lives of the options ranging from 3.5 to 5.5 years. The following table sets forth certain information with respect to exercises by the Company's executive officers of stock options during fiscal year 1997 and the value of all unexercised employee stock options as of December 31, 1997 held by the Company's executive officers. AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(2) ACQUIRED ------------------------------------- ----------------------------- NAME ON EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISE(1) James E. Brown . . . . -- 40,000 360,000 $450,000 $1,800,000 Edward S. Jacob, III . -- -- 150,000 -- $562,500 David E. Grose, III . . -- -- 60,000 -- $312,500
(1) None of the identified persons exercised options during the fiscal year ended December 31, 1997. 53 60 (2) The value of unexercised in-the-money options is based upon the $16.25 per share closing price of the Company's Common Stock on the AMEX on December 31, 1997. Employment Agreements. The Company has entered into employment agreements with James E. Brown, Edward S. Jacob, III and David E. Grose, III. The aggregate of the annual base salaries for all three executive officers (taken as a group) was $375,000 for the fiscal year ended December 31, 1997. Pursuant to an employment agreement dated December 10, 1996 (the "Brown Agreement"), James E. Brown is employed as President of the Company and, if elected by the Board, the Chairman of the Board. The Brown Agreement provides that Mr. Brown will receive an annual salary of not less than $120,000, subject to annual adjustment in the sole discretion of the Board based upon the performance and accomplishments of Mr. Brown. Currently, Mr. Brown's annual salary is $140,000. If the Company's earnings before deducting interest, taxes and depreciation during any full quarterly period equal or exceed the greater of (i) $1.5 million or (ii) 5% of the sum of the Company's stockholders' equity and long-term debt (averaged on a daily basis throughout such quarterly period), then Mr. Brown will be eligible to receive a quarterly bonus of $12,500. The Brown Agreement also provides for the grant of non-transferable options to purchase 200,000 shares of Common Stock at an exercise price of $5 per share, which options are subject to vesting and other restrictions provided in an option agreement. Pursuant to the Brown Agreement, Mr. Brown purchased 100,000 shares of restricted Common Stock which are subject to vesting in equal amounts annually over a five year period and other restrictions provided in the agreement, including Mr. Brown's continued employment with the Company and Mr. Brown's right, under certain circumstances, to purchase unvested shares for $2.50 per share. See "--Executive Compensation." Mr. Brown is also entitled to reimbursement of reasonable business expenses incurred by him in the performance of his duties, as well as certain fringe benefits. The initial term of the Brown Agreement expires on November 30, 1998 and is subject to extension for additional one-year periods by mutual consent of Mr. Brown and the Company. In the event Mr. Brown's employment is terminated by Mr. Brown voluntarily or by the Company for Due Cause (as defined in the Brown Agreement), Mr. Brown has agreed, for a period of two years thereafter, not to take certain actions in competition with the Company in the states of Oklahoma, Texas, New Mexico, Louisiana or any other state in which the Company then owns, leases or operates its assets. If, in the event of a Change of Control (as defined in the Brown Agreement), Mr. Brown is terminated without Due Cause or Mr. Brown voluntarily elects to terminate his employment for any reason, then Mr. Brown will be entitled to continue to receive his base salary and other employee benefits through the remaining term of the Brown Agreement and to receive a cash payment in an amount equal to any earned but unpaid quarterly bonus for the previous quarter. The Company has entered into employment agreements dated as of January 1, 1997 with Edward S. Jacob, III (the "Jacob Agreement") and July 16, 1997 with David E. Grose, III (the "Grose Agreement" and collectively with the Jacob Agreement, the "Executive Agreements"). Pursuant to the Executive Agreements, Mr. Jacob is employed as Executive Vice President--Operations & Marketing and Mr. Grose is employed as Vice President and Chief Financial Officer. The Jacob Agreement provides that Mr. Jacob will receive an annual salary of not less than $105,000 in 1997 and $115,000 in 1998, subject to annual adjustment in the sole discretion of the Board based upon performance and accomplishments of Mr. Jacob. Currently, Mr. Jacob's annual salary is $130,000. The Grose Agreement provides that Mr. Grose will receive an annual salary of not less than $105,000, subject to annual adjustment in the sole discretion of the Board based upon performance and accomplishments of Mr. Grose. Currently, Mr. Grose's salary is $105,000. If the Company's earnings before deducting interest, taxes and depreciation during any full quarterly period equal or exceed the greater of (i) $1.5 million or (ii) 5% of the sum of the Company's stockholders' equity and long-term debt (averaged on a daily basis throughout such quarterly period), then each of Messrs. Jacob and Grose will be eligible to receive a quarterly bonus of $5,000. The Executive Agreements also provide for the grant of non-transferable options to purchase 50,000 shares of Common Stock to each of Messrs. Jacob and Grose at an exercise price of $5 per share, for Mr. Jacob, and $10 per share, for Mr. Grose. Such options were granted to Mr. Jacob on January 1, 1997 and to Mr. Grose on July 16, 1997 and are subject to vesting and other restrictions. Such options generally become exercisable in equal annual amounts over five years. Each of Messrs. Jacob and Grose are entitled to reimbursement of reasonable business expenses incurred by him in the performance of his duties, as well as certain fringe benefits. The Jacob Agreement also provided for payment to Mr. Jacob of a relocation allowance of $50,000, which was paid by the Company in January 1997. The initial terms of the Jacob Agreement and the Grose Agreement expire on December 54 61 31, 1998 and June 30, 1999, respectively, and are subject to extension for additional one-year periods by mutual consent. Each of the Executive Agreements provides that if the applicable executive officer's employment is terminated by the executive voluntarily or by the Company for Due Cause (as defined in the Executive Agreements), for a period of two years thereafter, the executive will not take certain actions in competition with the Company in the states of Oklahoma, Texas, New Mexico, Louisiana or any other state in which the Company then owns, leases or operates its assets. If, in the event of a Change of Control (as defined in the Executive Agreement), the executive is terminated without Due Cause or the executive voluntarily elects to terminate his employment for any reason, then the executive will be entitled to continue to receive his base salary and other employee benefits through the remaining term of his Executive Agreement and to receive a cash payment in an amount equal to any earned but unpaid quarterly bonus for the previous quarter. 1997 STOCK OPTION AND STOCK AWARD PLAN The description set forth below represents a summary of the principal terms and conditions of the Employee Stock Plan and does not purport to be complete. Such description is qualified in its entirety by reference to the Employee Stock Plan, a copy of which has been filed with the Commission as an exhibit to the Registration Statement of which this Prospectus is a part. GENERAL Purpose. The Company adopted the Employee Stock Plan for the purposes of strengthening the ability of the Company and its subsidiaries to attract, motivate and retain employees of superior capability and encouraging valued employees to have a proprietary interest in the Company. To accomplish these purposes, the Employee Stock Plan provides terms upon which certain eligible employees of the Company and its subsidiaries may be granted stock options ("Options"), stock appreciation rights ("SARs"), restricted stock, performance units, performance shares or phantom stock rights (collectively, "Incentive Awards"). Administration. The Employee Stock Plan is administered by a committee (the "Committee") consisting of two or more non-employee members of the Board elected to the Committee by a majority of the Board. Presently, the members of the Committee are Carl B. Anderson, III and Sidney L. Tassin. Subject to the terms of the Employee Stock Plan, the Committee has the ability to (i) determine, among other things, which full-time employees (by individual or by class) are eligible to receive Incentive Awards and the time or times at which Incentive Awards are granted, (ii) determine the number of shares of Common Stock, Options, SARs, restricted stock awards, performance units or shares or phantom stock rights that will be subject to each Incentive Award and the terms and provisions of each Incentive Award, (iii) interpret the Employee Stock Plan and agreements thereunder, (iv) prescribe, amend and rescind any rules relating to the Employee Stock Plan and (v) make all other determinations necessary for Employee Stock Plan administration. Shares Subject to Employee Stock Plan. As of January 1, 1998, an aggregate of 1,818,394 shares of Common Stock (subject to certain adjustments) may be issued, transferred or exercised pursuant to Incentive Awards under the Employee Stock Plan. If the total number of issued and outstanding shares of Common Stock increases, (other than any increase due to issuances of Common Stock in connection with Incentive Awards under the Employee Stock Plan), then the number of shares reserved under the Employee Stock Plan will be increased one time per year, each January 1 during the existence of the plan, commencing January 1, 1998, such that the number of shares reserved and available for issuance under the Employee Stock Plan will equal 10% of the total number of shares of issued and outstanding Common Stock. Notwithstanding the foregoing, only a total of 400,000 shares of Common Stock reserved under the Employee Stock Plan may be issued, transferred or exercised pursuant to incentive stock options ("ISOs") that comply with the requirements of Section 422 of the Internal Revenue Code of 1986 (the "Code") under the Employee Stock Plan, and the number of shares eligible for such treatment as ISOs shall not be subject to annual adjustment. At the discretion of the Board or the Committee, the shares of Common Stock delivered under the Employee Stock Plan may be made available from (i) authorized but unissued shares, (ii) treasury shares or (iii) previously issued but reacquired shares (or through a combination thereof). 55 62 Eligibility and Participation. The Employee Stock Plan authorizes the Committee to designate, by individual or class, those persons who are eligible to receive Incentive Awards under the Plan ("Participants"). Participants must be employed on a full-time basis by the Company or its subsidiaries. Members of the Board who are not officers or employees of the Company may not be Participants. INCENTIVE AWARDS Except to the extent that the Committee in a written agreement evidencing an Incentive Award (an "Incentive Award Agreement") or the Employee Stock Plan provides otherwise, Incentive Awards vest and become exercisable in equal amounts on the first, second, third, fourth and fifth anniversaries of their grant. For purposes of all Incentive Awards under the Employee Stock Plan, the term "Fair Market Value" means the closing price per share of such Common Stock on the principal stock exchange or quotation system on which the Common Stock is traded or listed on the date of grant or other specified measuring date, or, if there shall have been no such price so reported or listed on that date, on the last preceding date on which a price was so reported or listed. If Common Stock is not publicly traded, then "Fair Market Value" shall mean the value of a share of Common Stock, as determined by the Committee, in the Committee's sole and absolute discretion, at least annually. The Committee may utilize the services of an independent third party in determining the Fair Market Value of the Common Stock for this purpose. The types of Incentive Awards that may be made under the Employee Stock Plan are as follows: Options. Options are rights to purchase a specified number of shares of Common Stock at a specified price. An Option granted pursuant to the Employee Stock Plan may consist of either an ISO or a non-qualified stock option ("NQSO") that does not comply with the requirements of section 422 of the Code. ISOs may not be granted to any employee who owns or would own immediately after the grant of such ISO, directly or indirectly, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (unless at the time of such grant, the incentive stock option price is at least 110% of fair market value and such Option is not exercisable after the expiration of five years from the date of grant). The exercise price for an ISO must be at least equal to fair market value of the Common Stock on the date of grant and the term of such option cannot be greater than 10 years. The exercise price for a NQSO must be equal to at least the greater of (i) the par value of the Common Stock or (ii) 50% of the fair market value of the Common Stock on the date of grant. The exercise price of an Option is payable in cash or an equivalent acceptable to the Committee. At the discretion of the Committee, the exercise price for an Option may be paid in Common Stock valued at fair market value on the exercise date, another Incentive Award valued at fair market value, or a combination thereof equal in value to the exercise price. Subject to the foregoing, the exercise price and other terms and conditions relating to each Option are determined by the Committee at the time of grant. Stock Appreciation Rights. SARs are rights to receive a payment, in cash or Common Stock, equal to the excess of the fair market value of a specified number of shares of Common Stock on the date of exercise over a specified strike price. The Committee may grant SARs in connection with an Option (either at the time of grant or at any time during the term of the Option) or without relation to an Option. For SARs related to Options, the applicable strike price is the exercise price of the related Stock Option and for SARs granted without relationship to an Option, the applicable strike price is the fair market value of a share of Common Stock on the date of grant of the SAR. Options related to SARs cease to be exercisable when the SAR is exercised. Subject to certain exceptions, an SAR granted in connection with an Option is exercisable at such time or times and only to the extent that the related Option is exercisable, and may not be disposed by the holder except to the extent that such related Option may be disposed. The Committee may provide at the date of grant of an SAR for a limit on the amount payable upon exercise of the SAR. Any such limitation must be noted in the agreement evidencing the holder's SAR. Restricted Stock Awards. The Committee may grant shares of restricted stock pursuant to the Employee Stock Plan. Shares of restricted stock may not be disposed of until the restrictions are removed or expire, and the Committee may impose other conditions on such shares as it may deem advisable. The restrictions upon restricted stock awards lapse as determined by the Committee, subject to certain other lapse provisions. Shares of restricted stock may remain subject to certain restrictions as set forth in the restricted stock agreement. Each restricted stock award may have a different restriction period, in the discretion of the Committee. The Committee may, in its discretion, prospectively change the restriction period applicable to a particular restricted stock award. Subject to certain provisions, the 56 63 Committee may, in its discretion, determine what rights, if any, a grantee of a restricted stock award will have with respect to such stock, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. Performance Awards. Performance units or performance shares (collectively, "Performance Awards") may be granted under the Employee Stock Plan subject to the attainment of one or more performance goals. Performance goals may relate to any financial, production, sales or cost performance objectives determined by the Committee at the beginning of a designated period. If minimum performance is achieved or exceeded, the value of a Performance Award will be based on the degree to which actual performance exceeds the preestablished minimum performance standards. The Committee may, at any time, modify the performance measures previously established for a Performance Award as it considers appropriate and equitable. Payments with respect to Performance Awards are made in cash or Common Stock valued at fair market value as of the close of the applicable performance period (or a combination of both) in the discretion of the Committee following the close of the applicable performance period. Phantom Stock Rights. Phantom stock rights entitle a holder, upon conversion, to receive payment of cash or in shares of Common Stock valued at fair market value on the date of conversion of the phantom stock right (or both) in the discretion of the Committee. Upon conversion of a phantom stock right, the Participant shall be entitled to receive payment of an amount determined by multiplying (i) the fair market value of a share of Common Stock on the date of conversion, by (ii) the number of shares of Common Stock as to which such phantom stock right has been converted. Any payment of shares of Common Stock upon conversion of a phantom stock right may be made in shares of restricted stock. ADDITIONAL PROVISIONS OF THE EMPLOYEE STOCK PLAN Expiration of Incentive Awards and Effects of Employment Separation. Except to the extent that the Committee provides otherwise in an Incentive Award Agreement, Incentive Awards (whether or not vested) expire immediately or are forfeited by the recipient upon termination of such recipient's employment with the Company or any subsidiary employing such recipient for any reason other than death, disability or retirement. Most, if not all, of the Incentive Award Agreements provide that vested Incentive Awards are not forfeited if the recipient is terminated for reasons other than Due Cause (as defined in the Incentive Award Agreement). Upon death, retirement, or disability resulting in the cessation of an employee's employment with the Company or its subsidiaries, any unexercised Options or SARs or outstanding phantom stock rights terminate on the date that is 90 days following the date of death, retirement or disability (unless it expires by its terms on an earlier date). In the event of death, disability or retirement, or other reasons that the Committee deems appropriate, the Performance Awards will continue after the date of the applicable event for such period of time as determined by the Committee, subject to the terms of the Incentive Award Agreement or any other applicable agreement, but only to the extent exercisable on the date of the applicable event. If a holder of a restricted stock award ceases to be an employee because of retirement, death, permanent and total disability, or because of other reasons as the Committee deems appropriate, the Committee may determine that restrictions on all or some portion of the restricted stock award subject to restrictions at the time of such employment termination will be deemed to have lapsed. If an eligible employee who has purchased restricted stock under the Employee Stock Plan terminates employment with the Company for any reason, then all shares of restricted stock that have not previously vested will be repurchased by the Company at the cost paid by such employee. In addition, upon an eligible employee's termination of employment with the Company and all of its subsidiaries for any reason (including by reason of death or disability), the Company has the right to purchase from such employee all shares of Common Stock awarded under the Employee Stock Plan on the terms and conditions set forth in the applicable Incentive Award. Adjustment Provisions. The Employee Stock Plan provides that upon the dissolution or liquidation of the Company, certain types of reorganizations, mergers or consolidations, the sale of all or substantially all of the assets of the Company, or a "change of control" (as defined in the Employee Stock Plan), the Committee may determine (without stockholder approval), subject to the terms of any applicable agreement evidencing an Incentive Award, that (i) all or some Incentive Awards then outstanding under the Employee Stock Plan will be fully vested and exercisable or convertible, as applicable, (ii) some or all restrictions on restricted stock lapse immediately, or (iii) there will be a 57 64 substitution of new Incentive Awards by such successor employer corporation or a parent or subsidiary company therefor, with appropriate adjustments as to the number and kind of shares or units subject to such awards and prices. In addition, in the event of a "change of control," the Committee may take certain actions, without stockholder approval, including but not limited to (i) acceleration of the exercise dates of any outstanding SARs or Options or immediate vesting, (ii) acceleration of the restriction (lapse of forfeiture provision) period of any restricted stock award, (iii) grants of SARs to holders of outstanding Options, (iv) payment of cash to holders of Options in exchange for the cancellation of their outstanding Options, (v) payment for outstanding Performance Awards, (vi) acceleration of the conversion dates of outstanding phantom stock rights, (vii) grants of new Incentive Awards or (viii) other adjustments or amendments to outstanding Incentive Awards. Transfer of Incentive Awards. No Incentive Award and no right under the Employee Stock Plan, contingent or otherwise, may be assigned, transferred or otherwise disposed by a recipient other than pursuant to a court order, by will or beneficiary designation, or pursuant to the laws of descent and distribution. Upon an employee's death, the Company has the right to purchase all or some of the Common Stock that such employee obtained pursuant to an Incentive Award at its fair market value within nine months of the employee's death. Amendment and Termination of the Employee Stock Plan. Subject to stockholder approval where expressly required by law, the Board may amend, suspend or terminate the Employee Stock Plan at any time. No amendment, unless approved by the holders of a majority of the outstanding shares of voting stock of the Company may (i) change the class of persons eligible to receive Incentive Awards, (ii) materially increase the benefits accruing to Participants, (iii) increase by more than 10% the number of shares of Common Stock subject to the Employee Stock Plan (except for certain adjustments required by the Employee Stock Plan) or (iv) transfer the administration of the Employee Stock Plan to any person who is not a non-employee director. Except as otherwise provided in the Employee Stock Plan, the Committee may not, without the applicable Participant's consent, modify the terms and conditions of such Participant's Incentive Award. No amendment, suspension, or termination of the Employee Stock Plan may, without the applicable Participant's consent, alter, terminate or impair any right or obligation under any Incentive Award previously granted under the Employee Stock Plan. Unless previously terminated, the Employee Stock Plan will terminate and no more Incentive Awards may be granted after the tenth anniversary of the adoption of the Employee Stock Plan by the Board. The Employee Stock Plan will continue in effect with respect to Incentive Awards granted before termination of the Employee Stock Plan and until such Incentive Awards have been settled, terminated or forfeited. 1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN The description set forth below represents a summary of the principal terms and conditions of the Director Stock Plan and does not purport to be complete. Such description is qualified in its entirety by reference to the Director Stock Plan, a copy of which has been filed with the Commission as an exhibit to the Registration Statement of which this Prospectus is a part. GENERAL Purpose. The Company adopted the Director Stock Plan for the purposes of strengthening the ability of the Company to attract and retain experienced and knowledgeable independent individuals to act as non-employee directors of the Company and encouraging such directors to have a proprietary interest in the Company. To accomplish these purposes, the Director Stock Plan provides terms upon which members of the Board who are not employees of the Company or any of its subsidiaries ("non-employee directors") will be granted non-qualified Options. Administration. The Director Stock Plan is administered by a committee (the "Director Plan Committee") consisting of two or more non-employee directors elected to the Director Plan Committee by a majority of the Board. Currently, the members of the Director Plan Committee are Carl B. Anderson, III, Merrill A. Miller, Jr. and Sidney L. Tassin. Subject to the terms of the Director Stock Plan, the Director Plan Committee has the ability to (i) determine the terms and provisions of the agreements under which Options are granted under the Director Stock Plan, (ii) to interpret the Director Stock Plan and the agreements thereunder, (iii) to prescribe, amend and rescind any rules relating to the Director Stock Plan and (iv) to make all other determinations necessary for the administration of the Director Stock Plan. 58 65 The Director Plan Committee does not have discretion or authority to disregard or change any of the terms and conditions under which Options are granted to non-employee directors. Shares Subject to Director Stock Plan. As of January 1, 1998, an aggregate of 218,207 shares of Common Stock may be issued, transferred or exercised pursuant to Options under the Director Stock Plan (the "Authorized Shares"). If the total number of issued and outstanding shares of Common Stock increases after the consummation of the Initial Public Offering (other than any increase due to issuances of Common Stock in connection with awards of Options under the Director Stock Plan), then the number of Authorized Shares automatically increases one time per year, commencing January 1, 1998 and occurring each January 1 thereafter during the existence of the Director Stock Plan, by a sufficient number of shares of Common Stock such that the number of Authorized Shares reserved and available for issuance under the Plan shall equal 1.2% of the total number of shares of issued and outstanding Common Stock. As a result, on January 1, 1998, the number of Authorized Shares increased to 218,207 shares. At the discretion of the Board or the Director Plan Committee, the shares of Common Stock delivered under the Director Stock Plan may be made available from (i) authorized but unissued shares, (ii) treasury shares or (iii) previously issued but reacquired shares (or through a combination thereof). Eligibility and Participation. Each non-employee director is automatically eligible to participate in the Director Stock Plan unless he does not retain the annual retainer to which he is entitled for service on the Board. No non-employee director may be issued an Option to acquire more than 15,000 shares of Common Stock in any plan year. OPTIONS Automatic Initial and Annual Awards of Options. Upon the consummation of the Initial Public Offering, each person who was then a non-employee director received, and thereafter on the date at which a person first becomes a non-employee director, such non-employee director will receive, a one-time grant of an Option to acquire 15,000 shares of Common Stock (an "Initial Award"), which shall be exercisable on or after November 4, 1998 except for the Initial Award granted to Mark Liddell, which shall be exercisable on or after November 24, 1998. In each year succeeding the year in which a non-employee director receives an Initial Award, the non-employee director, if reelected to the Board, will be granted an additional Option to acquire 5,000 shares of Common Stock (an "Annual Award"). Annual Awards will be made as of the date of the Company's regular annual meeting of stockholders and will be immediately exercisable. No Option granted as an Initial Award or Annual Award will be exercisable after the tenth anniversary of the date of grant. Retainer Options. Under the Director Stock Plan, a non-employee director may elect to receive, in lieu of any or all of the annual cash retainer he would otherwise receive in cash during the succeeding plan year (currently $10,000 annually), Options for the purchase of a number of shares equal to the amount of the annual retainer so forgone divided by the fair market value of the Common Stock on the date of grant. Exercise Price. Each Option granted pursuant to the Director Stock Plan will be exercisable at a per share price equal to the fair market value of a share of Common Stock as of the date of grant. Such price may be paid in cash or, in the discretion of the Director Plan Committee, by assigning to the Company shares equal in value to the exercise price. Termination. Except to the extent the Director Plan Committee provides otherwise in the agreement evidencing an Option under the Director Stock Plan, all Options granted under the Director Stock Plan that are held by a non-employee director will expire and be forfeited upon the date of resignation or removal from the Board of such non-employee director, unless such resignation or removal results from the death or permanent and total disability of the director, or resignation upon the attainment of 65 years. Upon such death, disability or resignation at age 65, such Options will remain exercisable and effective for six months following the date of the event causing the non-employee director to cease membership on the Board. Effect of Corporate Changes. In the event of certain significant corporate changes, including (i) dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation (other than for purposes of reincorporation 59 66 in a different state) in which the Company is not the survivor, (iii) the sale of all or substantially all of the assets of the Company, or (iv) a Change of Control (as defined in the Director Stock Plan), subject to the terms of any applicable agreement, the Director Plan Committee may, in its discretion, without obtaining stockholder approval, take any one or more of the following actions: (a) determine that all or some Options then outstanding will be fully vested and exercisable, (b) substitute new Options by a successor employer with appropriate adjustments as to the number and kind of shares subject to such awards and prices or (c) cancel such Options and pay the non-employee directors or their beneficiaries the difference between the exercise price and the fair market value of the shares subject to the Options as of the date of such corporate change. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is composed of Carl B. Anderson, III and Sidney L. Tassin, neither of whom are employees or current or former officers of the Company. See "Board of Directors--Board Committees." Mr. Anderson and Mr. Tassin each had direct or indirect interests in certain transactions described in "Certain Relationships and Related Transactions." INDEMNIFICATION AGREEMENTS The Company has entered into Indemnification Agreements (the "Indemnification Agreements") with its directors and certain of its officers (the "Indemnitees"). Under the terms of the Indemnification Agreements, the Company is required to indemnify the Indemnitees against certain liabilities arising out of their services for the Company. The Indemnification Agreements require the Company to indemnify each Indemnitee to the fullest extent permitted by law and to advance certain expenses incurred by an Indemnitee. The Indemnification Agreements provide limitations on the Indemnitees' rights to indemnification in certain circumstances. To the extent that indemnification provisions contained in the Indemnification Agreements purport to include indemnification for liabilities arising under the Securities Act, the Company has been informed that in the opinion of the Commission, such indemnification is contrary to public policy and is therefore unenforceable. 60 67 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of July 14, 1998 by (i) each person known by the Company to own more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) the Chief Executive Officer of the Company and each of the two other persons who served as executive officers of the Company during 1997, (iv) all parties to the Stockholders and Voting Agreement as a group and (v) all executive officers and directors as a group. All persons listed have an address in care of the Company's principal executive offices and have sole voting and investment power with respect to their shares unless otherwise indicated.
COMMON STOCK BENEFICIALLY OWNED(1) --------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE(2) Charles E. Davidson . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,708,231 9.4% 411 West Putnam Avenue Greenwich, Connecticut 06830 Carl B. Anderson, III . . . . . . . . . . . . . . . . . . . . . . . . . . 1,288,000(3)(4) 7.1 c/o AnSon Partners Limited Partnership 4005 Northwest Expressway, Suite 400E Oklahoma City, Oklahoma 73116 Energy Spectrum LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000(5) 6.0 5956 Sherry Lane, Suite 600 Dallas, Texas 75225 James E. Brown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,000(6) 1.7 Edward S. Jacob, III . . . . . . . . . . . . . . . . . . . . . . . . . . --(7) -- David E. Grose, III . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000(8) * Mark Liddell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,515(4) 1.6 6307 Waterford Boulevard, Suite 100 Oklahoma City, Oklahoma 73118 Merrill A. Miller, Jr . . . . . . . . . . . . . . . . . . . . . . . . . . --(4) -- c/o National-Oilwell, Inc. 5555 San Felipe Houston, Texas 77056 Sidney L. Tassin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000(4)(9) 6.0 c/o Energy Spectrum Partners LP 5956 Sherry Lane, Suite 600 Dallas, Texas 75225 Lew O. Ward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423,125(4)(10) 2.3 c/o Ward Petroleum Corporation 502 South Fillmore Road Enid, Oklahoma 73703 All parties to the Stockholders and Voting Agreement as a group(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,583,110 25.0 All directors and executive officers as a group (8 persons) . . . . . . . 3,415,640(12) 18.4
- ------------------- * Less than one percent. (1) The information contained in this table with respect to beneficial ownership reflects "beneficial ownership" as defined in Rule 13d-3 under the Exchange Act. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options or warrants held by that person that are exercisable on July 14, 1998 or become exercisable within 60 days following July 14, 1998 are deemed outstanding. However, such shares are not deemed outstanding for the purpose of 61 68 computing the percentage ownership of any other person. All information with respect to the beneficial ownership of any stockholder has been furnished by such stockholder and, unless otherwise indicated, each stockholder has sole voting and investment power with respect to the shares listed as beneficially owned by such stockholder, subject to community property laws where applicable. (2) Percentage of ownership is based on 18,193,945 shares of Common Stock outstanding. (3) Includes (i) 1,018,000 shares held of record by APLP, of which Mr. Anderson is managing general partner, (ii) 170,000 shares held of record by James E. Brown that are subject to voting rights retained by Mr. Anderson pursuant to an irrevocable proxy and (iii) 100,000 shares held of record and beneficially by Mr. Anderson. (4) Excludes 20,000 shares of Common Stock that may be acquired upon exercise of options granted pursuant to the Director Stock Plan. None of such options are exercisable within the next 60 days. (5) Represents shares of Common Stock (including 112,000 shares of Common Stock that may be acquired within the next 60 days upon exercise of outstanding Series B Warrants) held of record by Energy Spectrum Partners LP, of which Energy Spectrum Capital LP is the sole general partner. Energy Spectrum LLC is the sole general partner of Energy Spectrum Capital LP and possesses sole voting and investment power with respect to such shares. Sidney L. Tassin, as President and a member of Energy Spectrum LLC, may be deemed to have beneficial ownership of these shares. Mr. Tassin disclaims beneficial ownership of such shares. (6) Includes (i) 100,000 shares of Common Stock held by Mr. Brown which vest pro rata over five years starting on December 10, 1997 and are subject to certain restrictions on resale and provisions for the repurchase by the Company at a specified price and upon certain conditions, including termination of employment with the Company, (ii) 170,000 shares for which an irrevocable voting proxy has been granted to Carl B. Anderson, III and (iii) 40,000 shares subject to options granted pursuant to the Employee Stock Plan that are currently exercisable. Excludes options to purchase an aggregate of 360,000 shares held by Mr. Brown which were granted pursuant to the Employee Stock Plan, subject to vesting and other conditions contained in stock option agreements, none of which options are exercisable within the next 60 days. (7) Excludes options to purchase an aggregate of 180,000 shares held by Mr. Jacob which were granted pursuant to the Employee Stock Plan, subject to vesting and other conditions contained in stock option agreements, none of which options are exercisable within the next 60 days. (8) Includes 10,000 shares subject to options granted pursuant to the Employee Stock Plan that are currently exercisable. Excludes options to purchase an aggregate of 50,000 shares held by Mr. Grose which were granted pursuant to the Employee Stock Plan, subject to vesting and other conditions contained in stock option agreements, none of which options are exercisable within the next 60 days. (9) Represents shares held of record by Energy Spectrum Partners LP and beneficially by Energy Spectrum LLC. Mr. Tassin, a director of the Company, is the President of Energy Spectrum LLC, which is the ultimate general partner of Energy Spectrum Partners LP. Mr. Tassin disclaims beneficial ownership of such shares. See note (5) above. (10) Includes (i) 253,725 shares held of record by Will-Cas Investments, L.P., a family limited partnership controlled by Ward Petroleum and family trusts for the benefit of Mr. Ward's children, William C. Ward and Casidy Ward, of which they act as trustees, and (ii) 169,400 shares that may be acquired within the next 60 days upon the exercise of outstanding warrants held by Will-Cas Investments, L.P. (11) The parties to the Stockholders and Voting Agreement are Energy Spectrum, APLP, Carl B. Anderson, III, Mike Liddell, Mark Liddell and Charles E. Davidson. See "Certain Relationships and Related Transactions--Stockholders and Voting Agreement." 62 69 (12) Includes (i) 112,000 shares that may be acquired by Energy Spectrum Partners LP within the next 60 days upon the exercise of outstanding Series B Warrants, (ii) 170,000 shares subject to voting rights retained by Mr. Anderson, (iii) 100,000 shares of restricted stock held by Mr. Brown, (iv) 40,000 shares subject to options granted to Mr. Brown pursuant to the Employee Stock Plan that are currently exercisable and (v) 169,400 shares that may be acquired by Will-Cas Investments, L.P. within the next 60 days upon the exercise of outstanding warrants. 63 70 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following discussion identifies certain of the Company's relationships and related transactions since January 1, 1997 in which any director or executive officer of the Company, any person known to the Company to own of record or beneficially over 5% of the Common Stock, or any member of the immediate family of any such persons had, or has, a direct or indirect material interest. Transactions involving any former directors of the Company that have occurred since the formation of the Company in December 1996 are also included. Charles E. Davidson, Energy Spectrum and APLP are each record or beneficial owners of over 5% of the Common Stock. Prior to the Initial Public Offering, Chesapeake and the Oliver Companies were record or beneficial owners of over 5% of the Common Stock. Prior to April 28, 1998, DLB was the record and beneficial owner of over 5% of the Common Stock. Three of the Company's former directors, Aubrey K. McClendon, Tom L. Ward and Marcus C. Rowland, are stockholders, executive officers and/or directors of Chesapeake. One of the Company's directors, Sidney L. Tassin, and one of the Company's former directors, James W. Spann, are executive officers and partners of the ultimate general partner of Energy Spectrum. Roy T. Oliver, a former director of the Company, is a director, executive officer and significant stockholder of certain of the Oliver Companies. Mike Mullen is a director, executive officer and significant stockholder of certain of the Oliver Companies. Prior to the Ward Acquisition, Lew O. Ward, a director of the Company, was a director, executive officer and significant stockholder of Ward. Carl B. Anderson, III, a director of the Company, and Robert E. Bell, a former director of the Company, are directors, executive officers and holders of substantial ownership interests in APLP (of which Anadarko was a subsidiary). James E. Brown is a director and executive officer of the Company and, prior to the formation of the Company, was a director and executive officer of Anadarko. Edward S. Jacob, III and David E. Grose, III are each executive officers of the Company. Each of such persons and entities has or had a direct or indirect material interest in one or more of the arrangements and transactions described below. REGISTRATION RIGHTS AGREEMENTS The Company and certain of its investors, including certain directors, officers and significant stockholders, are party to a Registration Rights Agreement (the "Registration Rights Agreement") covering shares of Common Stock, including the shares of Common Stock issuable upon the exercise of options, warrants and other Company securities (collectively, "Common Stock Equivalents"), owned by such investors (the "Registrable Securities"). The Registration Rights Agreement applies to Registrable Securities owned by Energy Spectrum, APLP, the Oliver Companies and certain of their affiliates, Ward and certain of its transferees, Carl B. Anderson, III, James E. Brown, Edward S. Jacob, III, David E. Grose, III and certain other persons. As of July 14, 1998, up to 3,664,725 outstanding shares of Common Stock and 1,057,000 Common Stock Equivalents (610,000 of which remain subject to further vesting pursuant to the Employee Stock Plan and the Director Stock Plan) were subject to the Registration Rights Agreement. The Registration Rights Agreement provides, among other things, that (subject to customary "black-out" periods) certain holders of Registrable Securities with a minimum aggregate share value of at least $20 million may require the Company to effect the registration under the Securities Act of the Registrable Securities owned by such holders, subject to certain limitations. The Registration Rights Agreement also provides certain "piggyback" registration rights to the holders of Registrable Securities whenever the Company proposes to register an offering of any of its capital stock under the Securities Act, subject to certain exceptions, including pro rata reduction if, in the reasonable opinion of the managing underwriter of the offering, such a reduction is necessary to prevent an adverse effect on the marketability or offering price of all the securities proposed to be offered in such offering. The Registration Rights Agreement contains customary provisions regarding the payment of expenses by the Company and regarding mutual indemnification agreements between the Company and the holders of Registrable Securities for certain securities law violations. In connection with the Bonray Acquisition, the Company entered into a registration rights agreement (the "DLB Registration Rights Agreement") for the benefit of DLB and Donaldson, Lufkin & Jenrette Securities Corporation, its financial advisor with respect to such transaction. The DLB Registration Rights Agreement covers 3,015,000 shares of Common Stock issued in the Bonray Acquisition. Pursuant to the DLB Registration Rights Agreement, on December 31, 1997, the Company filed with the Commission a Registration Statement on Form S-1 (Registration No. 333-43535) 64 71 relating to the registration of the distribution (the "DLB Distribution") by DLB of 2,955,000 shares of Common Stock to the shareholders of DLB. On March 30, 1998, such Registration Statement was declared effective by the Commission and on April 28, 1998, the merger effecting the DLB Distribution was consummated and 2,955,000 shares of Common Stock formerly held by DLB were distributed to the former stockholders of DLB. The DLB Registration Rights Agreement requires the Company to pay expenses associated with the DLB Distribution. In addition, the DLB Registration Rights Agreement contains customary provisions regarding mutual indemnification agreements between the Company and the holders of registrable securities for certain securities law violations. The foregoing summary of the principal provisions of the Company's registration rights agreements does not purport to be complete and is subject to, and qualified in its entirety by reference to, all of the provisions of the Registration Rights Agreement and the DLB Registration Rights Agreement, copies of which have been filed with the Commission as exhibits to the Registration Statement of which this Prospectus is a part. STOCKHOLDERS AND VOTING AGREEMENT The Company is party to the Stockholders and Voting Agreement among Energy Spectrum, APLP, Carl B. Anderson, III, Charles E. Davidson, Mark Liddell and Mike Liddell that provides for certain agreements regarding the corporate governance of the Company, transfer restrictions on shares of Common Stock and Common Stock Equivalents (as defined in the Stockholders and Voting Agreement), and other customary terms and conditions. DLB, which was formerly a party to the Stockholders and Voting Agreement, ceased to be a party to that agreement upon the consummation of the DLB Distribution. At that time, Messrs. Liddell and Mr. Davidson (the "DLB Group") were added as parties to the Stockholders and Voting Agreement. As of July 14, 1998, the current parties to the Stockholders and Voting Agreement beneficially owned approximately 4,583,110 shares of Common Stock, representing approximately 25.0% of the outstanding shares of Common Stock. The Stockholders and Voting Agreement will terminate on November 4, 2007. Board Representation. The Stockholders and Voting Agreement provides that the Board shall not consist of more than ten members. In addition, the Stockholders and Voting Agreement provides that, certain stockholders who are party thereto have the right to designate a specified number of persons to be nominated for election as directors. Each of Energy Spectrum and APLP have the right to designate one nominee for director as follows: (i) Energy Spectrum has the right to designate one nominee for director as long as it owns at least (a) 5% of the outstanding Common Stock of the Company, (b) 50% in principal amount of the Subordinated Notes purchased by it in the May Financing or (c) 600,000 shares of Common Stock and (ii) APLP has the right to designate one nominee for director as long as it owns at least (a) 5% of the outstanding Common Stock of the Company or (b) 600,000 shares of Common Stock. The DLB Group, which formerly had the right to designate one nominee for director as long as the DLB Group owned at least 5% of the outstanding Common Stock of the Company, irrevocably waived such right effective June 2, 1998. The parties to the Stockholders and Voting Agreement (the "Bound Stockholders") are obligated to vote all of their voting securities (including certain Common Stock Equivalents) of the Company for these designees. Certain Transfer Restrictions. In accordance with the Stockholders and Voting Agreement. The Bound Stockholders have agreed that any such Bound Stockholder holding 5% or more of the Common Stock (on a fully diluted basis) shall not, subject to certain exceptions, transfer 5% or more of the Common Stock (on a fully diluted basis) unless such Bound Stockholder has received the prior written consent of the Board, with any member of the Board designated by such Bound Stockholder abstaining. The foregoing summary of the material provisions of the Stockholders and Voting Agreement does not purport to be complete and is subject to, and qualified in its entirety by reference to, all of the provisions of such agreement, a copy of which has been filed with the Commission as an exhibit to the Registration Statement of which this Prospectus is a part. 65 72 CERTAIN ARRANGEMENTS RELATED TO THE CONSOLIDATION TRANSACTIONS THE FORMATION TRANSACTIONS The Company was formed in December 1996 through a series of affiliated entity transactions in which the Company became the successor to Anadarko, the contract drilling subsidiary of privately held APLP. In connection with the Formation Transactions (i) APLP contributed ten drilling rigs, including two rigs requiring refurbishment, for 2,000,000 shares of Common Stock, (ii) the Oliver Companies exchanged six drilling rigs requiring refurbishment for 1,600,000 shares of Common Stock, (iii) Energy Spectrum acquired 2,000,000 shares of Common Stock for $10 million and (iv) Chesapeake entered into drilling contracts with two-year terms for six of the Company's rigs in consideration for the Chesapeake Option. See "Business-- Formation and Other Transactions." In connection with the Formation Transactions, the ten rigs acquired from APLP were valued at an aggregate of $10.8 million, the six rigs acquired from the Oliver Companies were valued at an aggregate of $9.5 million and the six Chesapeake Drilling Agreements were valued at an aggregate of $1.1 million. The valuations of the rigs acquired in the Formation Transactions from APLP and the Oliver Companies, the values placed upon the Chesapeake Drilling Agreements and the consideration to be received by each such founder were determined and established through negotiations among representatives of APLP and Anadarko (including Carl B. Anderson, III), Energy Spectrum (including Sidney L. Tassin), the Oliver Companies (including Roy T. Oliver and Mike Mullen) and Chesapeake (including Aubrey McClendon), taking into account the then existing market values of available rigs, the anticipated costs to complete the necessary refurbishment of the contributed rigs and the expected values of revenues to be received by the Company from the Chesapeake Drilling Agreements. Three of the rigs acquired by the Company from APLP were acquired by APLP within the two years prior to their contribution to the Company. APLP acquired one rig in each of August, September and October 1996 for $1.3 million, $922,000 and $450,000, respectively. At the time of their contribution to the Company, such rigs were valued on the books of the Company at $2.7 million. Four of the rigs acquired by the Company from the Oliver Companies were acquired by the contributing party within the two years prior to their contribution to the Company at an aggregate cost of $2.6 million. At the time of their contribution to the Company, such rigs were valued on the books of the Company at $4.4 million. Chesapeake Option. Upon issuance by the Company, the Chesapeake Option provided Chesapeake with the right to purchase up to 2,000,000 shares of Common Stock from the Company at an exercise price of $6 per share. The Chesapeake Option would have expired (i) as to 668,000 shares, on December 5, 2000 and (ii) as to 1,332,000 shares, on December 5, 1998, subject to extension to December 5, 2000 if Chesapeake extended four of the Chesapeake Drilling Agreements for additional two-year terms. In August 1997, Chesapeake relinquished the Chesapeake Option in connection with the Chesapeake Transactions. See "--Chesapeake Transactions." Chesapeake Drilling Agreements. In December 1996 in connection with the Formation Transactions, Chesapeake and its operating subsidiary (collectively referred to in this discussion as "Chesapeake") entered into drilling contracts (the "Chesapeake Drilling Agreements") with the Company pursuant to which Chesapeake agreed to engage six of the Company's rigs for two-year terms. Through December 31, 1997, the Company had recognized aggregate revenues of $11.3 million from the Chesapeake Drilling Agreements. Under the terms of the Chesapeake Drilling Agreements, the standard day rates were subject to upward, but not downward, adjustment annually in November to the average then-current market rates for the areas of operation, less $100 per day. The Company and Chesapeake were required to consider such adjustment each November during the term of the applicable Chesapeake Drilling Agreement and if no agreement could be timely reached as to the appropriate rate adjustment, the Company had the option to terminate the contract for such rig at the conclusion of operations at the well then being drilled. In December 1997, the Company and Chesapeake were unable to agree on an appropriate rate adjustment, so the Company exercised its option to terminate the Chesapeake Drilling Agreements. At June 15, 1998, three of the Company's six rigs formerly covered by the Chesapeake Drilling Agreements remained under contract with Chesapeake on a well-to-well basis. 66 73 In addition to the Chesapeake Drilling Agreements, during the year ended December 31, 1997, Chesapeake engaged five of the Company's rigs under short term drilling contracts on standard daywork terms. The Company recognized aggregate revenues of $7.1 million from such contracts over that period. The Company recognized aggregate revenues of $18 million over that period from all drilling contracts with Chesapeake. Oliver Companies' Put Rights. Also in connection with the Formation Transactions, the Company granted the Oliver Companies a right, exercisable at any time between June 2, 1998 and July 2, 1998 if the Company had not previously completed an initial public offering, to require the Company to either (at the Company's option) (i) repurchase all 1,600,000 of the shares of Common Stock held by the Oliver Companies for an aggregate purchase price of $12 million ($7.50 per share) in cash or (ii) issue to the Oliver Companies an aggregate of 400,000 additional shares of Common Stock. This right terminated upon consummation of the Initial Public Offering. Fees Paid to Energy Spectrum. In January 1997, the Company paid Energy Spectrum Capital LP ("ESC"), the general partner of Energy Spectrum, a fee in the amount of $300,000 in consideration for assistance provided by Energy Spectrum in the structuring of the Formation Transactions and arrangement and negotiation of external financing. The Company also reimbursed ESC for expenses incurred in connection with the rendering of such services. THE WARD ACQUISITION On May 31, 1997, the Company completed the Ward Acquisition involving the acquisition by the Company of all of the issued and outstanding common units of a subsidiary of Ward that held six drilling rigs in consideration for $8 million in cash, 400,000 shares of Common Stock and a warrant (the "Ward Warrant") to purchase up to 200,000 shares of Common Stock at an exercise price of $10 per share. The Ward Warrant is exercisable at any time on or before the later of (i) May 30, 2000 or (ii) one year after the completion of an initial public offering of the Common Stock (which was satisfied by the Initial Public Offering), but no later than June 1, 2003. In connection with the Ward Acquisition, the Company entered into an agreement (the "Ward Transportation Agreement") with Geronimo Trucking Company ("Geronimo"), a company owned and controlled by Lew O. Ward, a director of the Company. The Ward Transportation Agreement provides that the Company will have a preferential right to engage Geronimo's trucking services for covered transportation needs and that Geronimo will make its trucking services available to the Company at rates that are competitive in the area. The Ward Transportation Agreement also provides Geronimo with the preferential right to perform trucking services contracted for by the Company for the movement of the rigs acquired by the Company in the Ward Acquisition. The Company is obligated to allow Geronimo to bid on any covered rig movement required by the Company and to allow Geronimo the opportunity to match or better any bid received from a third party. Unless earlier terminated by the parties, the Ward Transportation Agreement is effective through May 2000. The Company paid an aggregate of $338,000 under the Ward Transportation Agreement for the year ended December 31, 1997 and approximately $509,000 from January 1, 1998 through June 15, 1998. THE BONRAY ACQUISITION In October 1997, the Company acquired all of the issued and outstanding capital stock of Bonray from DLB in consideration for the issuance of 3,015,000 shares of Common Stock. In connection with the Bonray Acquisition, DLB obtained certain rights to require the Company to effect the registration under the Securities Act of the shares of Common Stock acquired by DLB in the Bonray Acquisition. See "-- Registration Rights Agreements." Additionally, prior to the DLB Distribution, DLB was a party to the Stockholders and Voting Agreement and was entitled to designate one Board nominee as long as it owned at least 5% of the Common Stock of the Company. As a result of the DLB Distribution, the members of the DLB Group became parties to the Stockholders and Voting Agreement and are entitled to designate one Board nominee as long as the DLB Group owns at least 5% of the Common Stock of the Company. See "-- Stockholders and Voting Agreement." 67 74 INDIVIDUAL RIG ACQUISITIONS In May 1997, the Company purchased from R.T. Oliver Drilling, Inc. two drilling rigs for an aggregate purchase price consisting of $3.3 million in cash and warrants (the "Oliver Warrants") for the purchase of an aggregate of 100,000 shares of Common Stock at an exercise price of $8 per share. One of the Oliver Warrants was issued to RR&T, Inc., an affiliate of Roy T. Oliver, and the other was issued to Mike Mullen. Each of the Oliver Warrants expires on May 1, 2000 and is separately exercisable for 50,000 shares of Common Stock. CERTAIN FINANCING ARRANGEMENTS On May 1, 1997, the Company completed the May Financing in which the Company issued shares of Common Stock, subordinated notes and warrants to purchase Common Stock to certain significant stockholders in exchange for an aggregate of $28.5 million in cash, as described below. The following summary of terms of the May Financing does not purport to be complete and is qualified in its entirety by reference to the Securities Purchase Agreement, dated as of April 30, 1997 (the "May Securities Purchase Agreement"), the Subordinated Notes, Series A Warrants and Series B Warrants, copies or forms of which are filed with the Commission as exhibits to the Registration Statement relating to the Initial Public Offering. Common Stock and Subordinated Notes. In the May Financing, the Company issued 1,000,000 shares of Common Stock to Chesapeake in consideration for $7 million in cash and 140,000 shares of Common Stock to Energy Spectrum in consideration for $980,000 in cash. Additionally, the Company issued the Subordinated Notes due May 1, 2003 in the original principal amounts of $18 million and $2.52 million to Chesapeake and Energy Spectrum, respectively. The Subordinated Notes bore interest at the Company's option at either (i) 11% per annum, payable in cash, or (ii) 12.875% per annum, payable in the form of additional Subordinated Notes, which interest was payable quarterly in arrears. On each quarterly interest payment date, the Company was entitled to make an election as to the interest rate to be applied for the previous quarter. The Subordinated Notes were redeemable, solely at the option of the Company, in whole or in part, at any time at varying redemption prices. The Company was obligated to offer to redeem the Subordinated Notes upon the occurrence of certain events constituting a "Change of Control" (as defined in the Subordinated Notes) at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of redemption. The Subordinated Notes were convertible into Common Stock at the option of the Company, in whole or in part, in conjunction with a "Convertible Event" (as defined in the Subordinated Notes), which includes certain underwritten public offerings (including the Initial Public Offering), mergers, consolidations and other business combination transactions. The Subordinated Notes were general unsecured subordinated obligations of the Company that were subordinated in right of payment to all existing and future senior indebtedness of the Company, pari passu with all existing and future subordinated indebtedness of the Company and senior in right of payment to all future junior subordinated indebtedness of the Company. Upon consummation of the Initial Public Offering, the Company redeemed in full the $18 million principal amount of Subordinated Notes issued to Chesapeake in consideration for the payment by the Company to Chesapeake of $18.2 million in cash, based on the price to public in the Initial Public Offering. See "--Chesapeake Transactions." In April 1998, the Company redeemed in full the remaining $2.52 million principal amount of Subordinated Notes, together with accrued interest of $47,740. In connection therewith, Energy Spectrum waived its right to require the Company to redeem the Subordinated Notes at 110% of par value. In May 1997, the Company paid Chesapeake a commitment fee of $250,000 in connection with the funding of the Common Stock and Subordinated Notes in the May Financing. Warrants. In the May Financing, the Company also issued two series of detachable warrants (the "Warrants") for the purchase of shares of Common Stock, designated as "Series A Warrants" and "Series B Warrants." The Warrants are exercisable on or prior to May 1, 2003 at a price of $0.01 per share in the case of the Series A Warrants and $7.50 per share in the case of the Series B Warrants. In the May Financing, Chesapeake was issued Series A Warrants and Series B Warrants representing the right to purchase 700,000 shares and 800,000 shares of Common Stock, respectively, and Energy Spectrum was issued Series A Warrants and Series B Warrants representing the right to purchase 98,000 shares and 112,000 shares of Common Stock, respectively. The Warrants expire on May 1, 2003 and are exercisable (i) at any time with a cash payment or (ii) pursuant to a cashless exercise at any time after the completion of a "Qualified IPO" (as defined in the Warrants), which includes certain underwritten public offerings (including the Initial Public 68 75 Offering), mergers, consolidations and other business combination transactions. The exercise prices, as well as the number and kind of shares issuable under the Warrants, are subject to adjustment upon the happening of certain events described in the Warrants, including, the payment of in-kind dividends or distributions and the subdivision, reclassification or recapitalization of the Common Stock, whether in connection with a consolidation or merger or otherwise. On July 31, 1997, Energy Spectrum exercised in full its Series A Warrants. On the date hereof, Energy Spectrum holds all of the Series B Warrants issued to it in the May Financing. In August 1997, Chesapeake relinquished its Series A Warrants and Series B Warrants as part of the Chesapeake Transactions. See "--Chesapeake Transactions." CHESAPEAKE TRANSACTIONS In August 1997, Chesapeake and the Company agreed to complete a series of transactions (the "Chesapeake Transactions") pursuant to which the Company issued 3,194,000 shares of Common Stock to Chesapeake in consideration for (i) $9 million in cash, (ii) the relinquishment and cancellation of the Chesapeake Option and the Warrants issued to Chesapeake in connection with the May Financing and (iii) the redemption in full of the $18 million principal amount of Subordinated Notes held by Chesapeake at a cash redemption price of $18.2 million which was paid from the proceeds of the Initial Public Offering. Also in connection with the Chesapeake Transactions, the Company waived its right under the May Securities Purchase Agreement to require Chesapeake to purchase additional Common Stock, Warrants and Subordinated Notes for $3 million. OTHER RELATED PARTY TRANSACTIONS AND ARRANGEMENTS Weatherford Storage Yard. In connection with the Formation Transactions, Anadarko granted the Company a transferrable option, exercisable at any time prior to June 30, 1998, to either purchase from Anadarko a storage yard located in Weatherford, Oklahoma (the "Weatherford Storage Yard") for a price of $1,000 in cash or lease from Anadarko, for any period specified by the Company through a date not later than December 31, 1999, the Weatherford Storage Yard for a lease price of $100 per year. In August 1997, the Company acquired from Anadarko approximately five acres of land also in Weatherford, Oklahoma, in consideration for the relinquishment of the Company's option to acquire or lease the Weatherford Storage Yard. Fees Paid to Energy Spectrum. In May 1997, the Company paid ESC a fee in the amount of $220,000 for financial advisory and other services rendered to the Company in connection with the evaluation, negotiation and closing of the Trend Acquisition, for assistance in the arrangement of alternative financing sources, and for structuring, negotiating and closing the amended financing arrangements with CIT and Fleet. The Company also reimbursed ESC for expenses incurred in connection with the rendering of such services. Fees Paid to Energy Spectrum Advisors. The Company has engaged Energy Spectrum Advisors Inc. ("ESA") to provide financial advisory and investment banking services to the Company in connection with a possible restructuring or refinancing of the Company's existing funded debt. As compensation for such services, the Company has agreed to pay ESA an initial fee of $50,000 and an additional fee of $25,000 per month through the term of the engagement. The engagement letter expires on June 30, 1998. Through June 15, 1998, the Company has paid $150,000 in fees to ESA in connection with this arrangement. ESA is an affiliate of Energy Spectrum, which is the beneficial owner of approximately 6% of the Common Stock. Sidney L. Tassin, a director of the Company designated to serve on the Board by Energy Spectrum pursuant to the Stockholders and Voting Agreement, has a right under certain circumstances to acquire, and as a result may be deemed to beneficially own, a minority equity interest in ESA. Transactions with Affiliates of Roy T. Oliver. The Company has in the past purchased drilling rig equipment from U.S. Rig & Equipment, Inc., an affiliate of Roy T. Oliver, a former director of the Company and control person of certain of the Oliver Companies. From December 1996 through December 31, 1997, the Company paid U.S. Rig & Equipment, Inc. an aggregate of $5 million in connection with such purchases. Additionally, in August 1997, the Company sold to an affiliate of Mr. Oliver one rig acquired in the Trend Acquisition that did not meet the Company's operational and technical standards. The Company believes that the $500,000 price received by the Company in that sale is equivalent to the price that would have been received from an unaffiliated third party. Furthermore, in the Oliver Acquisition, which was completed in January 1998, the Company acquired six rigs and related drilling equipment from 69 76 R.T. Oliver Drilling, Inc. for $14 million. Such rigs will require additional refurbishment prior to placement into service. APLP Trucking Services. The Company has engaged affiliates of APLP for the provision of trucking services related to the movement of the Company's rigs on numerous occasions. For the year ended December 31, 1997 and three months ended March 31, 1998, the Company paid such affiliates of APLP an aggregate of approximately $1.7 million in consideration for such trucking services. APLP Administrative Services. From December 13, 1996 through December 31, 1997, APLP made available to the Company certain of APLP's employees, office space and administrative equipment, such as computer and telephone systems. In consideration for such assistance, the Company reimbursed APLP an aggregate of approximately $236,000. 70 77 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER The Old Notes were originally sold by the Company on June 26, 1998 to the Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers subsequently resold the Old Notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act and pursuant to offers and sales that occurred outside the United States within the meaning of Regulation S under the Securities Act. As a condition to the completion of the Old Notes Offering, the Company entered into the Exchange Offer Registration Rights Agreement with the Initial Purchasers pursuant to which the Company agreed to file with the Commission the Exchange Offer Registration Statement on the appropriate form under the Securities Act with respect to an offer to exchange the Old Notes for Exchange Notes. The Exchange Notes will be substantially identical to the Old Notes, except that the Exchange Notes will bear a Series B designation and will have been registered under the Securities Act and, therefore will not contain terms with respect to transfer restrictions (other than those that might be imposed by state securities laws). Under existing interpretations of the staff of the Commission, the Exchange Notes would, in general, be freely transferable after the Exchange Offer without further registration under the Securities Act. However, any purchaser of Old Notes who is an "affiliate" of the Company or intends to participate in the Exchange Offer for the purpose of distributing the Exchange Notes (i) will not be able to rely on the interpretations of the staff of the Commission, (ii) will not be able to tender its Old Notes in the Exchange Offer and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Old Notes, unless such sale or transfer is made pursuant to an exemption from such requirements. Each holder who wishes to exchange such Old Notes for Exchange Notes in the Exchange Offer will be required to make certain representations, including representations that (i) it is not an affiliate of the Company, (ii) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Exchange Notes and (iii) it is acquiring the Exchange Notes in its ordinary course of business. In addition, broker-dealers receiving Exchange Notes in the Exchange Offer will have a prospectus delivery requirement with respect to resales of Exchange Notes. The Commission has taken the position that such broker-dealers may fulfill their prospectus delivery requirements with respect to the Exchange Notes (other than a resale of an unsold allotment from the original sale of Old Notes) with the prospectus contained in the Exchange Offer Registration Statement. Under the Registration Rights Agreement, the Company is required to allow such broker-dealers to use the prospectus contained in the Exchange Offer Registration Statement in connection with the resale of such Exchange Notes for a period of 180 days after the Exchange Offer Registration Statement is declared effective. The Exchange Offer Registration Rights Agreement provides that, to the extent not prohibited by any applicable law or applicable interpretation of the staff of the Commission, the Company and the Guarantors will file the Exchange Offer Registration Statement with the Commission within 60 days after the Issue Date, and use their respective reasonable best efforts to have it declared effective at the earliest possible time but in no event later than 180 days after the Issue Date. The Company and the Guarantors have also agreed to use their reasonable best efforts to cause the Exchange Offer Registration Statement to be effective continuously, to keep the Exchange Offer open for a period of not less than 20 business days and to cause the Exchange Offer to be consummated no later than the 30th business day after the Exchange Offer Registration Statement is declared effective by the Commission (subject to extension to the 40th business day with the consent of the Initial Purchasers). If (i) the Exchange Offer is not permitted by applicable law or Commission policy or (ii) any Holder of Notes which are Transfer Restricted Securities (as hereinafter defined) notifies the Company on or prior to the 20th business day following the consummation of the Exchange Offer that (a) it is prohibited by law or Commission policy from participating in the Exchange Offer, (b) it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus, and this Prospectus is not appropriate or available for such resales by it, or (c) it is a broker-dealer and holds Old Notes acquired directly from the Company or any of the Company's affiliates, the Company and the Guarantors will file with the Commission the Shelf Registration Statement to register for public 71 78 resale the Transfer Restricted Securities held by any such Holder who provides the Company with certain information for inclusion in the Shelf Registration Statement. During any consecutive 365 day period, the Company may suspend the effectiveness of the Shelf Registration Statement on up to two occasions for a period of not more than 45 consecutive days, whereafter a Registration Default (as hereinafter defined) shall occur, if there is a possible acquisition or business combination transaction, business development or event involving the Company that may require disclosure in the Shelf Registration Statement and the Board determines in the exercise of its reasonable judgment that such disclosure is not in the best interests of the Company and its stockholders, or obtaining any financial statements relating to a possible acquisition or business combination required to be included in the Shelf Registration Statement would be impractical. In such a case, the Company shall promptly notify the holders of the suspension of the Shelf Registration Statement's effectiveness, provided that such notice shall not require the Company to disclose the business purpose for such suspension if the Board determines in good faith that such acquisition or business combination or other transaction, business development or event should remain confidential. The relevant period during which the Shelf Registration Statement is required to remain effective will be extended by the number of days the use of the Shelf Registration Statement is suspended. As used in this Prospectus and in the Exchange Offer Registration Rights Agreement, "Transfer Restricted Securities" means the following securities: (i) each Old Note, until the earliest to occur of (a) the date on which such Old Note is exchanged in the Exchange Offer for an Exchange Note which is entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Securities Act, (b) the date on which such Old Note has been disposed of in accordance with a Shelf Registration Statement (and the purchasers thereof have been issued Exchange Notes), (c) the date on which such Old Note is distributed to the public pursuant to Rule 144 under the Securities Act (and the purchasers thereof have been issued Exchange Notes) or (d) the date on which such Old Note is eligible for distribution to the public pursuant to paragraph (k) of Rule 144 under the Securities Act and (ii) each Exchange Note issued to a broker-dealer in the Exchange Offer until the date on which such Exchange Note is disposed of by a broker-dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the prospectus contained therein). The Exchange Offer Registration Rights Agreement also provides that (i) if the Company or the Guarantors fail to file an Exchange Offer Registration Statement with the Commission on or prior to the 60th day after the Issue Date, (ii) if the Exchange Offer Registration Statement is not declared effective by the Commission on or prior to the 180th day after the Issue Date, (iii) if the Exchange Offer is not consummated on or before the 30th business day (or, if extended with the Initial Purchasers' consent, the 40th business day) after the Exchange Offer Registration Statement is declared effective, (iv) if obligated to file the Shelf Registration Statement and the Company and the Guarantors fail to file the Shelf Registration Statement with the Commission on or prior to the 45th day after such filing obligation arises, (v) if obligated to file a Shelf Registration Statement and the Shelf Registration Statement is not declared effective on or prior to the 180th day after the obligation to file a Shelf Registration Statement arises, or (vi) if the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, is declared effective but thereafter ceases to be effective or useable in connection with resales of the Transfer Restricted Securities without being succeeded within five days by an appropriate post-effective amendment, for such time of non- effectiveness or non-usability (each, a "Registration Default"), the Company and the Guarantors agree to pay to each Holder of Transfer Restricted Securities affected thereby liquidated damages ("Liquidated Damages") in an amount equal to $0.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration Default continues for the first 90-day period immediately following the occurrence of such Registration Default, increasing by an additional $0.05 per week per $1,000 in principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.20 per week per $1,000 in principal amount of Transfer Restricted Securities. The Company and the Guarantors shall not be required to pay Liquidated Damages for more than one Registration Default at any given time. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. All accrued Liquidated Damages shall be paid by the Company or the Guarantors to Holders entitled thereto in the manner provided for the payment of interest in the Indenture on each interest payment date. 72 79 The summary herein of certain provisions of the Exchange Offer Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by, all the provisions of the Exchange Offer Registration Rights Agreement, a copy of which is filed as an exhibit to the Exchange Offer Registration Statement of which this Prospectus is a part. Following the consummation of the Exchange Offer, holders of the Old Notes who were eligible to participate in the Exchange Offer but who did not tender their Old Notes will not have any further registration rights and such Old Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Old Notes could be adversely affected. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York time, on the Expiration Date. The Company will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in integral multiples of $1,000. The form and terms of the Exchange Notes are the same as the form and terms of the Old Notes except that (i) the Exchange Notes bear a Series B designation and a different CUSIP Number from the Old Notes, (ii) the Exchange Notes have been registered under the Securities Act and hence will not bear legends restricting the transfer thereof and (iii) the holders of the Exchange Notes will not be entitled to certain rights under the Registration Rights Agreement, including the provisions providing for Liquidated Damages in certain circumstances relating to the timing of the Exchange Offer, all of which rights generally will terminate when the Exchange Offer is terminated. The Exchange Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of the Indenture. The Exchange Offer is not conditioned upon any minimum number of Old Notes being tendered. As of the date of this Prospectus, $100 million aggregate principal amount of Old Notes are outstanding. Holders of Old Notes do not have any appraisal or dissenters rights under the DGCL or the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission thereunder. The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders for the purpose of receiving the Exchange Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, the certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. Holders who tender Old Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than transfer taxes in certain circumstances, in connection with the Exchange Offer. See " -- Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York time, on ,1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange offer is extended. 73 80 In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice and will mail to the registered holders an announcement thereof, each prior to 9:00 a.m., New York time, on the next business day after the previously scheduled expiration date. The Company reserves the right, in its sole discretion, (i) to delay accepting any Old Notes, to extend the Exchange Offer (except that extension beyond the 30th business day after the effectiveness of the Exchange Offer Registration Statement requires consent of the Initial Purchasers) or to terminate the Exchange Offer if any of the conditions set forth below under " -- Conditions" shall not have been satisfied, by giving oral or written notice of such delay, extension or termination to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders. INTEREST ON THE EXCHANGE NOTES The Exchange Notes will bear interest from the most recent date to which interest has been paid or duly provided for on the Old Note surrendered in exchange for such Exchange Note or, if no interest has been paid or duly provided for on such Old Note, from June 26, 1998. Interest on the Exchange Notes is payable semi-annually on each June 30 and December 31, commencing on December 31, 1998. Holders of Old Notes whose Old Notes are accepted for exchange will not receive accrued interest on such Old Notes for any period from and after the last date to which interest has been paid or duly provided for on the Old Notes prior to the original issue date of the Exchange Notes or, if no such interest has been paid or duly provided for will not receive any accrued interest on such Old Notes, and will be deemed to have waived, the right to receive any interest on such Old Notes accrued from and after June 26, 1998. PROCEDURES FOR TENDERING For a holder of Old Notes to tender Old Notes validly pursuant to the Exchange Offer, a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantee, or (in the case of a book-entry transfer), an Agent's Message in lieu of the Letter of Transmittal, and any other required documents, must be received by the Exchange Agent at the address set forth in the Letter of Transmittal prior to 5:00 p.m., New York time, on the Expiration Date. In addition, prior to 5:00 p.m., New York time, on the Expiration Date, either (i) certificates for tendered Old Notes must be received by the Exchange Agent at such address or (ii) such Old Notes must be transferred pursuant to the procedures for book-entry transfer described below (and a confirmation of such tender received by the Exchange Agent, including an Agent's Message if the tendering holder has not delivered a Letter of Transmittal). The term "Agent's Message" means a message transmitted by the Depository, received by the Exchange Agent and forming part of the confirmation of a book-entry transfer, which states that the Depository has received an express acknowledgment from the participant in the Depository tendering Old Notes which are the subject of such book-entry confirmation that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Company may enforce such agreement against such participant. In the case of an Agent's Message relating to guaranteed delivery, the term means a message transmitted by the Depository and received by the Exchange Agent, which states that the Depository has received an express acknowledgment from the participant in the Depository tendering Old Notes that such participant has received and agrees to be bound by the Notice of Guaranteed Delivery. By tendering Old Notes pursuant to the procedures set forth above, each holder will make to the Company the representations set forth above in the third paragraph under the heading " -- Purpose and Effect of the Exchange Offer." The tender by a holder and the acceptance thereof by the Company will constitute agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. 74 81 THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. see "Instruction to Registered Holder and/or Book-Entry Transfer Facility Participant from Owner" included with the Letter of Transmittal. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as hereinafter) unless the Old Notes tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a member firm of the Medallion System (an "Eligible Institution"). If the Letter of Transmittal is signed by a person other than the registered holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by a properly completed bond power, signed by such registered holder as such registered holder's name appears on such Old Notes with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, offices of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. The Company understands that the Exchange Agent will make a request promptly after the date of this Prospectus to establish accounts with respect to the Old Notes at the book-entry transfer facility, The Depository Trust Company ("DTC" or the "Book-Entry Transfer Facility"), for the purpose of facilitating the Exchange Offer, and subject to the establishment thereof, any financial institution that is a participant in the Book-Entry Transfer Facility's system may make book-entry delivery of Old Notes by causing such Book-Entry Transfer Facility to transfer such Old Notes into the Exchange Agent's account with respect to the Old Notes in accordance with the Book-Entry Transfer Facility's procedures for such transfer. Although delivery of the Old Notes may be effected through book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly completed and duly executed with any required signature guarantee, or, in the case of a book-entry transfer, an Agent's Message in lieu of the Letter of Transmittal and all other required documents must in each case be transmitted to and received or confirmed by the Exchange Agent at its address set forth in the Letter of Transmittal on or prior to the Expiration Date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The Exchange Agent and DTC have confirmed that the Exchange Offer is eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC participants may electronically transmit their acceptance of the Exchange Offer by causing DTC to transfer Old Notes to the Exchange Agent in accordance with DTC's ATOP procedures for transfer. DTC will then send an Agent's Message to the Exchange Agent. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes will be determined by the Company in its sole discretion, which determination 75 82 will be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right in its sole discretion to waive any defects, irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Company shall determine. Although the Company intends to notify holders of defects or irregularities with respect to tenders of Old Notes, none of the Company, the Exchange Agent or any other person shall incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available, (ii) who cannot deliver their Old Notes, the Letter of Transmittal or any other required documents to the Exchange Agent or (iii) who cannot complete the procedures for book-entry transfer, prior to the Expiration Date, may effect a tender if: (a) the tender is made through an Eligible Institution; (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder, the certificate number(s) of such Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof) together with the certificate(s) representing the Old Notes (or a confirmation of book-entry transfer of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility), and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal (of facsimile thereof), as well as the certificates representing all tendered Old Notes in proper form for transfer (or a confirmation of book-entry transfer of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility), and all other documents required by the Letter of Transmittal are received by the Exchange Agent upon five New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their Old Notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York time, on the Expiration Date. To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex, letter or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth in the Letter of Transmittal prior to 5:00 p.m., New York time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number(s) and principal amount of such Old Notes, or, in the case of Old Notes transferred by book-entry transfer, the name and number of the account at the Book-Entry Transfer Facility to be credited), (iii) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to 76 83 have the Trustee with respect to the Old Notes register the transfer of such Old Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes which have been tendered but which are not accepted for exchange will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described above under " -- Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept any Old Notes for exchange, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Old Notes, if: (a) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the Company's reasonable discretion, might materially impair the ability of the Company to proceed with the Exchange Offer or any material adverse development has occurred in any existing action or proceeding with respect to the Company or any of its subsidiaries; or (b) any law, statute, rule, regulation or interpretation by the staff of the Commission is proposed, adopted or enacted, which, in the Company's reasonable discretion, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or (c) any governmental approval has not been obtained, which approval the Company shall, in the Company's reasonable discretion, deem necessary for the consummation of the Exchange Offer as contemplated hereby. If the Company determines in its reasonable discretion that any of the conditions are not satisfied, the Company may (i) refuse to accept any Old Notes and return all tendered Old Notes to the tendering holders, (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of holders to withdraw such Old Notes (see "-- Withdrawal of Tenders"), or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Old Notes which have not been withdrawn. 77 84 EXCHANGE AGENT U.S. Trust Company of Texas, N.A. has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: By Registered or By Overnight Courier: By Hand: Certified Mail: U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A. 770 Broadway 111 Broadway P.O. Box 841 13th Floor- Corporate Trust Operations Lower Level Cooper Station New York, New York 10003-9598 New York, New York 10006-1906 New York, New York 10276-0841 Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services
By Facsimile: (212) 420-6504 The Exchange Agent also serves as Trustee under the Indenture. FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telecopy, telephone or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers, or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company. Such expenses include fees and expenses of the Exchange Agent and Trustee, accounting and legal fees and printing costs, among others. ACCOUNTING TREATMENT The Exchange Notes will be recorded at the same carrying value as the Old Notes, which is face value, as reflected in the Company's accounting records on the date of exchange. Accordingly, no gain or loss for accounting purposes will be recognized by the Company. The expenses of the Exchange Offer will be expensed over the term of the Exchange Notes. CONSEQUENCES OF FAILURE TO EXCHANGE Participation in the Exchange Offer is voluntary and holders of Old Notes should carefully consider whether to accept. Holders of Old Notes are urged to consult their financial and tax advisors in making their own decisions on what action to take. The Old Notes that are not exchanged for Exchange Notes pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Old Notes may be resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A, to a person inside the United States whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A under the Securities 78 85 Act in a transaction meeting the requirements of Rule 144A, in accordance with Rule 144 under the Securities Act, (iii) pursuant to another exemption from the registration requirements of the Securities Act, (iv) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act, or (v) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. RESALE OF THE EXCHANGE NOTES With respect to resales of Exchange Notes, based on interpretations by the staff of the Commission set forth in no-action letters issued to third parties (for example, the letters of the commission to (i) Exxon Capital Holdings Corporation, available May 13, 1988, (ii) Morgan Stanley & Co., Inc., available June 5, 1991, and (iii) Shearson & Sterling, available July 2, 1993), the Company believes that a holder or other person (other than a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act) who receives Exchange Notes in exchange for Old Notes in the ordinary course of business and who is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of the Exchange Notes, will be allowed to resell the Exchange Notes to the public without further registration under the Securities Act and without delivering to the purchasers of the Exchange Notes a prospectus that satisfies the requirements of Section 10 of the Securities Act. However, if any holder acquires Exchange Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the Exchange Notes, such holder cannot rely on the position of the staff of the Commission enunciated in such no-action letters or any similar interpretive letters, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Further, each Participating Broker- Dealer that receives Exchange Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. Each holder of Old Notes who wishes to exchange Old Notes for Exchange Notes in the Exchange Offer will be required to represent that (i) it is not an affiliate of the Company, (ii) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Exchange Notes and (iii) it is acquiring the Exchange Notes in its ordinary course of business. Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it acquired the Old Notes for its own account as the result of market-making activities or other trading activities and must agree that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Based on the position taken by the staff of the Division of Corporation Finance of the Commission in the interpretive letters referred to above, the Company believes that Participating Broker-Dealers who acquired Old Notes for their own accounts as a result of market-making activities or other trading activities may fulfill their prospectus delivery requirements with respect to the Exchange Notes received upon exchange of such Old Notes (other than Old Notes which represent an unsold allotment from the original sale of the Old Notes) with a prospectus meeting the requirements of the Securities Act, which may be the prospectus prepared for an exchange offer so long as it contains a description of the plan of distribution with respect to the resale of such Exchange Notes. Accordingly, this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer during the period referred to below in connection with resales of Exchange Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker-Dealer for its own account as a result of market-making or such other trading activities. Subject to certain provisions set forth in the Exchange Offer Registration Rights Agreement, the Company has agreed that this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of such Exchange Notes for a period ending 180 days after the date on which the Exchange Offer Registration Statement is declared effective. However, a Participating Broker-Dealer who intends to use this Prospectus in connection with the resale of Exchange Notes received in exchange for Old Notes pursuant to the Exchange Offer must notify the Company, or cause the Company to be notified, on or prior to the Expiration Date, that it is a Participating Broker-Dealer. Such notice may be given in the space provided for that purpose in the Letter of Transmittal or may be delivered to the Exchange Agent at one of the addresses set forth in the Letter of Transmittal. 79 86 See "Plan of Distribution." Any Participating Broker-Dealer who is an "affiliate" of the Company may not rely on such interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. 80 87 DESCRIPTION OF EXCHANGE NOTES The Old Notes were issued and the Exchange Notes are to be issued pursuant to an Indenture dated as of June 26, 1998 among the Company, the Guarantors and U.S. Trust Company of Texas, N.A., as trustee ("Trustee"). A copy of the Indenture is available upon request from the Company as set forth under "Available Information." The Indenture is by its terms subject to and governed by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Indenture is by its terms subject to and governed by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following summaries of certain provisions of the Notes and the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, the Notes and the Indenture, including the definitions therein of certain capitalized terms used but not defined herein. For purposes of this section of this Prospectus, references to the "Company" mean Bayard Drilling Technologies, Inc., excluding its subsidiaries. The Old Notes and the Exchange Notes are collectively referred to herein as the "Notes". Certain other terms used herein are defined below under "-- Certain Definitions." GENERAL The Old Notes are, and the Exchange Notes will be, general unsecured senior obligations of the Company, limited in aggregate principal amount at Stated Maturity to $100 million. The Indebtedness evidenced by the Notes will rank pari passu in right of payment with all existing and future senior indebtedness and other obligations of the Company and senior in right of payment to all future subordinated indebtedness of the Company. The Company is a holding company that conducts substantially all of its operations through its subsidiaries. As of June 15, 1998, on a pro forma basis after giving effect to the TransTexas Acquisition and the Old Notes Offering, the Company had approximately $121.1 million of outstanding senior indebtedness, of which $21.1 million is secured by certain assets of the Subsidiaries. At such date, the Company would have had no Indebtedness subordinated to the Notes. The Indenture provides that each of the Company's wholly owned domestic Subsidiaries (and any other Subsidiaries that guarantee any Indebtedness of the Company) shall be a Guarantor. The Guarantees will be senior unsecured obligations of each respective Guarantor and will rank pari passu in right of payment with all other indebtedness and liabilities of such Guarantor that are not subordinated by their terms to other Indebtedness of such Guarantor, and senior in right of payment to all Subordinated Indebtedness of such Guarantor. The holders of secured indebtedness of the Company and the Guarantors (including Indebtedness under the Loan Agreements, which is secured by first priority liens on certain of the assets of the Company's domestic Subsidiaries), will have claims with respect to the assets constituting collateral for such Indebtedness that are prior to claims of holders of the Notes and the Trustee. In the event of a default on the Notes or the Guarantees, or a bankruptcy, liquidation or reorganization of the Company or any Guarantors, such assets will be available to satisfy obligations with respect to the Loan Agreements or other secured Indebtedness before any payment therefrom could be made on the Notes. To the extent that the value of such collateral is not sufficient to satisfy the indebtedness secured thereby, amounts remaining outstanding on such Indebtedness would be entitled to share with the holders of the Notes and the Trustee and their claims with respect to any other assets of the Company and the Guarantors. The Old Notes are, and the Exchange Notes will be, effectively subordinated to claims of creditors (other than the Company) of the Company's Subsidiaries other than the Guarantors. Claims of creditors (other than the Company) of such Subsidiaries, including trade creditors, tort claimants, secured creditors, taxing authorities and creditors holding guarantees, will generally have priority as to assets of such Subsidiaries over the claims and equity interest of the Company and, thereby indirectly, the holders of the indebtedness of the Company, including the Notes and the Guarantees. In addition, the Indenture permits under limited circumstances the creation of, or the designation of existing Subsidiaries as, Unrestricted Subsidiaries. At the Issue Date, none of the Company's subsidiaries will be an Unrestricted Subsidiary. Unrestricted Subsidiaries will not be generally subject to the covenants applicable to the Company and the Subsidiaries under the Indenture. The Notes will be effectively subordinated to claims of creditors (other than the Company) of the Unrestricted Subsidiaries. See "-- Certain Covenants -- Unrestricted Subsidiaries." 81 88 The form and terms of the Exchange Notes are the same as the form and terms of the Old Notes (which they are intended to replace) except that (i) the Exchange Notes bear a Series B designation, (ii) the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof. Additionally, the holders of Exchange Notes will not be entitled to certain rights under the Exchange Offer Registration Rights Agreement, including the provisions providing for Liquidated Damages in certain circumstances, which rights will terminate when the Exchange Offer is consummated. The Exchange Notes will be issued solely in exchange for an equal principal amount of Old Notes. As of the date hereof, $100 million aggregate principal amount of Old Notes is outstanding. See "The Exchange Offer." PRINCIPAL, MATURITY AND INTEREST The Notes will mature on June 30, 2005, and will bear interest at the rate per annum stated on the cover page hereof from the date of issuance or from the most recent interest payment date to which interest has been paid or provided for. Interest on the Notes will be payable semi-annually in arrears on June 30 and December 31 of each year, commencing December 31, 1998, to the Persons in whose names such Notes are registered at the close of business on June 15 or December 15, immediately preceding such interest payment date. Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The Notes may be presented or surrendered for payment of principal, premium, if any, and interest and for registration of transfer or exchange at the office or agency of the Company within the City and State of New York maintained for such purpose. In addition, in the event the Notes do not remain in book-entry form, interest may be paid, at the option of the Company, by check mailed to the registered holders of the Notes at the respective addresses as set forth on the Note Register. The Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and integral multiples thereof. No service charge will be made for any registration of transfer or exchange or redemption of Notes, but the Company or Trustee may require in certain circumstances payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. GUARANTEES OF NOTES Each Guarantor will unconditionally guarantee, jointly and severally, to each holder and the Trustee, the full and prompt performance of the Company's Obligations under the Indenture and the Notes, including the payment of principal of, premium, if any, and interest on the Notes pursuant to its Guarantee. If any Subsidiary of the Company that is not an initial Guarantor guarantees any Indebtedness of the Company at any time in the future, then the Company will cause the Notes to be equally and ratably guaranteed by such Subsidiary. In addition, the Company will cause each wholly owned domestic subsidiary that is or becomes a Subsidiary to execute and deliver a supplement to the Indenture pursuant to which such Subsidiary will guarantee the payment of the Notes on the same terms and conditions as the Guarantees by the initial Guarantors. The Obligations of each Guarantor will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the Obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture, result in the Obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law or otherwise not being void, voidable or unenforceable under any bankruptcy, reorganization, receivership, insolvency, liquidation or other similar legislation or legal principles under any applicable foreign law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in a pro rata amount based on the Adjusted Net Assets of each Guarantor. Each Guarantor may consolidate with or merge into or sell or otherwise dispose of all or substantially all of its Property and assets to the Company or another Guarantor without limitation, except to the extent any such transaction is subject to the "Consolidation, Merger, Conveyance, Lease or Transfer" covenant of the Indenture. Each Guarantor may consolidate with or merge into or sell all or substantially all of its Property and assets to a Person other than the Company or another Guarantor (whether or not Affiliated with the Guarantor), provided that (a) if the surviving Person 82 89 is not the Guarantor, the surviving Person agrees to assume such Guarantor's Guarantee and all its Obligations pursuant to the Indenture (except to the extent the following paragraph would result in the release of such Guarantee) and (b) such transaction does not result in a Default or Event of Default existing or continuing immediately thereafter. Upon the sale or other disposition (by merger or otherwise) of a Guarantor (or all or substantially all of its Property and assets) to a Person other than the Company or another Guarantor and pursuant to a transaction that is otherwise in compliance with the Indenture (including as described in clause (b) of the foregoing paragraph and as described below in the covenant described "-- Certain Covenants -- Limitation on Asset Sales"), such Guarantor (unless it otherwise remains a Subsidiary) shall be deemed released from its Guarantee and the related Obligations set forth in the Indenture; provided that any such termination shall occur only to the extent that all Obligations of such Guarantor under all of its guarantees of and under all of its pledges of assets or other security interests which secure, other Indebtedness of the Company shall also terminate or be released upon such sale or other disposition. Each Guarantor that is designated as an Unrestricted Subsidiary in accordance with the Indenture shall be released from its Guarantee and the related Obligations set forth in the Indenture so long as it remains an Unrestricted Subsidiary. OPTIONAL REDEMPTION Except as provided in the next paragraph, the Notes will not be redeemable at the option of the Company prior to June 30, 2003. On or after such date, the Notes will be redeemable at the option of the Company, in whole at any time or in part from time to time, at the following prices (expressed in percentages of the principal amount), if redeemed during the 12 months beginning June 30 of the years indicated below, in each case together with interest accrued to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date):
YEAR PERCENTAGE - ---- ---------- 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.500% 2004 and thereafter . . . . . . . . . . . . . . . . . . . . . . 100.000%
Notwithstanding the foregoing, at any time on or before June 30, 2001, the Company may, at its option, redeem up to a maximum of 35% of the aggregate principal amount of the Notes with the net cash proceeds of one or more Qualified Equity Offerings at a redemption price equal to 111% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date; provided that at least $65 million of the aggregate principal amount of Notes shall remain outstanding immediately after the occurrence of any such redemption; and provided, further, that each such redemption shall occur within 90 days of the closing of such Qualified Equity Offering. If fewer than all the Notes are redeemed, selection for redemption will be made by the Trustee in accordance with the principal stock exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by any other means which the Trustee determines to be fair and appropriate; provided that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but no more than 60 days before the redemption date to each holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original Note. On and after the redemption date, interest ceases to accrue on Notes or portions thereof called for redemption. CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder will have the right to require the Company to repurchase all of such holder's Notes in whole or in part (the "Change of Control Offer") at a purchase price (the "Change of Control Purchase Price") in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Change of Control Payment Date (as defined below) on the terms described below. 83 90 Within 30 days following any Change of Control, the Company or the Trustee (at the expense of the Company) will mail a notice to each holder and to the Trustee stating, among other things, (i) that a Change of Control has occurred and a Change of Control Offer is being made as provided for in the Indenture, and that, although holders are not required to tender their Notes, all Notes that are timely tendered will be accepted for payment; (ii) the Change of Control Purchase Price and the repurchase date, which will be no earlier than 30 days and no later than 60 days after the date such notice is mailed (the "Change of Control Payment Date"); (iii) that any Note accepted for payment pursuant to the Change of Control Offer (and duly paid for on the Change of Control Payment Date) will cease to accrue interest after the Change of Control Payment Date; and (iv) the instructions and any other information necessary to enable holders to tender their Notes and have such Notes purchased pursuant to the Change of Control Offer. The Company will comply with any applicable tender offer rules (including, without limitation, any applicable requirements of Rule 14e-1 under the Exchange Act) in the event that the Change of Control Offer is triggered under the circumstances described herein. The existence of the holders' rights to require, subject to certain conditions, the Company to repurchase Notes upon a Change of Control may deter a third party from acquiring the Company in a transaction that constitutes a Change of Control. The source of funds for the repurchase of Notes upon a Change of Control will be the Company's cash or cash generated from operations or other sources, including borrowings or sales of assets. Further, a "Change of Control" (as defined under any Loan Agreement) may constitute an event of default thereunder and allow the lenders to accelerate the Indebtedness outstanding hereunder and prevent the Company from borrowing thereunder. There can be no assurance that sufficient funds will be available at the time of any Change of Control to repay all amounts owing under such other Indebtedness or to make the required payments of the Notes. In the event that a Change of Control Offer occurs at a time when the Company does not have sufficient available funds to pay the Change of Control Purchase Price for all Notes timely tendered pursuant to such offer or at a time when the Company is prohibited from purchasing the Notes (and the Company is unable either to obtain the consent of the holders of the relevant Indebtedness or to repay such Indebtedness), an Event of Default would occur under the Indenture. In addition, one of the events that constitutes a Change of Control under the Indenture is a sale, conveyance, transfer or lease of all or substantially all of the assets of the Company or the Company and the Subsidiaries, taken as a whole. The Indenture will be governed by New York law, and there is no established quantitative definition under New York law of "substantially all" of the assets of a corporation. Accordingly, if the Company or its Subsidiaries were to engage in a transaction in which it or they disposed of less than all of the assets of the Company or the Company and its Subsidiaries taken as a whole, as applicable, a question or interpretation could arise as to whether such disposition was of "substantially all" of its assets and whether the Company was required to make a Change of Control Offer. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company and repurchases all Notes validly tendered and not withdrawn under such Change of Control Offer. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the holders to require the Company to repurchase or redeem the Notes in the event of a takeover, recapitalization or similar restructuring. The provisions of the Indenture may not afford holders protection in the event of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction affecting the Company that may adversely affect holders because (i) such transactions may not involve a shift in voting power or beneficial ownership or, even if they do, may not involve a shift of the magnitude required under the definition of Change of Control to require the Company to make a Change of Control Offer or (ii) such transactions may include an actual shift in voting power or beneficial ownership to a Permitted Holder which is excluded under the definition of Change of Control from the amount of shares involved in determining whether or not the transaction involves a shift of the magnitude required to trigger the provisions. A transaction involving the management of the Company or its Affiliates, or a transaction involving a recapitalization of the Company, will result in a Change of Control only if it is the type of transaction specified in such definition. 84 91 CERTAIN COVENANTS Set forth below are certain covenants contained in the Indenture: Transactions with Affiliates. Subsequent to the Issue Date, the Company will not, and will not permit any Subsidiary to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, but not limited to, the purchase, sale or exchange of Property, the making of any Investment, the giving of any guarantee to, or the rendering of any service with, any Affiliate of the Company, other than transactions among the Company and any Guarantor or any Wholly Owned Subsidiaries) unless (i) such transaction or series of related transactions is on terms no less favorable to the Company or such Subsidiary than those that could be obtained in a comparable arm's length transaction with a Person that is not such an Affiliate of the Company and (ii) (a) with respect to a transaction or series of related transactions that has a Fair Market Value in excess of $5 million but less than $10 million, the Company delivers an Officers' Certificate to the Trustee certifying that such transaction or series of related transactions complies with clause (i) above; or (b) with respect to a transaction or series of related transactions that has a Fair Market Value equal to or in excess of $10 million, the transaction or series of related transactions is approved by a majority of the Board of Directors of the Company (including a majority of the disinterested directors), which approval is set forth in a Board Resolution certifying that such transaction or series of transactions complies with clause (i) above. The foregoing provisions shall not be applicable to (i) reasonable and customary compensation, indemnification and other benefits paid or made available to an officer, director or employee of the Company or a Subsidiary for services rendered in such person's capacity as an officer, director or employee (including reimbursement or advancement of reasonable out-of-pocket expenses and provisions of directors' and officers' liability insurance as well as stock option agreements, restricted stock agreements and consulting or similar agreements), (ii) the making of any Restricted Payment otherwise permitted by the Indenture, (iii) any existing employment agreement, stock option agreement, restricted stock agreement, consulting agreement or similar agreement, (iv) any agreement in effect on the Issue Date or any amendment thereto (so long as such amendment is, taken as a whole, no less favorable to the holders of the Notes than the original agreement as in effect on the Issue Date) and any transactions contemplated thereby, or (v) any transaction described in "Certain Relationships and Related Transactions." Limitation on Restricted Payments. The Company will not, and will not permit any Subsidiary to, make any Restricted Payment, unless at the time of and after giving effect to the proposed Restricted Payment, (a) no Default shall have occurred and be continuing (or would immediately result therefrom), (b) the Company could incur at least $1.00 of additional Indebtedness under the tests described in the first sentence under the caption "-- Certain Covenants -- Limitation on Indebtedness" and (c) the aggregate amount of all Restricted Payments declared or made on or after the Issue Date by the Company or any Subsidiary shall not exceed the sum of (i) 50% (or if such Consolidated Net Income shall be a deficit, minus 100% of such deficit) of the aggregate Consolidated Net Income accrued during the period beginning on the first day of the fiscal quarter in which the Issue Date falls and ending on the last day of the fiscal quarter for which internal financial statements are available ending immediately prior to the date of such proposed Restricted Payment, minus 100% of the amount of any writedowns, write-offs and other negative extraordinary charges not otherwise reflected in Consolidated Net Income during such period, plus (ii) an amount equal to the aggregate net cash proceeds received by the Company, subsequent to the Issue Date, from the issuance or sale (other than to a Subsidiary) of shares of its Capital Stock (excluding Redeemable Stock, but including Capital Stock issued upon the exercise of options, warrants or rights to purchase Capital Stock (other than Redeemable Stock) of the Company) and the liability (expressed as a positive number) as expressed on the face of a balance sheet in accordance with GAAP in respect of any Indebtedness of the Company or any of its Subsidiaries, or the carrying value of Redeemable Stock, which has been converted into, exchanged for or satisfied by the issuance of shares of Capital Stock (other than Redeemable Stock) of the Company, subsequent to the Issue Date, plus (iii) 100% of the net reduction in Restricted Investments, subsequent to the Issue Date, in any Person, resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of Property (but only to the extent such interest, dividends, repayments or other transfers of Property are not included in the calculation of Consolidated Net Income), in each case to the Company or any Subsidiary from any Person (including, without limitation, from Unrestricted Subsidiaries) or from redesignations of Unrestricted Subsidiaries as Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed in the case of any Person the amount of Restricted Investments previously 85 92 made by the Company or any Subsidiary in such Person and in each such case which was treated as a Restricted Payment, plus (iv) $10 million. The foregoing provisions will not prevent (A) the payment of any dividend on Capital Stock of any class within 60 days after the date of its declaration if at the date of declaration such payment would be permitted by the Indenture; (B) any repurchase or redemption of Capital Stock or Subordinated Indebtedness of the Company or a Subsidiary made by exchange for Capital Stock of the Company (other than Redeemable Stock), or out of the net cash proceeds from the substantially concurrent issuance or sale (other than to a Subsidiary) of Capital Stock of the Company (other than Redeemable Stock), provided that the net cash proceeds from such sale are excluded from computations under clause (c) (ii) above to the extent that such proceeds are applied to purchase or redeem such Capital Stock or Subordinated Indebtedness; (C) so long as no Default shall have occurred and be continuing or should occur as a consequence thereof, any repurchase or redemption of Subordinated Indebtedness of the Company or a Subsidiary solely in exchange for, or out of the net cash proceeds from the substantially concurrent sale of, new Subordinated Indebtedness of the Company or a Subsidiary, so long as such Subordinated Indebtedness is permitted under the covenant described under "-- Limitation on Indebtedness" and (x) is subordinated to the Notes at least to the same extent as the Subordinated Indebtedness so exchanged, purchased or redeemed, (y) has a stated maturity later than the stated maturity of the Subordinated Indebtedness so exchanged, purchased or redeemed and (z) has an Average Life at the time incurred that is greater than the remaining Average Life of the Subordinated Indebtedness so exchanged, purchased or redeemed; (D) Investments in any Joint Ventures and foreign Subsidiaries not constituting Guarantors in an aggregate amount not to exceed $5 million; (E) the payment of any dividend or distribution by a Subsidiary of the Company or any of its Wholly Owned Subsidiaries; (F) so long as no Default or Event of Default shall have occurred and be continuing or should occur as a consequence thereof, the repurchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any employee of the Company or any of its Subsidiaries, provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock pursuant to the terms of an employee benefit plan or employment or similar agreement shall not exceed $500,000 in any calendar year; and (G) the acquisition of Capital Stock by the Company in connection with the exercise of stock options or stock appreciation rights by way of cashless exercise or in connection with the satisfaction of withholding tax obligations. Notwithstanding the foregoing, the amount available for Investments in Joint Ventures and foreign Subsidiaries pursuant to clause (D) of the preceding sentence may be increased by the aggregate amount received by the Company and its Subsidiaries from a Joint Venture or a foreign Subsidiary on or before such date resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances or other transfers of Property made to such Joint Venture or foreign Subsidiary (but only to the extent such interest, dividends, repayments or other transfers of Property are not included in the calculation of Consolidated Net Income). Restricted Payments permitted to be made as described in the first sentence of this paragraph will be excluded in calculating the amount of Restricted Payments thereafter, except that any such Restricted Payments permitted to be made pursuant to clauses (A), (D), (E) (but only to the extent paid to someone other than the Company or any of its Wholly Owned Subsidiaries) and (F) will be included in calculating the amount of Restricted Payments thereafter. For purposes of this covenant, if a particular Restricted Payment involves a non-cash payment, including a distribution of assets, then such Restricted Payment shall be deemed to be an amount equal to the cash portion of such Restricted Payment, if any, plus an amount equal to the Fair Market Value of the non-cash portion of such Restricted Payment. Limitation on Indebtedness. The Company will not, and will not permit any Subsidiary to, directly or indirectly, incur any Indebtedness (including Acquired Indebtedness), unless after giving pro forma effect to the incurrence of such Indebtedness, the Consolidated Interest Coverage Ratio for the Determination Period preceding the Transaction Date is at least 2.5 to 1.0. Notwithstanding the foregoing, the Company or any Subsidiary (subject to the following paragraph) may incur Permitted Indebtedness. Any Indebtedness of a Person existing at time at which such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be incurred by such Subsidiary at the time at which it becomes a Subsidiary. 86 93 Limitation on Subsidiary Indebtedness and Preferred Stock. Subject to the covenant captioned "Limitation on Indebtedness," the Company will not permit any Subsidiary to, directly or indirectly, incur any Indebtedness or issue any Preferred Stock except: (a) Indebtedness or Preferred Stock issued to and held by the Company, a Guarantor or a Wholly Owned Subsidiary, so long as any transfer of such Indebtedness or Preferred Stock to a Person other than the Company, Guarantor or a Wholly Owned Subsidiary will be deemed to constitute an incurrence of such Indebtedness or Preferred Stock by the issuer thereof as of the date of such transfer; (b) Acquired Indebtedness or Preferred Stock of a Subsidiary issued and outstanding prior to the date on which such Subsidiary was acquired by the Company (other than Indebtedness or Preferred Stock issued in connection with or in anticipation of such acquisition); (c) Indebtedness or Preferred Stock outstanding on the Issue Date and listed in a schedule attached to the Indenture; (d) Indebtedness described in clauses (b), (c), (d), (e), (f), (g), (h), (k) and (n) under the definition of "Permitted Indebtedness"; (e) Permitted Subsidiary Refinancing Indebtedness of such Subsidiary; (f) Indebtedness or Preferred Stock issued in exchange for, or the proceeds of which are used to refinance, repurchase or redeem, Indebtedness or Preferred Stock described in clauses (a) and (c) of this paragraph (the "Retired Indebtedness or Stock"), provided that the Indebtedness or the Preferred Stock so issued has (i) a principal amount or liquidation value, as the case may be, not in excess of the principal amount or liquidation value of the Retired Indebtedness or Stock plus related expenses for redemption and issuance, (ii) a final redemption date later than the stated maturity or final redemption date (if any) of the Retired Indebtedness or Stock and (iii) an Average Life at the time of issuance of such Indebtedness or Preferred Stock that is greater than the Average Life of the Retired Indebtedness or Stock; (g) Indebtedness of a Subsidiary which represents the assumption by such Subsidiary of Indebtedness of another Subsidiary in connection with a merger of such Subsidiaries, provided that no Subsidiary or any successor (by way of merger) thereto existing on the Issue Date shall assume or otherwise become responsible for any Indebtedness of an entity which is not a Subsidiary on the Issue Date, except to the extent that a Subsidiary would be permitted to incur such Indebtedness under this paragraph; (h) Non-Recourse Indebtedness incurred by a foreign Subsidiary not constituting a Guarantor; and (i) Indebtedness incurred to finance all or a part of the purchase price or construction, repair or improvement cost of Property acquired, constructed, repaired or improved after the Issue Date. Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Subsidiary, directly or indirectly, to create, enter into any agreement with any Person or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind which by its terms restricts the ability of any Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on its Capital Stock to the Company or any Subsidiary, (b) pay any Indebtedness owed to the Company or any Subsidiary, (c) make loans or advances to the Company or any Subsidiary or (d) transfer any of its Property or assets to the Company or any Subsidiary except any encumbrance or restriction contained in any agreement or instrument: (i) existing on the Issue Date; 87 94 (ii) relating to any Property or assets acquired after the Issue Date, so long as such encumbrance or restriction relates only to the Property or assets so acquired and is not and are not created in anticipation of such acquisition; (iii) relating to any Acquired Indebtedness of any Subsidiary at the date on which such Subsidiary was acquired by the Company or any Subsidiary (other than Indebtedness incurred in anticipation of such acquisition); (iv) effecting a refinancing of Indebtedness incurred pursuant to an agreement referred to in the foregoing clauses (i) through (iii), so long as the encumbrances and restrictions contained in any such refinancing agreement are no more restrictive than the encumbrances and restrictions contained in such agreements; (v) constituting customary provisions restricting subletting or assignment of any lease of the Company or any Subsidiary or provisions in license agreements or similar agreements that restrict the assignment of such agreement or any rights thereunder; (vi) constituting restrictions on the sale or other disposition of any Property securing Indebtedness as a result of a Permitted Lien on such Property; (vii) constituting any temporary encumbrance or restriction with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or Property and assets of, such Subsidiary; (viii) existing under or by reason of applicable law, rules or regulations, or any order or ruling by any governmental authority; (ix) constituting customary restrictions on cash or other deposits imposed by customers under contracts entered into in the ordinary course of business; (x) constituting restrictions with respect to a Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all of the capital stock or assets of such Subsidiary pending the closing of such sale or disposition; or (xi) constituting provisions contained in agreements or instruments relating to Indebtedness which prohibit the transfer of all or substantially all of the assets of the obligor thereunder unless the transferee shall assume the obligations of the obligor under such agreement or instrument. Limitation on Asset Sales. The Company will not engage in, and will not permit any Subsidiary to engage in, any Asset Sale unless (a) except in the case of an Asset Sale resulting from the requisition of title to, seizure or forfeiture of any Property or assets or any actual or constructive total loss or an agreed or compromised total loss the Company or such Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property; and (b) at least 75% of such consideration consists of Cash Proceeds (or the assumption of Indebtedness of the Company or such Subsidiary relating to the Capital Stock or Property or asset that was the subject of such Asset Sale and the unconditional release of the Company or such Subsidiary from such Indebtedness); and (c) the Company delivers to the Trustee an Officers' Certificate certifying that such Asset Sale complies with clauses (a) and (b); provided, however that any Asset Sale pursuant to a condemnation, appropriation or other similar taking, including by deed in lieu of condemnation, or pursuant to the foreclosure or other enforcement of a Permitted Lien or exercise by the related lienholder of rights with respect thereto, including by deed or assignment in lieu of foreclosure shall not be required to satisfy the conditions set forth in clauses (a) and (b) of this sentence. The Company or such Subsidiary, as the case may be, may apply the Net Available Proceeds from each Asset Sale (x) to the acquisition of one or more Replacement Assets, or (y) to repurchase or repay Senior Debt (with a permanent reduction of availability in the case of revolving credit borrowings); provided that such acquisition or such repurchase or repayment shall be made 88 95 within 365 days after the consummation of the relevant Asset Sale; provided, further, however, that the amount of (A) any liabilities (as shown on the Company's or such Subsidiary's most recent balance sheet or in the notes thereto) of the Company or any Subsidiary that are assumed by the transferee of any such assets and (B) any notes or other obligations received by the Company or any such Subsidiary from such transferee that are converted by the Company or such Subsidiary into cash (to the extent of the case received) within 90 days of such Asset Sale, shall be deemed to be cash for purposes of this provision. Any Net Available Proceeds from any Asset Sale that are not used to so acquire Replacement Assets or to repurchase or repay Senior Debt within 365 days after consummation of the relevant Asset Sale constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10 million, the Company shall within 30 days thereafter be required to make an offer to all Holders of Notes and other Indebtedness that ranks by its terms pari passu in right of payment with the Notes and the terms of which contain substantially similar requirements with respect to the application of net proceeds from asset sales as are contained in the Indenture (an "Asset Sale Offer") to purchase on a pro rata basis the maximum principal amount of the Notes, that is an integral multiple of $1,000, that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture. If the aggregate principal amount of Notes surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset to zero and the Company may use any remaining amount for general corporate purposes. Pending the final application of any such Net Available Proceeds, the Company may temporarily reduce Indebtedness under any Credit Facility or otherwise invest such Net Available Proceeds in any manner that is not prohibited by the Indenture. The Company will comply with any applicable tender offer rules (including, without limitation, any applicable requirements of Rule 14e-1 under the Exchange Act) in the event that an Asset Sale Offer is required under the circumstances described herein. Limitation on Sale and Lease-Back Transactions. The Company will not, and will not permit any Subsidiary to, directly or indirectly, enter into, assume, guarantee or otherwise become liable with respect to any Sale and Lease-Back Transaction unless (i) the proceeds from such Sale and Lease-Back Transaction are at least equal to the Fair Market Value of such Property being transferred and (ii) the Company or such Subsidiary would have been permitted to enter into such transaction under the covenants described in "-- Certain Covenants -- Limitation on Indebtedness" and "-- Certain Covenants -- Limitation on Liens," and "-- Certain Covenants -- Limitation on Subsidiary Indebtedness and Preferred Stock." Limitation on Liens. The Company will not, and will not permit any Subsidiary to, directly or indirectly, create, affirm, incur, assume or suffer to exist any Liens of any kind other than Permitted Liens on or with respect to any Property of the Company or such Subsidiary or any interest therein or any income or profits therefrom, whether owned at the Issue Date or thereafter acquired, without effectively providing that the Notes shall be secured equally and ratably with (or prior to) the Indebtedness so secured for so long as such obligations are so secured. Limitation on Guarantees by Guarantors. The Company will not permit any Guarantor to guarantee the payment of any Subordinated Indebtedness of the Company unless such guarantee shall be subordinated to such Guarantor's Guarantee at least to the same extent as such Subordinated Indebtedness is subordinated to the Notes; provided that this covenant will not be applicable to any guarantee of any Guarantor that (i) existed at the time at which such Person became a Subsidiary of the Company and (ii) was not incurred in connection with, or in contemplation of, such Person becoming a Subsidiary of the Company. Unrestricted Subsidiaries. The Indenture provides that the Company may designate a subsidiary (including a newly formed or newly acquired subsidiary) of the Company or any of its Subsidiaries as an Unrestricted Subsidiary; provided that (i) immediately after giving effect to the transaction, the Company could incur $1.00 of additional Indebtedness pursuant to the first sentence of "-- Certain Covenants -- Limitation on Indebtedness" and (ii) such designation is at the time permitted under "-- Certain Covenants -- Limitation on Restricted Payments." 89 96 Notwithstanding any provisions of this covenant all subsidiaries of an Unrestricted Subsidiary will be Unrestricted Subsidiaries. The Indenture further provides that the Company will not, and will not permit any of its Subsidiaries to, take any action or enter into any transaction or series of transactions that would result in a Person (other than a subsidiary having no outstanding Indebtedness (other than Indebtedness to the Company or a Subsidiary) at the date of determination) becoming a Subsidiary (whether through an acquisition, the redesignation of an Unrestricted Subsidiary or otherwise) unless, after giving effect to such action, transaction or series of transactions on a pro forma basis, (i) the Company could incur at least $1.00 of additional Indebtedness pursuant to the first sentence of "-- Certain Covenants - -- Limitation on Indebtedness" and (ii) no Default or Event of Default would occur. Subject to the preceding paragraphs, an Unrestricted Subsidiary may be redesignated as a Subsidiary. The designation of a subsidiary as an Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary as a Subsidiary in compliance with the preceding paragraphs shall be made by the Board of Directors pursuant to a Board Resolution delivered to the Trustee and shall be effective as of the date specified in such Board Resolution, which shall not be prior to the date such Board Resolution is delivered to the Trustee. Any Unrestricted Subsidiary shall become a Subsidiary if it incurs any Indebtedness other than Non-Recourse Indebtedness. If at any time Indebtedness of an Unrestricted Subsidiary which was Non-Recourse Indebtedness no longer so qualifies, such Indebtedness shall be deemed to have been incurred when such Non-Recourse Indebtedness becomes Indebtedness. Limitations on Line of Business. The Indenture provides that neither the Company nor any of its Subsidiaries will directly or indirectly engage to any substantial extent in any line or lines of business activity other than a Related Business. Reports. The Indenture provides that, whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, or any successor provision thereto, the Company shall file with the Commission the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to such Section 13(a) or 15(d) or any successor provision thereto if the Company were subject thereto, such documents to be filed with the Commission on or prior to the respective dates (the "Required Filing Dates") by which the Company would have been required to file them. The Company shall also (whether or not it is required to file reports with the Commission), within 30 days of each Required Filing Date, (i) transmit by mail to all holders of Notes, as their names and addresses appear in the applicable Security Register, without cost to such holders or Persons, and (ii) file with the Trustee, copies of the annual reports, quarterly reports and other documents (without exhibits) which the Company has filed or would have filed with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act, any successor provisions thereto or this covenant. The Company shall not be required to file any report with the Commission if the Commission does not permit such filing. CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER The Company will not, in any transaction or series of transactions, consolidate with or merge into any other Person (other than a merger of a Subsidiary into the Company in which the Company is the continuing Person), or continue in a new jurisdiction or sell, convey, assign, transfer, lease or otherwise dispose of all or substantially all of the Property and assets of the Company and the Subsidiaries, taken as a whole, to any Person, unless (i) either (a) the Company shall be the continuing Person or (b) the Person (if other than the Company) formed by such consolidation or into which the Company is merged, or the Person which acquires, by sale, assignment, conveyance, transfer, lease or disposition, all or substantially all of the Property and assets of the Company and the Subsidiaries, taken as a whole (such Person, the "Surviving Entity"), shall be a Person organized and validly existing under the laws of the United States of America, any political subdivision thereof or any state thereof or the District of Columbia, and shall expressly assume, by a supplemental indenture, the due and punctual payment of the principal of (and premium, if any) and interest on all the Notes and the performance of the Company's covenants and obligations under the Indenture; 90 97 (ii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Event of Default or Default shall have occurred and be continuing or would result therefrom; (iii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), the Company (or the Surviving Entity if the Company is not continuing) shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transactions; and (iv) immediately after giving effect to any such transaction or series of transactions on a pro forma basis as if such transaction or series of transactions had occurred on the first day of the Determination Period, the Company (or the Surviving Entity if the Company is not continuing) would be permitted to incur $1.00 of additional Indebtedness pursuant to the test described in the first sentence under the caption "-- Certain Covenants -- Limitation on Indebtedness." The provision of clause (iv) shall not apply to any merger or consolidation into or with, or any such transfer of all or substantially all of the Property and assets of the Company and the Subsidiaries taken as a whole into, the Company or a Wholly Owned Subsidiary. In connection with any consolidation, merger, transfer of assets or other transactions contemplated by this provision, the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, conveyance or transfer and the supplemental indenture in respect thereto comply with the provisions of the Indenture and that all conditions precedent in the Indenture relating to such transactions have been complied with. Upon any transaction or series of transactions that are of the type described in, and are effected in accordance with, the foregoing paragraphs, the Surviving Entity shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture and the Notes with the same effect as if such Surviving Entity had been named as the Company in the Indenture; and when a Surviving Person duly assumes all of the obligations and covenants of the Company pursuant to the Indenture and the Notes, except in the case of a lease, the predecessor Person shall be relieved of all such obligations. EVENTS OF DEFAULT Each of the following is an "Event of Default" under the Indenture: (a) default in the payment of interest on any Note issued pursuant to the Indenture when the same becomes due and payable, and the continuance of such default for a period of 30 days; (b) default in the payment of the principal of (or premium, if any, on) any Note issued pursuant to the Indenture at its Maturity, whether upon optional redemption, required repurchase (including pursuant to a Change of Control Offer or an Asset Sale Offer) or otherwise or the failure to make an offer to purchase any such Note as required; (c) the Company fails to comply with any of its covenants or agreements contained in "-- Change of Control," "-- Certain Covenants -- Limitation on Restricted Payments," "-- Certain Covenants -- Limitation on Asset Sales," "-- Certain Covenants -- Limitation on Indebtedness," "-- Certain Covenants -- Limitations on Subsidiary Indebtedness and Preferred Stock," "-- Certain Covenants -- Limitation on Sale and Lease- back Transactions" or "-- Consolidation, Merger, Conveyance, Lease or Transfer"; 91 98 (d) default in the performance, or breach, of any covenant or warranty of the Company in the Indenture (other than a covenant or warranty addressed in clause (a), (b) or (c) above) and continuance of such Default or breach for a period of 60 days after written notice thereof has been given to the Company by the Trustee or to the Company and the Trustee by holders of at least 25% of the aggregate principal amount at Stated Maturity of the outstanding Notes; (e) Indebtedness of the Company or any Subsidiary (other than Non-Recourse Indebtedness) is not paid when due within the applicable grace period, if any, or is accelerated by the holders thereof and, in either case, the principal amount of such unpaid or accelerated Indebtedness exceeds $10 million; (f) the entry by a court of competent jurisdiction of one or more final judgments against the Company or any Subsidiary in an uninsured or unindemnified aggregate amount in excess of $10 million which is not discharged, waived, appealed, stayed, bonded or satisfied for a period of 60 consecutive days; (g) the entry by a court having jurisdiction in the premises of (i) a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state, or foreign bankruptcy, insolvency, or other similar law or (ii) a decree or order adjudging the Company or any Significant Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Significant Subsidiary under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state or foreign bankruptcy, insolvency, or similar law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Significant Subsidiary or of any substantial part of the Property or assets of the Company or any Significant Subsidiary, or ordering the winding up or liquidation of the affairs of the Company or any Significant Subsidiary, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; (h) (i) the commencement by the Company or any Significant Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state or foreign bankruptcy, insolvency or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent by the Company or any Significant Subsidiary to the entry of a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state, or foreign bankruptcy, insolvency or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against the Company or any Significant Subsidiary; or (iii) the filing by the Company or any Significant Subsidiary of a petition or answer or consent seeking reorganization or relief under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state or foreign bankruptcy, insolvency or other similar law; or (iv) the consent by the Company or any Significant Subsidiary to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or of any substantial part of the Property or assets of the Company or any Significant Subsidiary or of any substantial part of the Property or assets of the Company or any Significant Subsidiary, or the making by the Company or any Significant Subsidiary of an assignment for the benefit of creditors; or (v) the admission by the Company or any Significant Subsidiary in writing of its inability to pay its debts generally as they become due; or (vi) the taking of corporate action by the Company or any Significant Subsidiary in furtherance of any such action; or (i) any Guarantee shall for any reason cease to be, or be asserted by the Company or any Guarantor, as applicable, not to be, in full force and effect (except pursuant to the release of any such Guarantee in accordance with the Indenture). If any Event of Default (other than an Event of Default specified in clause (g) or (h) above) occurs and is continuing, then and in every such case the Trustee or the holders of not less than 25% of the outstanding aggregate principal amount at Stated Maturity of the Notes, may declare the principal amount at Stated Maturity, premium, if any, 92 99 and any accrued and unpaid interest on all such Notes then outstanding to be immediately due and payable by a notice in writing to the Company (and to the Trustee if given by holders of such Notes), and upon any such declaration all amounts payable in respect of the Notes will become and be immediately due and payable. If any Event of Default specified in clause (g) or (h) above occurs, the principal amount at Stated Maturity, premium, if any, and any accrued and unpaid interest on the Notes then outstanding shall become immediately due and payable without any declaration or other act on the part of the Trustee or any holder of such Notes. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) shall be remedied, or cured or waived by the holders of the relevant Indebtedness within 30 days after such event of default; provided that no judgment or decree for the payment of the money due on the Notes has been obtained by the Trustee as provided in the Indenture. Under certain circumstances, the holders of a majority in principal amount at Stated Maturity of the outstanding Notes by notice to the Company and the Trustee may rescind an acceleration and its consequences. The holders of a majority in principal amount at Stated Maturity of the Notes then outstanding by notice to the Trustee may waive an existing Default and its consequences under the Indenture except (a) a Default in the payment of interest on, or the principal of, such Notes or (b) a Default in respect of a provision that under the "Defeasance and Discharge" section of the Indenture cannot be amended without the consent of each holder of Notes affected. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the holders, unless such holders have offered to such Trustee reasonable security or indemnity. Subject to the provisions of the Indenture and applicable law, the holders of a majority in aggregate principal amount at Stated Maturity of the Notes at the time outstanding have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required within five Business Days after becoming aware of any Default or Event of Default, to deliver to the Trustee a statement describing such Default or Event of Default, its status and what action the Company is taking or proposes to take with respect thereto. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Company, the Subsidiaries or the Unrestricted Subsidiaries, as such, shall have any liability for any obligations of the Company under the Notes, the Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Securities and Exchange Commission that such a waiver is against public policy. AMENDMENT, SUPPLEMENT AND WAIVER The Company, the Guarantors and the Trustee may, at any time and from time to time, without notice to or consent of any holder, enter into one or more indentures supplemental to the Indenture (a) to evidence the succession of another Person to the Company and the Guarantors and the assumption by such successor of the covenants and Obligations of the Company under the Indenture and contained in the Notes and the Guarantors contained in the Indenture and the Guarantees, (b) to add to the covenants of the Company, for the benefit of the holders, or to surrender any right or power conferred upon the Company or the Guarantors by the Indenture, (c) to add any additional Events of Default, (d) to provide for uncertificated Notes in addition to or in place of certificated Notes, (e) to evidence and provide for the acceptance of appointment under the Indenture by the successor Trustee, (f) to secure the Notes and/or the Guarantees, (g) to cure any ambiguity, to correct or supplement any provision in the Indenture which may be inconsistent with any other provision therein or to add any other provisions with respect to matters or questions arising under the Indenture, provided that such actions will not adversely affect the interests of the holders in any material respect or (h) to add or release any Guarantor pursuant to the terms of the Indenture. 93 100 With the consent of the holders of not less than a majority in principal amount at Stated Maturity of the outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes), the Company, the Guarantors and the Trustee may enter into one or more indentures supplemental to the Indenture for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of the holders; provided, however, that no such supplemental indenture will, without the consent of the holder of each outstanding Note affected thereby, (a) change the Stated Maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof (or premium, if any), or the interest thereon that would be due and payable upon Maturity thereof, or change the place of payment where, or the coin or currency in which, any Note or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof, (b) reduce the percentage in principal amount at Stated Maturity of the Outstanding Notes, the consent of whose Holders is necessary for any such supplemental indenture or required for any waiver of compliance with certain provisions of the Indenture, or certain Defaults thereunder, (c) modify the Obligations of the Company to make offers to purchase Notes upon a Change of Control or from the proceeds of Asset Sales, (d) subordinate in right of payment, or otherwise subordinate, the Notes or the Guarantees to any other Indebtedness, (e) amend, supplement or otherwise modify the provisions of the Indenture relating to Guarantees or (f) modify any of the provisions of this paragraph (except to increase any percentage set forth herein or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the holders of each outstanding Note affected thereby). The holders of not less than a majority in principal amount at Stated Maturity of the outstanding Notes may, by notice to the Trustee, waive an existing Default under the Indenture and its consequences, except a Default or Event of Default (a) in the payment of the principal of or interest on any Note or (b) in respect of a covenant or provision hereof which under the proviso to the prior paragraph cannot be modified or amended without the consent of the holder of each outstanding Note affected. SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE The Company may terminate its obligations and the obligations of the Guarantors under the Notes, the Indenture, and the Guarantees when (i) either (A) all outstanding Notes have been delivered to the Trustee for cancellation or (B) all such Notes not therefore delivered to the Trustee for cancellation have become due and payable, will become due and payable within one year or are to be called for redemption within one year under irrevocable arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name and at the expense of the Company, and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of (premium, if any, on) and interest to the date of deposit or Maturity or date of redemption; (ii) the Company has paid or caused to be paid all sums then due and payable by the Company under the Indenture; and (iii) the Company has delivered an Officers' Certificate and an opinion of counsel relating to compliance with the conditions set forth in the Indenture. The Company, at its election, shall (a) be deemed to have paid and discharged its debt on the Notes and the Indenture and Guarantees shall cease to be of further effect as to all outstanding Notes (except as to (i) rights of registration of transfer, substitution and exchange of Notes, (ii) the Company's right of optional redemption, (iii) rights of holders to receive payments of principal of, premium, if any, and interest on the Notes (but not the Change of Control Purchase Price or the Asset Sale Offer Purchase Price) and any rights of the holders with respect to such amounts, (iv) the rights, obligations and immunities of the Trustee under the Indenture, and (v) certain other specified provisions in the Indenture) or (b) cease to be under any obligation to comply with certain restrictive covenants that are described in the Indenture, after the irrevocable deposit by the Company with the Trustee, in trust for the benefit of the holders, at any time prior to the Stated Maturity of the Notes, of (A) money in an amount, (B) U.S. Government Obligations which through the payment of interest and principal will provide, not later than one day before the due date of payment in respect of such Notes, money in an amount, or (C) a combination thereof sufficient to pay and discharge the principal of, premium, if any on, and interest on, such Notes then outstanding on the dates on which any such payments are due in accordance with the terms of the Indenture and of such Notes. Such defeasance or covenant defeasance shall be deemed to occur only if certain conditions are satisfied, including, among other things, delivery by the Company to the 94 101 Trustee of an opinion of outside counsel acceptable to the Trustee to the effect that (i) such deposit, defeasance and discharge will not be deemed, or result in, a taxable event for federal income tax purposes with respect to the holders; and (ii) the Company's deposit will not result in the trust or such Trustee being subject to regulation under the Investment Company Act of 1940. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any capitalized terms used herein for which no definition is provided. "Acquired Indebtedness" means, with respect to any specified Person, (a) Indebtedness of any other Person existing at the time such other Person merged with or into or became a subsidiary of such specified Person, including Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a subsidiary of such specified Person, but excluding Indebtedness which is extinguished, retired or repaid in connection with such other Person merging with or into or becoming a subsidiary of such specified Person, and (b) Indebtedness existing and secured by an asset acquired by such specified Person but not incurred in contemplation of such acquisition. "Adjusted Net Assets" of a Guarantor at any date shall mean the amount by which the fair value of the properties and assets of such Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under its Guarantee, of such Guarantor at such date. "Affiliate" of any specified Person means another Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided, however, that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. "Asset Sale" means any direct or indirect sale, conveyance, transfer, lease or other disposition (including, without limitation, by way of merger or consolidation or by means of a Sale and Lease-Back Transaction) by the Company or any Subsidiary to any Person other than the Company, a Guarantor or a Subsidiary, in one transaction, or a series of related transactions, of (i) any Capital Stock of any Subsidiary (except for directors' qualifying shares or minority interests sold to other Persons solely due to local law requirements that there be more than one stockholder, but which are not in excess of what is required for such purpose), or (ii) any other Property or assets of the Company or any Subsidiary, other than (A) sales of drill-string components and obsolete or worn out equipment in the ordinary course of business or other assets that, in the Company's reasonable judgment, are no longer used or useful in the conduct of the business of the Company and its Subsidiaries), (B) any drilling contract, charter or other lease of Property or other assets entered into by the Company or any Subsidiary in the ordinary course of business, (C) a Restricted Payment or Restricted Investment permitted under "-- Certain Covenants -- Limitation on Restricted Payments," (D) a Change of Control, (E) a sale, lease, consolidation, merger, continuance or the disposition of all or substantially all of the assets of the Company and the Subsidiaries, taken as a whole in compliance with the provision of the Indenture described in "-- Consolidation, Merger, Conveyance, Lease or Transfer," (F) any trade or exchange by the Company or any Subsidiary of one or more drilling rigs for one or more other drilling rigs of like kind owned or held by another Person, provided that (x) the Fair Value of the rig or rigs traded or exchanged by the Company or such Subsidiary (including cash or cash equivalents to be delivered by the Company or such Subsidiary) is reasonably equivalent to the Fair Value of the drilling rig or rigs (together with cash or cash equivalents to be received by the Company or such Subsidiary) or other assets having a Fair Market Value in excess of $10 million as determined by written appraisal by a nationally (or industry) recognized investment banking firm or appraisal firm and (y) such exchange is approved by a majority of the disinterested directors of the Company and (G) any transfer of assets pursuant 95 102 to a Permitted Investment. An Asset Sale shall include the requisition of title to, seizure of or forfeiture of any Property or assets, or any actual or constructive total loss or an agreed or compromised total loss of any Property or assets. "Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction means, at any date of determination, the present value (discounted at the interest rate borne by the Notes, compounded annually) of the total obligations of the lessee for rental payments (other than amounts required to be paid on account of property taxes, maintenance, repairs, insurance, assessments, utilities, operating and labor costs and other items which do not constitute payments for property rights) during the remaining term of the lease (or to the first date on which the lessee is permitted to terminate such lease without the payment of a penalty) included in such Sale and Lease-Back Transaction (including any period for which such lease has been extended). "Average Life" means, as of any date, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (x) the number of years from such date to the date of each scheduled principal payment (including any sinking fund or mandatory redemption payment requirements) of such debt security multiplied in each case by (y) the amount of such principal payment by (ii) the sum of all such principal payments. "Capital Lease Obligation" means, at any time as to any Person with respect to any Property leased by such Person as lessee, the amount of the liability with respect to such lease that would be required at such time to be capitalized and accounted for as a capital lease on the balance sheet of such Person prepared in accordance with GAAP. "Capital Stock" in any Person means any and all shares, interests, membership interests, partnership interests, participations or other equivalents in the equity interest (however designated) in such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to acquire any equity interest in such Person. "Cash Proceeds" means, with respect to any Asset Sale by any Person, the aggregate consideration received for such Asset Sale by such Person in the form of cash or cash equivalents (including any amounts of insurance or other proceeds received in connection with an Asset Sale of the type described in the last sentence of the definition thereof), including payments in respect of deferred payment obligations when received in the form of cash or cash equivalents (except to the extent that such obligations are financed or sold with recourse to such Person or any subsidiary thereof). "Change of Control" means (i) a determination by the Company that any Person or group (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the Voting Stock of the Company other than Permitted Holders; (ii) the Company is merged with or into or consolidated with another corporation and, immediately after giving effect to the merger or consolidation, less than 50% of the outstanding voting securities entitled to vote generally in the election of directors or persons who serve similar functions of the surviving or resulting entity are then beneficially owned (within the meaning of Rule 13d-3 of the Exchange Act) in the aggregate by (x) the stockholders of the Company immediately prior to such merger or consolidation, or (y) if the record date has been set to determine the stockholders of the Company entitled to vote on such merger or consolidation, the stockholders of the Company as of such a record date; (iii) the Company, either individually or in conjunction with one or more Subsidiaries, sells, conveys, transfers or leases, or the Subsidiaries sell, convey, transfer or lease, all or substantially all of the assets of the Company or the Company and the Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of the Subsidiaries, to any Person (other than a Wholly Owned Subsidiary); (iv) the liquidation or dissolution of the Company; or (v) the first day on which a majority of the individuals who constitute the Board of Directors of the Company are not Continuing Directors. "Consolidated Interest Coverage Ratio" means as of the date of the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio (the "Transaction Date"), the ratio of (i) the lesser of the aggregate amount of EBITDA of the Company and its consolidated Subsidiaries for either (a) the four fiscal quarters immediately prior to the applicable Transaction Date for which financial information in respect thereof is available or (b) the immediately preceding fiscal quarter for which financial information in respect thereof is available multiplied by four (the period yielding such lesser amount shall be the "Determination Period"), to (ii) the aggregate Consolidated Interest Expense of the Company and its consolidated Subsidiaries that is anticipated to accrue during a period consisting of the 96 103 fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent thereto (based upon the pro forma amount and maturity of, and interest payments in respect of, Indebtedness of the Company and its consolidated Subsidiaries expected by the Company to be outstanding on the Transaction Date), assuming for the purposes of this measurement the continuation of market interest rates prevailing on the Transaction Date and base interest rates in respect of floating interest rate obligations equal to the base interest rates on such obligations in effect as of the Transaction Date, provided that if the Company or any of its consolidated Subsidiaries is a party to any Interest Swap Obligation that would have the effect of changing the interest rate on any Indebtedness of the Company or any of its consolidated Subsidiaries for such four-quarter period (or portion thereof), the resulting rate shall be used for such four-quarter period (or portion thereof); provided, further, that any Consolidated Interest Expense of the Company with respect to Indebtedness incurred or retired by the Company or any of its Subsidiaries during the fiscal quarter in which the Transaction Date occurs shall be calculated as if such debt was incurred or retired on the first day of the fiscal quarter in which the Transaction Date occurs; provided, further, that if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio would have the effect of increasing or decreasing EBITDA in the future and if such increase or decrease is readily quantifiable and is attributable to such transaction, EBITDA shall be calculated on a pro forma basis as if such transaction had occurred on the first day of the Determination Period referred to in clause (i) of this definition, and if, during the same Determination Period, (x) the Company or any of its consolidated Subsidiaries shall have engaged in any Asset Sale, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which are the subject of such Asset Sale for such period calculated on a pro forma basis as if such Asset Sale and any related retirement of Indebtedness had occurred on the first day of such period or (y) after the Issue Date, the Company or any of its consolidated Subsidiaries shall have acquired any material assets other than in the ordinary course of business, EBITDA and Consolidated Interest Expense shall be calculated on a pro forma basis as if such acquisition had occurred on the first day of such period. "Consolidated Interest Expense" means, with respect to any Person for any period, without duplication (A) the sum of (i) the aggregate amount of cash and noncash interest expense (including capitalized interest) of such Person and its subsidiaries for such period as determined on a consolidated basis in accordance with GAAP in respect of Indebtedness (including, without limitation, (v) any amortization of debt discount, (w) net costs associated with Interest Swap Obligations (including any amortization of discounts), (x) the interest portion of any deferred payment obligation calculated in accordance with the effective interest method, (y) all accrued interest and (z) all commissions, discounts and other fees and charges owed with respect to letters of credit, bankers acceptances or similar facilities) paid or accrued, or scheduled to be paid or accrued, during such period; (ii) dividends on Preferred Stock or Redeemable Stock of such Person (and Preferred Stock or Redeemable Stock of its subsidiaries if paid to a Person other than such Person or its subsidiaries) declared and payable in cash; (iii) the portion of any rental obligation of such Person or its subsidiaries in respect of any Capital Lease Obligation allocable to interest expense in accordance with GAAP; (iv) the portion of any rental obligation of such Person or its subsidiaries in respect of any Sale and Lease-Back Transaction allocable to interest expense (determined as if such were treated as a Capital Lease Obligation); and (v) to the extent any debt of any other Person is guaranteed by such Person or any of its subsidiaries, the aggregate amount of interest paid, accrued or scheduled to be paid or accrued, by such other Person during such period attributable to any such debt, less (B) to the extent included in (A) above, amortization or write-off of deferred financing costs of such Person and its subsidiaries during such period and any charge related or any premium or penalty paid in connection with redeeming or retiring any Indebtedness of such Person and its subsidiaries prior to its stated maturity; in the case of both (A) and (B) above, after elimination of intercompany accounts among such Person and its subsidiaries and as determined in accordance with GAAP. For purposes of clause (ii) above, dividend requirements attributable to any Preferred Stock or Redeemable Stock shall be deemed to be an amount equal to the amount of dividend requirements on such Preferred Stock or Redeemable Stock times a fraction, the numerator of which is one, and the denominator of which is one minus the applicable combined federal, state, local and foreign income tax rate of the Company and its Subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal year immediately preceding the date of the transaction giving rise to the need to calculate Consolidated Interest Expense. "Consolidated Net Income" of any Person means, for any period, the aggregate net income (or net loss, as the case may be) of such Person and its subsidiaries for such period on a consolidated basis, determined in accordance with GAAP, provided that there shall be excluded therefrom, without duplication, (i) any net income of any Unrestricted 97 104 Subsidiary, except that the Company's or any Subsidiary's interest in the net income of such Unrestricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash or cash equivalents actually distributed by such Unrestricted Subsidiary during such period to the Company or a Subsidiary as a dividend or other distribution, (ii) gains and losses, net of taxes, from Asset Sales or reserves relating thereto, (iii) the net income of any Person that is not a subsidiary or that is accounted for by the equity method of accounting which shall be included only to the extent of the amount of dividends or distributions paid to such Person or its subsidiaries, (iv) items (but not loss items) classified as extraordinary, unusual or nonrecurring (other than the tax benefit, if any, of the utilization of net operating loss carryforwards or alternative minimum tax credits), (v) the net income (but not net loss) of any Person acquired by such specified Person or any of its subsidiaries in a pooling-of-interests transaction for any period prior to the date of such acquisition, (vi) any gain or loss, net of taxes, realized on the termination of any employee pension benefit plan, (vii) the net income (but not net loss) of any subsidiary of such specified Person to the extent that the transfer to that Person of that income is not at the time permitted, directly or indirectly, by any means (including by dividend, distribution, advance or loan or otherwise), by operation of the terms of its charter or any agreement with a Person other than with such specified Person, instrument held by a Person other than by such specified Person, judgment, decree, order, statute, law, rule or governmental regulations applicable to such subsidiary or its stockholders, except for any dividends or distributions actually paid by such subsidiary to such Person, (viii) with regard to a non-Wholly Owned Subsidiary, any aggregate net income (or loss) in excess of such Person's or such subsidiary's pro rata share of such non-Wholly Owned Subsidiary's net income (or loss) and (ix) the cumulative effect of any changes in accounting principles. "Consolidated Net Worth" of any Person means, as of any date, the sum of the Capital Stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) on a consolidated basis at such date, less amounts attributable to Redeemable Stock of such Person or any of its subsidiaries with each item determined in accordance with GAAP. "Continuing Director" means an individual who (i) is a member of the Board of Directors of the Company and (ii) either (A) was a member of the Board of Directors of the Company on the Issue Date or (B) whose nomination for election or election to the Board of Directors of the Company was approved by vote of at least a majority of the directors then still in office who were either directors on the Issue Date or whose election or nomination for election was previously so approved. "Currency Hedge Obligations" means, at any time as to any Person, the obligations of such Person at such time which were incurred in the ordinary course of business pursuant to any foreign currency exchange agreement, option or future contract or other similar agreement or arrangement designed to protect against or manage such Person's or any of its subsidiaries exposure to fluctuations in foreign currency exchange rates. "Default" means any event, act or condition the occurrence of which is, or after notice or the passage time or both would be, an Event of Default. "Determination Period" has the meaning specified under clause (i) of the definition of "Consolidated Interest Coverage Ratio." "EBITDA" means, with respect to any Person for any period, the sum of, without duplication, the amounts for such period, taken as a single accounting period, of the Consolidated Net Income of such Person for such period, plus to the extent reflected in the income statement of such Person for such period from which Consolidated Net Income is determined, without duplication, (i) Consolidated Interest Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization expense, (v) any charge related to any premium or penalty paid in connection with redeeming or retiring any Indebtedness prior to its stated maturity and (vi) any other non-cash charges and minus, to the extent reflected in such income statement, any non-cash credits that had the effect of increasing Consolidated Net Income of such Person for such period. 98 105 "Fair Market Value" means, with respect to consideration or other amount received or to be received pursuant to any transaction by any Person, the fair market value of such consideration or other amount as determined in good faith by the Board of Directors of the Company. "Fair Value" means, with respect to any asset or Property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. "GAAP" means, at any date, United States generally accepted accounting principles, consistently applied, as set forth in the opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants ("AICPA") and statements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be designated by the AICPA, that are applicable to the circumstances as of the date of determination; provided, however, that all calculations made for purposes of determining compliance with the provisions set forth in the Indenture shall utilize GAAP in effect at the Issue Date. "Guarantee" means any guarantee of the Notes by any Guarantor in accordance with the provisions described under "-- Guarantees of Notes." "Guarantor" means each Subsidiary of the Company that is required to guarantee the Company's Obligations under the Notes and the Indenture as described in "-- Guarantees of Notes" and any other Subsidiary of the Company that executes a supplemental indenture in which such Subsidiary agrees to guarantee the Company's Obligations under the Notes and the Indenture. "incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, suffer to exist, incur (by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or other obligation or the recording, as required pursuant to GAAP, of any such Indebtedness or obligation on the balance sheet of such Person (and "incurrence," "incurred," "incurrable" and "incurring" shall have meanings correlative to the foregoing); provided that a change in GAAP that results in an obligation of such Person that exists at such time becoming Indebtedness shall not be deemed an incurrence of such Indebtedness. Indebtedness otherwise incurred by a Person before it becomes a Subsidiary shall be deemed to have been incurred at the time at which it becomes a Subsidiary. "Indebtedness" as applied to any Person means, at any time, without duplication, whether recourse is to all or a portion of the assets of such Person, and whether or not contingent, (i) any obligation of such Person for borrowed money; (ii) any obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, excluding accounts payable and accrued liabilities arising in the ordinary course of business; (iii) any obligation of such Person for all or any part of the purchase price of Property or for the cost of Property constructed or of improvements thereto (including any obligation under or in connection with any letter of credit related thereto), other than accounts payable incurred and accrued liabilities arising in respect of Property and services purchased in the ordinary course of business; (iv) any obligation of such Person upon which interest charges are customarily paid (other than accounts payable incurred in the ordinary course of business); (v) any obligation of such Person under conditional sale or other title retention agreements relating to purchased Property; (vi) any obligation of such Person issued or assumed as the deferred purchase price of Property (other than accounts payable incurred in the ordinary course of business; (vii) any Capital Lease Obligation or Attributable Indebtedness pursuant to any Sale and Lease-Back Transaction of such Person; (viii) any obligation of any other Person secured by (or for which the obligee thereof has an existing right, contingent or otherwise, to be secured by) any Lien on Property owned or acquired, whether or not any obligation secured thereby has been assumed, by such Person; (ix) any obligation of such Person in respect of any letter of credit supporting any obligation of any other Person described in clauses (i) through (viii); (x) the maximum fixed repurchase price of any Redeemable Stock of such Person (or if such Person is a Subsidiary, any Preferred Stock of such Person); (xi) the notional amount of any Interest Swap Obligation or Currency Hedge Obligation of such Person at the time of determination; and (xii) any obligation under a bond, note, payment guarantee or similar instrument which is in economic effect a guarantee, regardless of its characterization (other than an endorsement in the ordinary course of business), with respect to any Indebtedness of another Person, to the extent guaranteed. For purposes of the preceding 99 106 sentence, the maximum fixed repurchase price of any Redeemable Stock or subsidiary Preferred Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock or subsidiary Preferred Stock as if such Redeemable Stock or subsidiary Preferred Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture Supplement; provided, however, that if such Redeemable Stock or subsidiary Preferred Stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Redeemable Stock or subsidiary Preferred Stock. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any guarantees at such date; provided that for purposes of calculating the amount of any non-interest bearing or other discount security, such Indebtedness shall be deemed to be the principal amount thereof that would be shown on the balance sheet of the issuer dated such date prepared in accordance with GAAP but that such security shall be deemed to have been incurred only on the date of the original issuance thereof. "Interest Swap Obligation" means, with respect to any Person, the obligation of such Person pursuant to any interest rate swap agreement, interest rate cap, collar or floor agreement or other similar agreement or arrangement designed to protect against or manage such Person's or any of its subsidiaries exposure to fluctuations in interest rates. "Investment" means, with respect to any Person, any direct, indirect investment in another Person, whether by means of a share purchase, capital contribution, loan, advance (other than advances to employees for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or similar credit extension constituting Indebtedness of such other Person, and any guarantee of Indebtedness of any other Person; provided that the term "Investment" shall not include any transaction involving the purchase or other acquisition (including by way of merger) of Property (including Capital Stock) by the Company or any Subsidiary in exchange for Capital Stock (other than Redeemable Stock) of the Company. The amount of any Person's Investment shall be the original cost of such Investment to such Person, plus the cost of all additions thereto paid by such Person, and minus the amount of any portion of such Investment repaid or loaned to such Person as a repayment of principal or a return of capital, as the case may be, but without any other adjustments for increases or decreases in value, or write- ups, writedowns, or write-offs with respect to such Investment. In determining the amount of any Investment involving a transfer of any Property or assets other than cash, such Property or assets shall be valued at its Fair Value at the time of such transfer as determined in good faith by the board of directors (or comparable body) of the Person making such transfer. The Company shall be deemed to make an "Investment" in the amount of the Fair Value of the Assets of a Subsidiary at the time such Subsidiary is designated an Unrestricted Subsidiary. "Issue Date" means the date on which the Notes are first authenticated and delivered under the Indenture. "Joint Venture" means any Person (other than a Guarantor) designated as such by a resolution of the Board of Directors of the Company and as to which (i) the Company, any Guarantor or any Joint Venture owns less than 50% of the Capital Stock of such Person; (ii) no more than ten unaffiliated Persons own of record any Capital Stock of such Person; (iii) at all times, each such Person owns the same proportion of each class of Capital Stock of such Person outstanding at such time; (iv) no Indebtedness of such Person is or becomes outstanding other than Non-Recourse Indebtedness; (v) there exist no consensual encumbrances or restrictions on the ability of such Person to (x) pay, directly or indirectly, dividends or make any other distributions in respect of its Capital Stock to the holders of its Capital Stock or (y) pay any Indebtedness or other obligation owed to the holders of its Capital Stock or (z) make any Investment in the holders of its Capital Stock, in each case other than the types of consensual encumbrances or restrictions that would be permitted by the "Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries" covenant if such Person were a Subsidiary; and (vi) the business engaged in by such Person is a Related Business. "Lien" means any mortgage, pledge, hypothecation, charge, assignment, deposit arrangement, encumbrance, security interest, lien (statutory or other), or preference, priority or other security or similar agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any agreement to give or grant a Lien or any lease, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). "Loan Agreements" means the Term Loan, the Revolving Loan and the Top Drive Notes. 100 107 "Maturity" means the date on which the principal of a Note becomes due and payable as provided therein or in the Indenture, whether at the Stated Maturity or the Change of Control Payment Date or purchase date established pursuant to the terms of the Indenture for an Asset Sale Offer or by declaration of acceleration, call for redemption or otherwise. "Net Available Proceeds" means, as to any Asset Sale, the Cash Proceeds therefrom, net of all legal and title expenses, commissions and other fees and expenses incurred (including, without limitation, fees and expenses of legal counsel and accountants and fees, expenses, discounts or commissions of underwriters, placement agents and investment bankers), and all Federal, state, foreign, recording and local taxes payable or provided for as a consequence of such Asset Sale, net of all payments made to any Person other than the Company or a Subsidiary on any Indebtedness which is secured by such assets, in accordance with the terms of any Lien upon or with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale and, as for any Asset Sale by a Subsidiary, net of the equity interest in such Cash Proceeds of any holder of Capital Stock of such Subsidiary (other than the Company, any other Subsidiary or any Affiliate of the Company or any such other Subsidiary) and net of appropriate amounts to be provided by the Company or any Subsidiary of the Company, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Company or any Subsidiary of the Company, as the case may be, after such Asset Sale including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Non-Recourse Indebtedness" means Indebtedness or that portion of Indebtedness of an Unrestricted Subsidiary or a foreign Subsidiary not constituting a Guarantor as to which (a) neither the Company nor any other Subsidiary (other than an Unrestricted Subsidiary or a Subsidiary of such foreign Subsidiary) (i) provides credit support constituting Indebtedness or (ii) is directly or indirectly liable for such Indebtedness and (b) no default with respect to such Indebtedness (including any rights which the holders thereof may have to take enforcement action against an Unrestricted Subsidiary or such foreign Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or its other Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Obligations" means, with respect to any Indebtedness, any obligation thereunder, including, without limitation, principal, premium and interest (including post petition interest thereon), penalties, fees, costs, expenses, indemnifications, reimbursements, damages and other liabilities. "Obligors" means the Company and the Guarantors, collectively; "Obligor" means the Company or any Guarantor. "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the President, the Chief Executive Officer, the Chief Operating Officer or a Vice President, and by the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company or a Subsidiary and delivered to the Trustee, which shall comply with the Indenture. "Permitted Holders" means the parties to the Stockholders and Voting Agreement. "Permitted Indebtedness" means (a) Indebtedness of the Company under the Notes; (b) Indebtedness under the Loan Agreements; (c) Indebtedness (and any guarantee thereof) under one or more credit or revolving Loan Agreements with a bank or syndicate of banks or financial institutions or other lenders, as such may be amended, modified, revised, extended, replaced, or refunded from time to time, provided that at the date such Indebtedness is incurred and after giving effect to the incurrence of such Indebtedness, the aggregate amount of all Indebtedness outstanding at such time under this clause (c) shall not exceed $50 million, less any amounts derived from Asset Sales and applied to the required permanent reduction of Senior Debt (and a permanent reduction of the related commitment to lend or amount available to be reborrowed in the case of a revolving Loan Agreement) under such Loan Agreements as contemplated by the "Limitation on Asset Sales" covenant; (d) Indebtedness of the Company or any Subsidiary under 101 108 Interest Swap Obligations, provided that (i) such Interest Swap Obligations are related to payment obligations on Indebtedness otherwise permitted under the covenants described in "-- Certain Covenants -- Limitation on Indebtedness" and (ii) the notional principal amount of such Interest Swap Obligations does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligations relate; (e) Indebtedness of the Company or any Subsidiary under Currency Hedge Obligations, provided that (i) such Currency Hedge Obligations are related to payment obligations on Indebtedness otherwise permitted under the covenants described in "-- Certain Covenants -- Limitation on Indebtedness" or to the foreign currency cash flows reasonably expected to be generated by the Company and the Subsidiaries and (ii) the notional principal amount of such Currency Hedge Obligations does not exceed the principal amount of the Indebtedness and the amount of the foreign currency cash flows to which such Currency Hedge Obligations relate; (f) Indebtedness of the Company or any Subsidiary outstanding on the Issue Date; (g) the Guarantees of the Notes (and any assumption of the Obligations guaranteed thereby); (h) Indebtedness of the Company or any Subsidiary in respect of bid performance bonds, surety bonds, appeal bonds and letters of credit or similar arrangements issued for the account of the Company or any Subsidiary, in each case in the ordinary course of business and other than for an obligation for money borrowed; (i) Indebtedness of the Company to a Guarantor or other Wholly Owned Subsidiary and Indebtedness of a Guarantor or other Wholly Owned Subsidiary to the Company or another Guarantor or other Wholly Owned Subsidiary; provided that upon any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Guarantor ceasing to be a Guarantor or such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary, as the case may be, or any other subsequent transfer of any such Indebtedness (except to the Company or a Guarantor or other Wholly Owned Subsidiary), such Indebtedness shall be deemed, in each case, to be incurred and shall be treated as an incurrence for purposes of the "Limitation on Indebtedness" covenants at the time the Guarantor in question ceased to be a Guarantor or the Wholly Owned Subsidiary in question ceased to be a Wholly Owned Subsidiary; (j) Subordinated Indebtedness of the Company to an Unrestricted Subsidiary; (k) Indebtedness of the Company and its Subsidiaries in connection with a purchase of the Notes pursuant to a Change of Control Offer, provided that the aggregate principal amount of such Indebtedness does not exceed 101% of the aggregate principal amount at Stated Maturity of the Notes purchased pursuant to such Change of Control Offer; provided, further, that such Indebtedness (A) has an Average Life equal to or greater than the remaining Average Life of the Notes and (B) does not mature prior to one year following the Stated Maturity of the Notes; (l) Permitted Refinancing Indebtedness; (m) Permitted Subsidiary Refinancing Indebtedness; and (n) additional Indebtedness in an aggregate principal amount not in excess of $5.0 million at any one time outstanding. So as to avoid duplication in determining the amount of Permitted Indebtedness under any clause of this definition, guarantees permitted to be incurred pursuant to the Indenture of, or obligations permitted to be incurred pursuant to the Indenture in respect of letters of credit supporting, Indebtedness otherwise included in the determination of such amount shall not also be included. For purposes of determining compliance with the covenant captioned "-- Limitation on Indebtedness," in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness or is entitled to be incurred pursuant to the first paragraph of such covenant, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph of such covenant. "Permitted Investments" means (a) certificates of deposit, bankers acceptances, time deposits, Eurocurrency deposits and similar types of Investments routinely offered by commercial banks organized in the United States with final maturities of one year or less issued by commercial banks organized in the United States having capital and surplus in excess of $300 million; (b) commercial paper issued by any corporation, if such commercial paper has credit ratings of at least "A-1" or its equivalent by S&P or at least "P-I" or its equivalent by Moody's; (c) U.S. Government Obligations with a maturity of four years or less; (d) repurchase obligations for instruments of the type described in clause (c) with any bank meeting the qualifications specified in clause (a) above; (e) shares of money market mutual or similar funds having assets in excess of $100 million; (f) payroll advances in the ordinary course of business; (g) other advances and loans to officers and employees of the Company or any Subsidiary, so long as the aggregate principal amount of such advances and loans does not exceed $500,000 at any one time outstanding; (h) Investments represented by that portion of the proceeds from Asset Sales that is not required to be Cash Proceeds by the covenant described in "-- Certain Covenants - -- Limitation on Asset Sales"; (i) Investments made by the Company in Guarantors or in its other Wholly Owned Subsidiaries (or any Person that will be a Wholly Owned Subsidiary as a result of such Investment) or by a Subsidiary in the Company or in one or more Guarantors or other Wholly Owned Subsidiaries (or any Person that will 102 109 be a Wholly Owned Subsidiary as a result of such Investment); (j) Investments in stock, obligations or securities received in settlement of debts owing to the Company or any Subsidiary as a result of bankruptcy or insolvency proceedings or upon the foreclosure, perfection or enforcement of any Lien in favor of the Company or any Subsidiary, in each case as to debt owing to the Company or any Subsidiary that arose in the ordinary course of business of the Company or any such Subsidiary or otherwise in the Company's reasonable credit judgment; (k) certificates of deposit, bankers acceptances, time deposits, Eurocurrency deposits and similar types of Investments routinely offered by commercial banks organized in the United States with final maturities of one year or less and in an aggregate amount not to exceed $5 million at any one time outstanding with a commercial bank organized in the United States having capital and surplus in excess of $75 million; (l) Interest Swap Obligations with respect to any floating rate Indebtedness that is permitted by the terms of the Indenture to be outstanding; (m) Currency Hedge Obligations, provided that such Currency Hedge Obligations constitute Permitted Indebtedness permitted by clause (d) of the definition thereof, (n) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility, worker's compensation and performance and other similar deposits in the ordinary course of business; and (o) Investments pursuant to any agreement or obligation of the Company or any Subsidiary in effect on the Issue Date and listed on a schedule attached to the Indenture. "Permitted Liens" means (a) Liens in existence on the Issue Date; (b) Liens created for the benefit of the Notes and/or the Guarantees; (c) Liens on Property of a Person existing at the time such Person is merged or consolidated with or into the Company or a Subsidiary (and not incurred as a result of, or in anticipation of, such transaction), provided that any such Lien relates solely to such Property; (d) Liens on Property existing at the time of the acquisition thereof (and not incurred as a result of, or in anticipation of such transaction), provided that any such Lien relates solely to such Property; (e) Liens incurred or pledges and deposits made in connection with worker's compensation, unemployment insurance and other social security benefits, statutory obligations, bid, surety or appeal bonds, performance or tender bonds or leases or other obligations of a like nature incurred in the ordinary course of business; (f) Liens imposed by law or arising by operation of law, including, without limitation, landlords', mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors' Liens and Liens for master's and crew's wages and other similar maritime Liens, and incurred in the ordinary course of business for sums not delinquent or being contested in good faith, if such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made with respect thereof; (g) zoning restrictions, easements, licenses, covenants, reservations, restrictions on the use of real property and defects, irregularities and deficiencies in title to real property that do not, individually or in the aggregate, materially affect the ability of the Company or any Subsidiary to conduct its business presently conducted; (h) Liens for taxes or assessments or other governmental charges or levies not yet due and payable, or the validity of which is being contested by the Company or a Subsidiary in good faith and by appropriate proceedings upon stay of execution or the enforcement thereof and for which adequate reserves in accordance with GAAP or other appropriate provision has been made; (i) Liens to secure Indebtedness incurred for the purpose of financing all or a part of the purchase price or construction cost of Property acquired or constructed after the Issue Date, provided that (1) the principal amount of Indebtedness secured by such Liens shall not exceed 100% of the lesser of cost or Fair Market Value of the Property so acquired or constructed plus transaction costs related thereto, (2) such Liens shall not encumber any other assets or Property of the Company or any Subsidiary (other than the proceeds thereof and accessions and upgrades thereto) and (3) such Liens shall attach to such Property within 180 days of the date of the completion of the construction or acquisition of such Property; (j) Liens securing Capital Lease Obligations, provided, further, that such Liens secure Capital Lease Obligations which, when combined with (1) the outstanding secured Indebtedness of the Company and its Subsidiaries (other than Indebtedness secured by Liens described under clauses (b) and (i) hereof) and (2) the aggregate principal amount of all other Capital Lease Obligations of the Company and Subsidiaries, does not exceed $5 million at any one time outstanding; (k) Liens to secure any extension, renewal, refinancing or refunding (or successive extensions, renewals, refinancings or refundings), in whole or in part, of any Indebtedness secured by Liens referred to in the foregoing clauses (a), (c) and (d), provided, further, that such Lien does not extend to any other Property of the Company or any Subsidiary and the principal amount of the Indebtedness secured by such Lien is not increased; (1) any charter or lease; (m) leases or subleases of real property to other Persons; (n) Liens securing Permitted Indebtedness described in clause (c) of the definition thereof, (o) judgment liens not giving rise to an Event of Default so long as any appropriate legal proceedings which may have been initiated for the review of such judgment shall not have been finally terminated or the period within which such proceeding may be initiated shall not have expired; (p) rights of off-set of banks and other Persons; (q) liens in favor of the Company; (r) other deposits made to secure liability to insurance 103 110 carriers under insurance or self insurance arrangements; (s) Liens securing reimbursement obligations under letters of credit, provided in each case that such Liens cover only the title documents and related goods (and any proceeds thereof) covered by the related letter of credit and (t) Liens or equitable encumbrances deemed to exist by reason of a negative pledge or other agreements to refrain from permitting Liens. "Permitted Refinancing Indebtedness" means Indebtedness of the Company, incurred in exchange for, or the net proceeds of which are used to renew, extend, refinance, refund or repurchase, outstanding Indebtedness of the Company which outstanding Indebtedness was incurred in accordance with, or is otherwise permitted by, the terms of clauses (a) and (e) of the definition of "Permitted Indebtedness," provided that (i) if the Indebtedness being renewed, extended, refinanced, refunded or repurchased is pari passu with or subordinated in right of payment (without regard to its being secured) to the Notes, then such new Indebtedness is pari passu with or subordinated in right of payment (without regard to its being secured) to, as the case may be, the Notes at least to the same extent as the Indebtedness being renewed, extended, refinanced, refunded or repurchased, (ii) such new Indebtedness is scheduled to mature later than the Indebtedness being renewed, extended, refinanced, refunded or repurchased, (iii) such new Indebtedness has an Average Life at the time such Indebtedness is incurred that is greater than the Average Life of the Indebtedness being renewed, extended, refinanced, refunded or repurchased, and (iv) such new Indebtedness is in aggregate principal amount (or, if such Indebtedness is issued at a price less than the principal amount thereof, the aggregate amount of gross proceeds therefrom is) not in excess of the aggregate principal amount then outstanding of the Indebtedness being renewed, extended, refinanced, refunded or repurchased (or if the Indebtedness being renewed, extended, refinanced, refunded or repurchased was issued at a price less than the principal amount thereof, then not in excess of the amount of liability in respect thereof determined in accordance with GAAP) plus the amount of reasonable fees, expenses, and premium, if any, incurred by the Company or such Subsidiary in connection therewith. "Permitted Subsidiary Refinancing Indebtedness" means Indebtedness of any Subsidiary, incurred in exchange for, or the net proceeds of which are used to renew, extend, refinance, refund or repurchase, outstanding Indebtedness of such Subsidiary which outstanding Indebtedness was incurred in accordance with, or is otherwise permitted by, the terms of clauses (e) and (f) of the definition of Permitted Indebtedness, provided that (i) if the Indebtedness being renewed, extended, refinanced, refunded or repurchased is pari passu with or subordinated in right of payment (without regard to its being secured) to the Guarantee of such Subsidiary, then such new Indebtedness is pari passu with or subordinated in right of payment (without regard to its being secured) to, as the case may be, the Guarantee of such Subsidiary at least to the same extent as the Indebtedness being renewed, extended, refinanced, refunded or repurchased, (ii) such new Indebtedness is scheduled to mature later than the Indebtedness being renewed, extended, refinanced, refunded or repurchased, (iii) such new Indebtedness has an Average Life at the time such Indebtedness is incurred that is greater than the Average Life of the Indebtedness being renewed, extended, refinanced, refunded or repurchased, and (iv) such new Indebtedness is in an aggregate principal amount (or, if such Indebtedness is issued at a price less than the principal amount thereof, the aggregate amount of gross proceeds therefrom is) not in excess of the aggregate principal amount then outstanding of the Indebtedness being renewed, extended, refinanced, refunded or repurchased (or if the Indebtedness being renewed, extended, refinanced, refunded or repurchased was issued at a price less than the principal amount thereof, then not in excess of the amount of liability in respect thereof determined in accordance with GAAP) plus the amount of reasonable fees, expenses, and premium, if any, incurred by the Company or such Subsidiary in connection therewith. "Person" means any individual, corporation, limited liability company, partnership, joint venture, incorporated or unincorporated association, joint stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind. "Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends and/or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of at least one other class of such Person. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, excluding Capital Stock in any other Person. 104 111 "Qualified Equity Offering" means an offering of Capital Stock (other than Redeemable Stock) of the Company for cash, whether pursuant to an effective registration statement under the Securities Act (other than on Form S-8) or any private placement of Capital Stock (other than Redeemable Stock) of the Company which offering or placement is consummated after the Issue Date. "Redeemable Stock" means, with respect to any Person, any equity security that by its terms or otherwise is required to be redeemed, or is redeemable at the option of the holder thereof, at any time prior to one year following the Stated Maturity of the Notes or is exchangeable into Indebtedness of such Person or any of its subsidiaries. "Related Business" means the contract drilling business and activities incidental thereto and any business related, complimentary or ancillary thereto. "Replacement Asset" means a Property or asset that, as determined by the Board of Directors of the Company as evidenced by a Board Resolution, is used or is useful in a Related Business. "Restricted Investment" means any Investment in any Person, including an Unrestricted Subsidiary or the designation of a Subsidiary as an Unrestricted Subsidiary, other than a Permitted Investment. "Restricted Payment" means to (i) declare or pay any dividend on, or make any distribution in respect of, or purchase, redeem, retire or otherwise acquire for value, any Capital Stock of the Company or any Affiliate of the Company, or warrants, rights or options to acquire such Capital Stock, other than (x) dividends payable solely in the Capital Stock (other than Redeemable Stock) of the Company or such Affiliate, as the case may be, or in warrants, rights or options to acquire such Capital Stock and (y) dividends or distributions by a Subsidiary to the Company or to a Wholly Owned Subsidiary; (ii) make any principal payment on, or redeem, repurchase, defease (including an in-substance or legal defeasance) or otherwise acquire or retire for value (including pursuant to mandatory repurchase covenants), prior to any scheduled principal payment, scheduled sinking fund payment or other stated maturity, Indebtedness of the Company or any Subsidiary which is subordinated (whether pursuant to its terms or by operation of law) in right of payment to the Notes or the Guarantees, as applicable; or (iii) make any Restricted Investment in any Person. "Sale and Lease-Back Transaction" means, with respect to any Person, any direct or indirect arrangement pursuant to which Property is sold or transferred by such Person or a subsidiary of such Person and is thereafter leased back from the purchaser or transferee thereof by such Person or one of its subsidiaries. "Senior Debt" means any Indebtedness incurred by the Company, unless the instrument under which such Indebtedness is incurred expressly provides that it is subordinated in right of payment to the Notes, provided that Senior Debt will not include (a) any liability for federal, state, local or other taxes owed or owing, (b) any Indebtedness owing to any Subsidiaries of the Company, (c) any trade payables or (d) any Indebtedness that is incurred in violation of the Indenture. "Significant Subsidiary" means a Subsidiary that is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act. "Stated Maturity" when used with respect to a Note or any installment of interest thereon, means the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable. "Subordinated Indebtedness" means any Indebtedness of the Company or any Guarantor that is subordinated in right of payment to the Notes or the Guarantees, as the case may be, and does not mature prior to the Stated Maturity of the Notes. "subsidiary" means, with respect to any Person, (i) any corporation more than 50% of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person, or by one or more other subsidiaries of such Person, 105 112 or by such Person and one or more other subsidiaries of such Person, (ii) any general partnership, limited liability company, joint venture or similar entity, more than 50% of the outstanding partnership, membership or similar interest of which is owned, directly or indirectly, by such Person, or by one or more other subsidiaries of such Person, or by such Person and one or more other subsidiaries of such Person and (iii) any limited partnership of which such Person or any subsidiary of such Person is a general partner. For purposes of this definition, any directors' qualifying shares or investments by foreign nationals mandated by applicable law shall be disregarded in determining the ownership of a Subsidiary. "Subsidiary" means a subsidiary of the Company other than an Unrestricted Subsidiary. "Transaction Date" has the meaning specified within the definition of Consolidated Interest Coverage Ratio. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged; (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) above, are not callable or redeemable at the option of the issuers thereof; or (iii) depository receipts issued by a bank or trust company as custodian with respect to any such U.S. Government Obligations or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a Depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such Depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation evidenced by such Depository receipt. "Unrestricted Subsidiary" means any subsidiary of the Company that the Company has classified as an Unrestricted Subsidiary and that has not been reclassified as a Subsidiary pursuant to the terms of the Indenture. "Voting Stock" means with respect to any Person, securities of any class or classes of Capital Stock in such Person entitling the holder thereof (whether at all times or at the times that such class of Capital Stock has voting power by reason of the happening of any contingency) to vote in the election of members of the board of directors or comparable body of such Person. "Wholly Owned Subsidiary" means any Subsidiary to the extent (i) all of the Capital Stock or other ownership interests in such Subsidiary, other than any directors' qualifying shares mandated by applicable law, is owned directly or indirectly by the Company or (ii) such Subsidiary is organized in a foreign jurisdiction and is required by the applicable laws and regulations of such foreign jurisdiction to be partially owned by the government of such foreign jurisdiction or individual or corporate citizens of such foreign jurisdiction in order for such Subsidiary to transact business in such foreign jurisdiction, provided that the Company, directly or indirectly, owns the remaining Capital Stock or ownership interest in such Subsidiary and, by contract or otherwise, controls the management and business of such Subsidiary and derives the economic benefits of ownership of such Subsidiary to substantially the same extent as if such Subsidiary were a wholly owned Subsidiary. BOOK-ENTRY, DELIVERY AND FORM The Exchange Notes will initially be issued in the form of one or more Global Notes (the "Global Notes"). The Global Notes will be deposited on the date of the closing of the sale of the Notes offered hereby (the "Closing Date") with, or on behalf of, DTC and registered in the name of Cede & Co., as nominee for DTC. Transfer of beneficial interests in any Global Notes will be subject to the applicable rules and procedures of DTC and its Direct or Indirect Participants (including, if applicable, those of Euroclear and Cedel), which may change from time to time. The Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee in certain limited circumstances. Beneficial interests in the Global Notes may be exchanged for Notes in certificated form in certain limited circumstances. See "-- Transfer of Interests in Global Notes for Certificated Notes." 106 113 Initially, the Trustee will act as Paying Agent and Registrar. The Notes may be presented for registration of transfer and exchange at the offices of the Registrar. DEPOSITARY PROCEDURES DTC has advised the Company that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Direct Participants") and to facilitate the clearance and settlement of transactions in those securities between Direct Participants through electronic book-entry changes in accounts of Participants. The Direct Participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations, including Euroclear and Cedel. Access to DTC's system is also available to other entities that clear through or maintain a direct or indirect, custodial relationship with a Direct Participant (collectively, the "Indirect Participants"). DTC has advised the Company that, pursuant to DTC's procedures, (i) upon deposit of the Global Notes, DTC will credit the accounts of the Direct Participants designated by the Initial Purchasers with portions of the principal amount of the Global Notes allocated by the Initial Purchasers to such Direct Participants, and (ii) DTC will maintain records of the ownership interests of such Direct Participants in the Global Notes and the transfer of ownership interests by and between Direct Participants. DTC will not maintain records of the ownership interests of, or the transfer of ownership interests by and between, Indirect Participants or other owners of beneficial interests in the Global Notes. Direct Participants and Indirect Participants must maintain their own records of the ownership interests of, and the transfer of ownership interests by and between, Indirect Participants and other owners of beneficial interests in the Global Notes. The laws of some states in the United States require that certain persons take physical delivery in definitive, certificated form, of securities that they own. This may limit or curtail the ability to transfer beneficial interests in a Global Note to such persons. Because DTC can act only on behalf of Direct Participants, which in turn act on behalf of Indirect Participants and others, the ability of a person having a beneficial interest in a Global Note to pledge such interest to persons or entities that are not Direct Participants in DTC, or to otherwise take actions in respect of such interests, may be affected by the lack of physical certificates evidencing such interests. For certain other restrictions on the transferability of the Notes see "-- Transfers of Interests in Global Notes for Certificated Notes." EXCEPT AS DESCRIBED IN "-- TRANSFER OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE. Under the terms of the Indenture, the Company, the Guarantors and the Trustee will treat the persons in whose names the Notes are registered (including Notes represented by Global Notes) as the owners thereof for the purpose of receiving payments and for any and all other purposes whatsoever. Payments in respect of the principal, premium, if any, and interest on Global Notes registered in the name of DTC or its nominee will be payable by the Trustee to DTC or its nominee as the registered holder under the Indenture. Consequently, neither the Company, the Trustee nor any agent of the Company, or the Trustee has or will leave any responsibility or liability for (i) any aspect of DTC's records or any Direct Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any of DTC's records or any Direct Participant's or Indirect Participant's records relating to the beneficial ownership interests in any Global Note or (ii) any other matter relating to the actions and practices of DTC or any of its Direct Participants or Indirect Participants. DTC has advised the Company that its current payment practice (for payments of principal, interest and the like) with respect to securities such as the Notes is to credit the accounts of the relevant Direct Participants with such payment on the payment date in amounts proportionate to such Direct Participant's respective ownership interests in the Global Notes as shown on DTC's records. Payments by Direct Participants and Indirect Participants to the beneficial owners of the Notes will be governed by standing instructions and customary practices between them and will not be 107 114 the responsibility of DTC, the Trustee, the Company or the Guarantors. Neither the Company, the Guarantors nor the Trustee will be liable for any delay by DTC or its Direct Participants or Indirect Participants in identifying the beneficial owners of the Notes and the Company and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the Notes for all purposes. The Global Notes will trade in DTC's Same-Day Funds Settlement System and, therefore, transfers between Direct Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in immediately available funds. Transfers between Indirect Participants (other than Indirect Participants who hold an interest in the Notes through Euroclear or Cedel) who hold an interest through a Direct Participant will be effected in accordance with the procedures of such Direct Participant but generally will settle in immediately available funds. Transfers between and among Indirect Participants who hold interest in the Notes through Euroclear and Cedel will be effected in the ordinary way in accordance with their respective rules and operating procedures. DTC has advised the Company that it will take any action permitted to be taken by a holder of Notes only at the direction of one or more Direct Participants to whose accounts interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of the Notes as to which such Direct Participant or Direct Participants has or have given direction. However, if there is an Event of Default under the Notes, DTC reserves the right to exchange Global Notes (without the direction of one or more of its Direct Participants) for legended Notes in certificated form, and to distribute such certificated forms of Notes to its Direct Participants. See "-- Transfers of Interests in Global Notes for Certificated Notes." The information in this section concerning DTC and its book-entry system has been obtained from sources that the Company believes to be reliable, but the Company takes no responsibility for the accuracy thereof. TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES An entire Global Note may be exchanged for definitive Notes in registered, certificated form without interest coupons ("Certificated Notes") if (i) DTC (x) notifies the Company that it is unwilling or unable to continue as depositary for the Global Notes and the Company thereupon fails to appoint a successor depositary within 90 days or (y) has ceased to be a clearing agency registered under the Exchange Act, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Certificated Notes or (iii) there shall have occurred and be continuing a Default or an Event of Default with respect to the Notes. In any such case, the Company will notify the Trustee in writing that, upon surrender by the Direct and Indirect Participants of their interest in such Global Note, Certificated Notes will be issued to each person that such Direct and Indirect Participants and the DTC identify as being the beneficial owner of the related Notes. Beneficial interests in Global Notes held by any Direct or Indirect Participant may be exchanged for Certificated Notes upon request to DTC, by such Direct Participant (for itself or on behalf of an Indirect Participant), to the Trustee in accordance with customary DTC procedures. Certificated Notes delivered in exchange for any beneficial interest in any Global Note will be registered in the names, and issued in any approved denominations, requested by DTC on behalf of such Direct and Indirect Participants (in accordance with DTC's customary procedures). None of the Company, the Guarantors or the Trustee will be liable for any delay by the holder of the Notes or the DTC in identifying the beneficial owners of Notes, and the Company, the Guarantors and the Trustee may conclusively rely on, and will be protected in relying on, instructions from the holder of the Global Note or the DTC for all purposes. SAME DAY SETTLEMENT AND PAYMENT The Indenture requires that payments in respect of the Notes represented by the Global Notes (including principal, premium, if any, interest and Liquidated Damages, if any) be made by wire transfer of immediately available same day funds to the accounts specified by the holder of interests in such Global Note. With respect to Certificated Notes, the Company will make all payments of principal, premium, if any, interest and Liquidated Damages, if any, by 108 115 wire transfer of immediately available same day funds to the accounts specified by the holders thereof or, if no such account is specified, by mailing a check to each such holder's registered address. The Company expects that secondary trading in the Certificated Notes will also be settled in immediately available funds. CERTAIN U.S. FEDERAL TAX CONSEQUENCES TO U.S. HOLDERS The following summary describes all material United States federal income tax consequences for holders of the Exchange Notes who are subject to U.S. net income tax with respect to the Exchange Notes ("U.S. persons") and who will hold the Exchange Notes as capital assets. There can be no assurance that the U.S. Internal Revenue Service (the "IRS") will take a similar view of the purchase, ownership or disposition of the Exchange Notes. This summary is based upon the Internal Revenue Code of 1986, as amended, and regulations, rulings and judicial decisions now in effect, all of which are subject to change. It does not include any discussion of the tax laws of any state, local or foreign governments or any estate or gift tax considerations that may be applicable to the Exchange Notes or holders thereof; nor does it discuss all aspects of U.S. federal income taxation that may be relevant to a particular investor under his particular circumstances or to investors subject to special treatment under the U.S. federal income tax laws (for example, dealers in securities or currencies, S corporations, life insurance companies, tax-exempt organizations, taxpayers subject to the alternative minimum tax and non-U.S. persons) and also does not discuss Exchange Notes held as a hedge against currency risks or as part of a straddle with other investments or as part of a "synthetic security" or other integrated investment (including a "conversion transaction") comprising an Exchange Note and one or more other investments, or situations in which the functional currency of the holders is not the U.S. dollar. Holders of Old Notes contemplating acceptance of the Exchange Offer should consult their tax advisors with respect to their particular circumstances and with respect to the effects of state, local or foreign tax laws to which they may be subject. EXCHANGE OF NOTES The exchange of Old Notes for Exchange Notes should not be a taxable event to holders for federal income tax purposes. The exchange of Old Notes for the Exchange Notes pursuant to the Exchange Offer should not be treated as an "exchange" for federal income tax purposes, because the Exchange Notes should not be considered to differ materially in kind or extent from the Old Notes. Accordingly, the Exchange Notes should have the same issue price as the Old Notes, and a holder should have the same adjusted basis and holding period in the Exchange Notes as it had in the Old Notes immediately before the exchange. INTEREST ON EXCHANGE NOTES For U.S. federal income tax purposes, a holder of an Exchange Note will be required to report as ordinary income any interest earned on the Exchange Note in accordance with the holder's method of tax accounting. DISPOSITION OF EXCHANGE NOTES A holder's tax basis in an Exchange Note generally will be the holder's purchase price for the Old Note. Upon the sale, exchange, redemption, retirement or other disposition of an Exchange Note, a holder will recognize gain or loss equal to the difference (if any) between the amount realized and the holder's tax basis in the Exchange Note. Such gain or loss will be long-term capital gain or loss if the Exchange Note has been held for more than one year and otherwise will be short-term capital gain or loss (with certain exceptions to the characterization as capital gain if the Exchange Note was acquired at a market discount). BACKUP WITHHOLDING A holder of an Exchange Note may be subject to backup withholding at the rate of 31% with respect to interest paid on the Exchange Note and proceeds from the sale, exchange, redemption or retirement of the Exchange Note, 109 116 unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates that fact or (b) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A holder of an Exchange Note who does not provide the Company with his correct taxpayer identification number may be subject to penalties imposed by the IRS. A holder of an Exchange Note who is not a U.S. person generally will be exempt from backup withholding and information reporting requirements, but may be required to comply with certification and identification procedures in order to obtain an exemption from backup withholding and information reporting. Any amount paid as backup withholding is not additional tax, but instead will be creditable against the holder's U.S. federal income tax liability. CERTAIN U.S. FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS The following summary describes certain United States federal income and estate tax consequences of the ownership of Notes as of the date hereof. It deals only with Notes held as capital assets by Non-United States Holders. As used herein, the term "Non-United States Holder" means any person or entity that is, as to the United States, a foreign corporation, a nonresident alien individual, a nonresident fiduciary of a foreign estate or trust or a foreign partnership one or more of the members of which is, as to the United States, a foreign corporation, a nonresident alien individual or a nonresident fiduciary of a foreign estate or trust. THE DISCUSSION SET FORTH BELOW IS BASED UPON THE PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), AND REGULATIONS, RULINGS AND JUDICIAL DECISIONS THEREUNDER AS OF THE DATE HEREOF. SUCH AUTHORITIES MAY BE REPEALED, REVOKED OR MODIFIED SO AS TO RESULT IN FEDERAL INCOME TAX CONSEQUENCES DIFFERENT FROM THOSE DISCUSSED BELOW. FURTHERMORE, THIS SUMMARY DOES NOT DISCUSS ANY ASPECT OF STATE, LOCAL OR FOREIGN TAXATION. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. INTEREST INCOME Under present United States federal income tax law, and subject to the discussion below concerning backup withholding, under the "portfolio interest" exception no withholding of United States federal income tax will be required with respect to the payment by the Company or any paying agent of principal or interest on a Note owned by a Non-United States Holder, provided (i) that the beneficial owner does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote, (ii) the beneficial owner is not a controlled foreign corporation that is related to the Company through stock ownership, (iii) the beneficial owner is not a bank whose receipt of interest on a Note is described in section 881(c) (3) (A) of the Code and (iv) the beneficial owner satisfies the statement requirement (described generally below) set forth in section 871(h) and section 881(c) of the Code and the regulations thereunder. To satisfy the requirement referred to in (iv) above, the beneficial owner of such Note, or a financial institution holding the Note on behalf of such owner, must provide, in accordance with specified procedures, a paying agent of the Company with a statement to the effect that the beneficial owner is not a United States person. Currently, these requirements will be met if (1) the beneficial owner provides his name and address, and certifies, under penalties of perjury, that he is not a United States person (which certification may be made on an Internal Revenue Service ("IRS") Form W-8 (or successor form)) or (2) a financial institution holding the Note on behalf of the beneficial owner certifies, under penalties of perjury, that such statement has been received by it and furnishes a paying agent with a copy thereof. Under recently finalized Treasury regulations (the "Final Regulations"), the statement requirement referred to in (iv) above may also be satisfied with other documentary evidence for interest paid after December 31, 2000, with respect to an offshore account or through certain foreign intermediaries. 110 117 If a Non-United States Holder cannot satisfy the requirements of the "portfolio interest" exception described above, payments of interest made to such Non-United States Holder will be subject to a 30% withholding tax (or such lower rate as may be provided by an applicable income tax treaty between the United States and a foreign country) unless the beneficial owner of the Note provides the Company or its paying agent, as the case may be, with a properly executed (1) IRS Form 1001 (or successor form) claiming an exemption from withholding under the benefit of a tax treaty or (2) IRS Form 4224 (or successor form) stating that interest paid on the Note is not subject to withholding tax because it is effectively connected with the beneficial owner's conduct of a trade or business in the United States. Under the Final Regulations, which are to be effective after December 31, 2000, Non-United States Holders will generally be required to provide IRS Form W-8 in lieu of IRS Form 1001 and IRS Form 4224, although alternative documentation may be applicable in certain situations. If a Non-United States Holder is engaged in a trade or business in the United States and interest on the Note is effectively connected with the conduct of such trade or business, the Non-United States Holder, although exempt from the withholding tax discussed above (provided the Non-United States Holder files the appropriate certification with the Company or its agent), will be subject to United States federal income tax on such interest on a net income basis in the same manner as if it were a United States person. In addition, if such holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits for the taxable year, subject to adjustments. For this purpose, such premium, if any, and interest on a Note will be included in such foreign corporation's earnings and profits. DISPOSITION OF EXCHANGE NOTES Non-U.S. Holders generally will not be subject to U.S. federal income taxation on gain recognized on a disposition of Exchange Notes so long as (i) the gain is not effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States and (ii) in the case of a Non- U.S. Holder who is an individual, either such holder is not present in the United States for 183 days or more in the taxable year of disposition or such holder does not (a) have a "tax home" (within the meaning of section 911(d)(3) of the Code) in the United States or (b) maintain an office or fixed place of business in the United States to which the gain is attributable. FEDERAL ESTATE TAXES An Exchange Note held by an individual who, at the time of death, is not a citizen or resident of the United States will not be includible in the individual's gross estate for purposes of the U.S. federal estate tax as a result of such individual's death if the individual does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote and if, at the time of the individual's death, payments with respect to such Exchange Note would not have been effectively connected with the conduct by such individual of a trade or business in the United States. INFORMATION REPORTING AND BACKUP WITHHOLDING No information reporting or backup withholding tax (which is imposed at the rate of 31% on certain payments to persons who fail to furnish the information required under United States information reporting requirements) will be required with respect to payments made by the Company or any paying agent to Non-United States Holders if the statement described in (iv) under "Interest Income" has been received and the payor does not have actual knowledge that the beneficial owner is a United States person. In addition, backup withholding and information reporting generally will not apply if payments of the principal or interest on an Exchange Note are paid or collected by a foreign office of a custodian, nominee or other foreign agent on behalf of the beneficial owner of such Exchange Note, or if a foreign office of a broker (as defined in applicable Treasury regulations) pays the proceeds of the sale of an Exhange Note to the owner thereof. If, however, such nominee, custodian, agent or broker is, for United States federal income tax purposes, a United States person, or a foreign person with certain specified relationships to the United States, such payments will not be subject to backup withholding but will be subject to information reporting, unless (1) such custodian, nominee, agent or broker has documentary evidence 111 118 in its records that the beneficial owner is not a United States person and certain other conditions are met or (2) the beneficial owner otherwise establishes an exemption. Payments of principal or interest on an Exchange Note paid to the beneficial owner of a Note by a United States office of a custodian, nominee or agent, or the payment of the United States office of a broker of the proceeds of sale of an Exchange Note, will be subject to both backup withholding and information reporting unless the beneficial owner provides the statement referred to in (iv) above and the payor does not have actual knowledge that the beneficial owner is a United States person or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's United States federal income tax liability provided the required information is furnished to the IRS. DESCRIPTION OF CERTAIN INDEBTEDNESS TERM LOAN Bayard and its wholly owned subsidiary Trend, as co-borrowers, had outstanding at March 31, 1998 $25.5 million of long term debt under the Term Loan which was issued pursuant to a term loan agreement (the "Term Loan Agreement") with CIT and Fleet (the "Term Loan Lenders"). The Term Loan was incurred to finance the purchase of certain land drilling rigs, the refurbishment of such rigs and equipment and for working capital purposes. On May 14, 1998, in connection with the reorganization of its corporate structure, (i) the Company prepaid $6.2 million of the Term Loan, obtained a release of all collateral for the Term Loan, except 12 drilling rigs and related equipment, and transferred to Bayard Drilling substantially all of its assets, subject to such liens, and (ii) Bayard Drilling and Bayard LLC agreed to guarantee the Term Loan. Prior to such prepayment and collateral release, the Term Loan was secured by substantially all of the assets of Bayard and Trend. At June 15, 1998, $18.2 million of the Term Loan was outstanding. In connection with the issuance of the Old Notes, the Company and the Term Loan Lenders further amended the Term Loan and added Bonray as a guarantor of the Company's obligations. The Term Loan Agreement requires the Company and its subsidiaries to maintain collateral security for the Term Loan based on appraised fair market value and orderly liquidation value of the Company's drilling rigs and associated rig equipment equivalent to the balance of the Term Loan, and adhere to specified cash flow, leverage and liquidity ratios and minimum net worth and liquidity requirements. The Term Loan Agreement contains restrictions on, among other things, the ability of the Company and its subsidiaries to pay dividends, make investments, incur indebtedness and liens, and make capital expenditures and requires the maintenance of liquidity of $3 million through December 31, 1998. The Term Loan Agreement also contains affirmative covenants typical of secured loan arrangements with finance companies, such as requiring financial reports, insurance maintenance, legal, environmental and permit compliance. The Company is prohibited from prepaying the Term Loan until after December 31, 1999. The Term Loan bears interest at the Company's choice of LIBOR plus 4.25% per annum (10.00% at March 31, 1998) or the prime rate of The Chase Manhattan Bank plus 2.00% per annum and requires equal monthly payments of principal, together with accrued interest, in amounts sufficient to repay borrowings at maturity on March 31, 2002. REVOLVING LOAN The Revolving Loan Agreement provides revolving credit loans, subject to a borrowing base comprised of a portion of the co-borrowers' accounts receivable, of up to $10 million ($2 million of which is available for letters of credit) for general corporate purposes. The Company has not borrowed under the Revolving Loan Agreement since November 1997 but has approximately $1.3 million of letters of credit outstanding thereunder. The Company believes that it has adequate liquidity for its needs in the near term. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Liquidity." Any borrowings under the Revolving Loan Agreement would bear interest at Fleet National Bank's prime rate plus 1.5% per annum (approximately 10.5% at March 31, 1998). The Company pays certain fees under the Revolving 112 119 Loan Agreement, including a commitment fee equal to 0.5% of the unused portion of the maximum commitment. Fleet's commitment to lend under the Revolving Loan Agreement ends in April 2000. The Company may terminate the Revolving Loan Agreement upon 60 days' prior written notice to Fleet and the payment of a termination fee of 2% of the facility. The Revolving Loan Agreement is secured by certain assets of Bayard and Trend that were transferred to Bayard Drilling pursuant to the Company's corporate reorganization, including accounts receivable, certain equipment and inventory, the Company's El Reno, Oklahoma yard and the same 12 drilling rigs that secure the Term Loan Agreement, together with equipment and drilling contracts related to such rigs. The Revolving Loan Agreement is also secured by the receivables and certain other assets of Bayard, Bayard Drilling, Bayard LLC, Trend and Bonray. Until May 14, 1998, the Revolving Loan Agreement was also secured by all drilling rigs of Bayard and Trend, upon which date Fleet released all but such 12 rigs and related assets. Trend, Bonray, Bayard Drilling and Bayard LLC have agreed to guarantee the obligations under the Revolving Loan Agreement. The Revolving Loan Agreement contains customary restrictive covenants that are substantially similar to the covenants contained in the Term Loan Agreement. OTHER INDEBTEDNESS The Company also has issued the Top Drive Notes which consist of three amortizing term notes totaling approximately $2.9 million outstanding at June 15, 1998. This debt bears interest of 9.5% per annum and is secured by certain equipment (top drives) of the Company and letters of credit in amounts totaling approximately $700,000. The debt represented by the Top Drive Notes matures in July, October and November of 2000. The note agreement relating to the Top Drive Notes does not contain any restrictive financial covenants but contains a cross default to the Term Loan Agreement and the Revolving Loan Agreement. 113 120 DESCRIPTION OF CAPITAL STOCK AUTHORIZED AND OUTSTANDING CAPITAL STOCK The authorized capital stock of the Company consists of 100,000,000 shares of common stock, par value $0.01 per share, and 20,000,000 shares of preferred stock, par value $0.01 per share ("Preferred Stock"). As of May 28, 1998, 18,193,945 shares of Common Stock and no shares of Preferred Stock were outstanding. The following summary is qualified in its entirety by reference to the Restated Certificate of Incorporation of the Company (the "Certificate")and the Amended and Restated Bylaws of the Company (the "Bylaws"), copies of which are filed with the Commission as exhibits to the Registration Statement relating to the Initial Public Offering. COMMON STOCK All outstanding shares of Common Stock are fully paid and nonassessable. As of July 14, 1998, there were 18,193,945 shares of Common Stock outstanding held of record by approximately 88 stockholders. The holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of common stockholders of the Company. The Common Stock does not have cumulative voting rights in the election of directors. Shares of Common Stock have no preemptive rights, conversion rights, redemption rights or sinking fund provisions. The Common Stock is not subject to redemption by the Company. Subject to the rights of the holders of any class of capital stock of the Company having any preference or priority over the Common Stock, the holders of Common Stock are entitled to dividends in such amounts as may be declared by the Board from time to time out of funds legally available for such payments and, in the event of liquidation, to share ratably in any assets of the Company remaining after payment in full of all creditors and provision for any liquidation preferences on any outstanding preferred stock ranking prior to the Common Stock. PREFERRED STOCK The Certificate authorizes the Board, subject to limitations prescribed by law, to provide for the issuance of up to 20,000,000 shares of Preferred Stock in one or more series. The Board is authorized to establish the number of shares to be included in any such series and to fix the designations, powers, preferences and rights of the shares of each such series, and any qualifications, limitations or restrictions thereof. The Company believes that the ability of the Board to issue one or more series of Preferred Stock will provide the Company with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs which might arise from time to time. The authorized shares of Preferred Stock, as well as shares of Common Stock, will be available for issuance without further action by the Company's stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. If the approval of the Company's stockholders is not required for the issuance of shares of Preferred Stock or Common Stock, the Board may determine not to seek stockholder approval. Although the Board has no intention at the present time of doing so, it could issue a series of Preferred Stock that may, depending on the terms of such series, hinder, delay or prevent the completion of a merger, tender offer or other takeover attempt. Among other things, the Board could issue a series of Preferred Stock having terms that could discourage an acquisition attempt through which an acquiror may be able to change the composition of the Board, including a tender offer or other transaction that some, or a majority, of the Company's stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then current market price of such stock. 114 121 CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS The Board consists of directors who are elected for one-year terms at each annual meeting of stockholders. Stockholders may remove a director only for cause. In general, the Board, not the stockholders, has the right to appoint persons to fill vacancies on the Board. The Certificate contains a "fair price" provision that requires the affirmative vote of the holders of at least 80% of the Company's voting stock and the affirmative vote of at least 66 2/3% of the Company's voting stock not owned, directly or indirectly, by a Company Related Person (as hereinafter defined) to approve any merger, consolidation, sale or lease of all or substantially all of the Company's assets, or certain other transactions involving a Company Related Person. For purposes of this fair price provision, a "Company Related Person" is any person beneficially owning 10% or more of the voting power of the outstanding capital stock of the Company who is a party to the transaction at issue. The voting requirement is not applicable to certain transactions, including those that are approved by the Company's Continuing Directors (as defined in the Certificate) or that meet certain "fair price" criteria contained in the Certificate. The Certificate further provides that stockholders may act only at annual or special meetings of stockholders and not by written consent, that special meetings of stockholders may be called only by the Board, and that only business proposed by the Board may be considered at special meetings of stockholders. The Certificate also provides that the only business (including election of directors) that may be considered at an annual meeting of stockholders, in addition to business proposed (or persons nominated to be directors) by the directors of the Company, is business proposed (or persons nominated to be directors) by stockholders who comply with the notice and disclosure requirements set forth in the Certificate. In general, the Certificate requires that a stockholder give the Company notice of proposed business or nominations no later than 60 days before the annual meeting of stockholders (meaning the date on which the meeting is first scheduled and not postponements or adjournments thereof) or (if later) ten days after the first public notice of the annual meeting is sent to common stockholders. In general, the notice must also contain information about the stockholder proposing the business or nomination, his interest in the business, and (with respect to nominations for director) information about the nominee of the nature ordinarily required to be disclosed in public proxy solicitations. The stockholder also must submit a notarized letter from each of his nominees stating the nominee's acceptance of the nominations and indicating the nominee's intention to serve as director if elected. The Certificate also restricts the ability of stockholders to interfere with the powers of the Board in certain specified ways, including the constitution and composition of committees and the election and removal of officers. The Certificate provides that approval by the holders of at least 66 2/3% of the outstanding voting stock of the Company is required to amend the provisions of the Certificate discussed above and certain other provisions, except that (i) approval by the holders of at least 80% of the outstanding voting stock of the Company, together with approval by the holders of at least 66 2/3% of the outstanding voting stock not owned, directly or indirectly, by the Company Related Person, is required to amend the fair price provisions and (ii) approval of the holders of at least 80% of the outstanding voting stock is required to amend the provisions prohibiting stockholders from acting by written consent. DELAWARE ANTI-TAKEOVER STATUTE The Company is a Delaware corporation and is subject to Section 203 of the Delaware General Corporation Law (the "DGCL"). In general, Section 203 prevents an "interested stockholder" (defined generally as a person owning 15% or more of the outstanding voting stock of the Company) from engaging in a "business combination" (as defined in Section 203) with the Company for three years following the date that person becomes an interested stockholder unless (i) before that person became an interested stockholder, the Board approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination, (ii) upon completion of the transaction that resulted in the interested stockholder's becoming an interested stockholder, the interested stockholder owns at least 85% of the Company's voting stock outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the Company and by employee stock plans that do not 115 122 provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer), or (iii) following the transaction in which that person became an interested stockholder, the business combination is approved by the Board and authorized at a meeting of stockholders by the affirmative vote of the holders of at least two-thirds of the outstanding voting stock of the Company not owned by the interested stockholder. Under Section 203, these restrictions also do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of one of certain extraordinary transactions involving the Company and a person who was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the Company's directors, if that extraordinary transaction is approved or not opposed by a majority of the directors who were directors before any person became an interested stockholder in the previous three years or who were recommended for election or elected to succeed such directors by a majority of such directors then in office. LIABILITY OF DIRECTORS; INDEMNIFICATION The Certificate provides, as authorized by Section 102(b)(7) of the DGCL, that a director of the Company will not be personally liable to the Company or any of its stockholders for monetary damages for breach of fiduciary duty as a director involving any act or omission of any such director, except that such provisions do not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, as it now exists or hereafter may be amended, or (iv) for any transaction from which the director derived an improper personal benefit. The Certificate also provides that if the DGCL is amended after the date of filing of the Certificate to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of a director of the Company, in addition to the limitation on personal liability provided for already, shall be limited to the fullest extent permitted by the DGCL as so amended. Any repeal or modification of such provision in the Certificate by the stockholders of the Company will be effective prospective only, and will not adversely affect any limitation on the personal liability of a director of the Company existing at the time of such repeal or modification. The Certificate also provides for indemnification of directors to the fullest extent permitted by the DGCL. Such indemnification may be available for liabilities arising in connection with the Exchange Offer. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Pursuant to its Certificate, the Company may indemnify its officers, employees, agents and other persons to the fullest extent permitted by the DGCL. The Company's Bylaws obligate the Company, under certain circumstances, to advance expenses to its directors and officers in defending an action, suit or proceeding for which indemnification may be sought. The Company has entered into Indemnification Agreements with certain of its directors and officers. See "Management--Indemnification Agreements." The Company's Bylaws also provide that the Company shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or who, while a director, officer, employee or agent, is or was serving as a director, officer, trustee, general partner, employee or agent of one of the Company's subsidiaries or, at the request of the Company, of any other organization, against any liability asserted against such person or incurred by such person in any such capacity, where the Company would have the power to indemnify such person against such liability under the DGCL. 116 123 PLAN OF DISTRIBUTION Each Participating Broker-Dealer that receives Exchange Notes for its own account in connection with the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by Participating Broker-Dealers during the period referred to below in connection with resales of Exchange Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker-Dealers for their own accounts as a result of market-making activities or other trading activities (other than a resale of an unsold allotment from the original sale of Old Notes). The Company has agreed that this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of such Exchange Notes for a period ending 180 days from the Expiration Date. However, a Participating Broker- Dealer who intends to use this Prospectus in connection with the resale of Exchange Notes received in exchange for Old Notes pursuant to the Exchange Offer must notify the Company, or cause the Company to be notified, on or prior to the Expiration Date, that it is a Participating Broker-Dealer. Such notice may be given in the space provided for that purpose in the Letter of Transmittal or may be delivered to the Exchange Agent at one of the addresses set forth in the Letter of Transmittal. See "The Exchange Offer -- Resales of Exchange Notes." The Company will not receive any proceeds from the issuance of the Exchange Notes offered hereby. Exchange Notes received by Participating Broker-Dealers for their own accounts in connection with the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any Participating Broker-Dealer that resells Exchange Notes that were received by it for its own account in connection with the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act, and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. LEGAL MATTERS The legality of the securities offered hereby will be passed upon for the Company by Baker & Botts, L.L.P., Dallas, Texas. EXPERTS The financial statements of the Company as of December 31, 1996 and for each of the two years in the period ended December 31, 1996 included in this Prospectus have been audited by Grant Thornton LLP, independent public accountants, as stated in their reports thereon appearing elsewhere herein, and are so included in reliance on such reports given upon the authority of that firm as experts in auditing and accounting. The financial statements of the Company as of December 31, 1997 and for the fiscal year then ended, included in this Prospectus have been included herein in reliance on the report of PricewaterhouseCoopers LLP, independent public accountants, given upon the authority of that firm as experts in auditing and accounting. In preparation for its initial public offering, the Board appointed PricewaterhouseCoopers LLP as auditors for the Company's financial statements for the six months ended June 30, 1997, and for the year ending December 31, 1997. During the period Grant Thornton LLP was engaged by the Company and up to and including March 7, 1997, the date of the PricewaterhouseCoopers LLP engagement, there were no disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure and there were no "reportable events" as the term is defined under the Securities Act. The audit reports previously issued by Grant 117 124 Thornton LLP with respect to the Company's financial statements did not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. 118 125 INDEX TO FINANCIAL STATEMENTS
PAGE CONSOLIDATED FINANCIAL STATEMENTS OF BAYARD DRILLING TECHNOLOGIES, INC. Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . F-2 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Balance Sheets as of December 31, 1996 and 1997, and March 31, 1998 . . . . . . . . . . . . . . . . F-4 Statements of Operations for the years ended December 31, 1995, 1996 and 1997, and three months ended March 31, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Statements of Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997 and three months ended March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997, and three months ended March 31, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9 PRO FORMA CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23 Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 1997 . . . . . F-24 Unaudited Pro Forma Combined Statement of Operations for the three months ended March 31, 1998 . . F-25 Unaudited Pro Forma Combined Balance Sheet as of March 31, 1998 . . . . . . . . . . . . . . . . . . F-26 Notes to Unaudited Pro Forma Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . F-27
F-1 126 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Bayard Drilling Technologies, Inc. We have audited the accompanying balance sheet of Bayard Drilling Technologies, Inc. (Note A), as of December 31, 1996, and the related statements of operations, equity (deficit), and cash flows for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bayard Drilling Technologies, Inc., as of December 31, 1996, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. GRANT THORNTON LLP Oklahoma City, Oklahoma January 20, 1997 F-2 127 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Bayard Drilling Technologies, Inc. We have audited the accompanying balance sheet of Bayard Drilling Technologies, Inc., as of December 31, 1997, and the related statements of operations, equity, and cash flows for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bayard Drilling Technologies, Inc., as of December 31, 1997 and the results of its operations and its cash flows for the year ended December 31, 1997 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Oklahoma City, Oklahoma February 19, 1998 F-3 128 BAYARD DRILLING TECHNOLOGIES, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS
DECEMBER 31, MARCH 31, ---------------------- --------- 1996 1997 1998 (UNAUDITED) CURRENT ASSETS: Cash ....................................................... $ 4,963 $ 49,302 $ 27,738 Restricted investments ..................................... -- 880 524 Accounts receivable ........................................ 286 19,491 23,112 Accounts receivable--affiliate ............................. 798 -- -- Other current assets ....................................... 1 538 1,065 --------- --------- --------- Total current assets ............................... 6,048 70,211 52,439 Property, plant and equipment, net ......................... 26,973 155,673 179,807 Goodwill, net of accumulated amortization of $375 at December 31, 1997 and $593 at March 31, 1998 ............ -- 12,704 12,487 Other assets ............................................... 1,652 1,900 1,861 --------- --------- --------- Total assets ....................................... $ 34,673 $ 240,488 $ 246,594 ========= ========= ========= LIABILITIES AND EQUITY CURRENT LIABILITIES: Accounts payable ........................................... $ 409 $ 8,246 $ 14,028 Accounts payable--affiliate ................................ 412 494 -- Accrued liabilities ........................................ 253 5,067 4,749 Current portion of long-term debt .......................... 947 7,450 7,450 --------- --------- --------- Total current liabilities .......................... 2,021 21,257 26,227 --------- --------- --------- Deferred income tax liabilities ............................ 348 13,554 14,848 --------- --------- --------- Other long term liabilities ................................ -- 2,055 2,039 --------- --------- --------- Long-term debt, less current maturities .................... 6,053 23,069 21,137 --------- --------- --------- Subordinated notes, net of debt discount of $429 at December 31, 1997 and $409 at March 31, 1998 ............ -- 2,091 2,111 --------- --------- --------- Commitments and Contingencies--Note G, H & K STOCKHOLDERS EQUITY: Preferred stock, $0.01 par value, 20,000,000 shares authorized; none issued or outstanding .................. -- -- -- Common stock, $0.01 par value, 100,000,000 shares authorized; 5,600,000 shares issued and outstanding at December 31, 1996; 18,183,945 at December 31, 1997; and at March 31, 1998 ............................. 56 182 182 Additional paid-in capital (net of deferred compensation of $258 at December 31, 1997 and $245 at March 31, 1998) ................................................... 26,229 180,400 180,413 Accumulated deficit ........................................ (34) (2,120) (363) --------- --------- --------- Total equity ....................................... 26,251 178,462 180,232 --------- --------- --------- Total liabilities and equity ....................... $ 34,673 $ 240,488 $ 246,594 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-4 129 BAYARD DRILLING TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- ------------------------------------- 1995 1996 1997 1997 1998 (UNAUDITED) REVENUES: Drilling ............................................. $ 5,491 $ 8,995 $ 39,165 $ 4,111 $ 23,962 Drilling--affiliate .................................. 1,914 798 16,582 -- -- Other ................................................ 303 60 -- -- -- --------- --------- --------- --------- --------- Total revenues ............................... 7,708 9,853 55,747 4,111 23,962 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Drilling ............................................. 6,075 7,653 40,705 3,047 17,221 General and administrative ........................... 880 658 1,868 195 755 Depreciation and amortization ........................ 791 1,126 7,943 876 3,169 Other ................................................ 47 46 -- -- -- --------- --------- --------- --------- --------- Total costs and expenses ..................... 7,793 9,483 50,516 4,118 21,145 --------- --------- --------- --------- --------- Operating income (loss) ...................... (85) 370 5,231 (7) 2,817 --------- --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense ..................................... (3) (11) (3,065) (145) (367) Interest income ...................................... -- -- 597 17 496 Gain (loss) on sale of assets ........................ (131) 54 544 -- 52 Other ................................................ (3) 17 37 -- 34 --------- --------- --------- --------- --------- Total other income (expense) ................. (137) 60 (1,887) (128) 215 --------- --------- --------- --------- --------- Earnings (loss) before income taxes and extraordinary item ................................................. (222) 430 3,344 (135) 3,032 Income tax provision--deferred ......................... -- 17 1,428 51 1,275 --------- --------- --------- --------- --------- Net income (loss) before extraordinary item ............ (222) 413 1,916 (84) 1,757 Extraordinary loss ..................................... -- -- (4,002) -- -- --------- --------- --------- --------- --------- Net earnings (loss) .................................... $ (222) $ 413 $ (2,086) $ (84) $ 1,757 ========= ========= ========= ========= ========= EARNINGS (LOSS) PER SHARE: Basic: Before extraordinary item ......................... $ .21 $ (.01) $ .10 ========= ========= ========= Extraordinary item ................................ $ (.44) -- -- ========= ========= ========= Net earnings (loss) ............................... $ (.23) $ (.01) $ .10 ========= ========= ========= Diluted: ............................................. -- ========= Before extraordinary item ......................... $ .17 $ (.01) $ .10 ========= ========= ========= Extraordinary item ................................ $ (.35) -- -- ========= ========= ========= Net earnings (loss) ............................... $ (.18) $ (.01) $ .10 ========= ========= ========= Weighted average common shares outstanding, basic ...... 5,600 5,600 9,064 5,700 18,184 ========= ========= ========= ========= ========= Weighted average common shares outstanding, diluted .............................................. 5,600 5,749 11,500 8,191 18,488 ========= ========= ========= ========= ========= PRO FORMA INFORMATION: Additional income tax expense ........................ -- 146 --------- --------- Pro forma net earnings (loss) ........................ $ (222) $ 267 --------- --------- Pro forma earnings (loss) per share, basic and diluted ........................................... $ (.04) $ .05 ========= =========
The accompanying notes are an integral part of these financial statements. F-5 130 BAYARD DRILLING TECHNOLOGIES, INC. STATEMENTS OF EQUITY (IN THOUSANDS)
STOCKHOLDERS' EQUITY --------------------------------------------------------------- PARTNERS ADDITIONAL CAPITAL COMMON PAID-IN DEFERRED RETAINED (DEFICIT) STOCK CAPITAL COST EARNINGS TOTAL Balance at December 31, 1995 .............. $ (276) $ -- $ -- $ -- $ -- $ -- Net earnings through date of corporate capitalization ....................... 447 -- -- -- -- -- Net increase in equity arising from affiliate transactions ............... 5,285 -- -- -- -- -- Issuance of stock in corporate capitalization ....................... (5,456) 20 5,436 -- -- 5,456 Sale of stock ........................... -- 20 9,980 -- -- 10,000 Issuance of stock options and warrants for drilling agreements and debt ..... -- -- 1,319 -- -- 1,319 Issuance of stock and options for property and equipment ............... -- 16 9,494 -- -- 9,510 Net loss from date of corporate capitalization to December 31, 1996 ................................. -- -- -- -- (34) (34) --------- --------- --------- --------- --------- --------- Balance at December 31, 1996 .............. -- 56 26,229 -- (34) 26,251 Net loss ................................ -- -- -- -- (2,086) (2,086) Issuance of stock options to employees ............................ -- -- 60 (53) -- 7 Sale of stock ........................... -- 89 107,020 -- -- 107,109 Issuance of stock options and warrants ............................. -- -- 5,068 -- -- 5,068 Executive compensation agreements ....... -- -- 250 (205) -- 45 Issuance of stock for acquisitions ...... -- 37 42,031 -- -- 42,068 --------- --------- --------- --------- --------- --------- Balance at December 31, 1997 .............. -- 182 180,658 (258) (2,120) 178,462 Net income (unaudited) .................. -- -- -- -- 1,757 1,757 Executive compensation agreements (unaudited) .......................... -- -- -- 13 -- 13 --------- --------- --------- --------- --------- --------- Balance at March 31, 1998 (unaudited)...... $ -- $ 182 $ 180,658 $ (245) $ (363) $ 180,232 ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-6 131 BAYARD DRILLING TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------- ----------------------- 1995 1996 1997 1997 1998 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) .......................... $ (222) $ 413 $ (2,086) $ (84) $ 1,757 Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities-- .................... 791 1,126 7,943 876 3,169 Depreciation and amortization (Gain) loss on sale of assets ............. 131 (54) (544) -- (52) Extraordinary loss ........................ -- -- 4,002 -- -- Compensation expense ...................... -- -- 52 -- 13 Deferred income taxes ..................... -- 17 1,428 (51) 1,275 Change in assets and liabilities, net of effects of affiliate transactions -- Decrease (increase) in accounts .............. 242 (2,059) (18,407) (2,157) (3,621) receivable Increase in prepaid expenses ................. -- -- (537) -- -- Decrease (increase) in other assets .......... (6) (185) 513 (733) (520) Increase (decrease) in accrued liabilities ............................... (237) 251 4,814 1,398 (318) Increase (decrease) in accounts payable ...... (389) (383) 1,432 3,794 5,288 Increase (decrease) in other liabilities ..... -- -- -- -- (16) Increase (decrease) in payable to affiliate ................................. -- 412 82 -- -- --------- --------- --------- --------- --------- Net cash (used in) provided by operating activities ................................ 310 (462) (1,308) 3,043 6,975 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment ........ (2,088) (10,578) (60,924) (13,711) (27,094) Acquisition of businesses .................... -- -- (26,056) -- -- Proceeds from sale of assets ................. 378 137 1,390 -- 63 (Purchase) proceeds of investments ........... -- -- (880) (730) 355 --------- --------- --------- --------- --------- Net cash used in investing activities ......................... (1,710) (10,441) (86,470) (14,441) (26,676) --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments made to affiliates .................. (8,828) (19,719) -- -- -- Advances received from affiliates ............ 10,228 18,791 -- -- -- Proceeds from borrowings ..................... -- 7,000 49,780 8,700 -- Net proceeds from issuance of stock .......... -- 10,000 107,109 250 -- Debt issuance costs .......................... -- (206) (761) -- -- Payments on long-term debt ................... -- -- (24,011) (474) (1,863) Payments under line of credit ................ -- -- (8,701) -- -- Borrowings under line of credit .............. -- -- 8,701 -- -- --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities .............................. 1,400 15,866 132,117 8,476 (1,863) --------- --------- --------- --------- --------- Net change in cash ........................... -- 4,963 44,339 (2,922) (21,564) Cash at beginning of period .................. -- -- 4,963 4,963 49,302 --------- --------- --------- --------- --------- Cash at end of period ........................ $ -- $ 4,963 $ 49,302 $ 2,041 $ 27,738 ========= ========= ========= ========= ========= Cash paid during the period for interest ..... $ -- $ -- $ 2,854 $ -- $ 844 Cash paid during the period for income taxes ..................................... $ -- $ -- $ -- $ -- $ -- ========= ========= ========= ========= =========
Continued F-7 132 BAYARD DRILLING TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS) Continued Supplemental noncash activity: During 1995 an affiliate transferred drilling equipment to the Company at the affiliate's basis totaling $173, net of accumulated depreciation of $1,306, which has been reflected as an increase in payable to affiliate. Additionally, the Company acquired property and equipment through trade payables totaling $1,180. During 1996 the Company acquired property and equipment totaling $9,841 through the issuance of stock and options and assumed a net deferred income tax liability of $331. The Company acquired property and equipment through trade payables and payables to affiliates totaling $1,390. The Company transferred property and equipment totaling $29, net of accumulated depreciation of $1,254 to an affiliate which has been reflected as a decrease in payables to affiliates. The Company issued stock options and warrants in exchange for certain drilling agreements and debt. The stock options were valued at $1,100 and the warrants associated with the debt were valued at $219. Additionally in 1996, the Company transferred the following assets and liabilities to affiliates which resulted in a net increase in equity at the time of corporate capitalization, effective December 1, 1996. Accounts receivable ......................................... $ 2,667 Other assets ................................................ 17 Cash ........................................................ 9,252 Accounts payable and accrued liabilities .................... (1,799) Payable to affiliates........................................ (15,422) -------- $ (5,285) ========
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-8 133 BAYARD DRILLING TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INFORMATION FOR THE PERIODS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED NOTE A--NATURE OF OPERATIONS Bayard Drilling Technologies, Inc. together with its predecessor, (the "Company"), a Delaware corporation, is the successor to the drilling operations of Anadarko Drilling Company ("Anadarko"), which began drilling operations in 1980. The Company provides land-based contract drilling services to major and independent oil and gas companies in the Mid-Continent and Gulf Coast regions of the United States. Beginning in October 1996, AnSon Partners Limited Partnership ("APLP") initiated a series of transactions among its wholly owned affiliates, Anadarko, a partnership, and Bayard Drilling Company ("BDC"), a corporation, and the Company. These series of transactions resulted in the corporate capitalization of the Company in December 1996 with net assets, primarily drilling rigs, previously owned by Anadarko. Such transactions were accounted for as a reorganization of entities under common control. NOTE B--SUMMARY OF ACCOUNTING POLICIES The summary of significant accounting policies applied in the preparation of the accompanying financial statements follows. 1. BASIS OF PRESENTATION AND CONSOLIDATION The financial statements and information for periods prior to December 1, 1996 represent those of the predecessor. The consolidated financial statements for periods after December 31, 1996 include the accounts of the Company and its wholly owned subsidiaries, Trend Drilling Company ("Trend") and WD Equipment, L.L.C. and Bonray Drilling Corporation. All significant intercompany accounts and transactions have been eliminated. 2. CASH The Company considers all cash and investments with an original maturity of 90 days or less to be cash equivalents. The Company maintains its cash in a bank deposit account which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. At December 31, 1997 and March 31, 1998, the Company had cash and cash equivalents in or at four financial institutions, where the balance exceeded federally insured limits, in total by approximately $48.9 and $27.3 million, respectively. 3. RESTRICTED INVESTMENTS Restricted investments consist of certificates of deposits pledged to state insurance departments and insurance companies to support payment of workers compensation claims. 4. CONCENTRATION OF CREDIT RISK The primary market for the Company's services are independent oil and gas companies whose level of activities are related to, among other things, oil and gas prices. The Company performs ongoing credit evaluations of its customers and provides for potential credit losses when necessary. No allowance was required at December 31, 1997, 1996 or 1995. At December 31, 1997 and March 31, 1998, approximately 53% and 44%, respectively, of the Company's trade receivables and over 63% and 52%, respectively, of total revenues were derived from the Company's five largest customers in terms of total revenues. F-9 134 5. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, reduced by provisions to recognize economic impairment in value when management determines that such impairment has occurred. Drilling equipment is depreciated using the declining balance method (which approximates straight line) over the estimated useful lives from five to fifteen years. Other property and equipment are depreciated on the same basis over estimated useful lives from three to ten years. Refurbishments and upgrades of drilling equipment are capitalized if such expenditures are significant and extend the lives of the equipment. Maintenance and repairs are expensed as incurred. When assets are sold, retired or disposed of, the cost and related accumulated depreciation are eliminated from the accounts and the gain or loss is recognized. It is the Company's policy to capitalize interest on construction costs for rig refurbishments during the period in which those costs are incurred. The Company incurred interest costs of approximately $3.6 million during 1997 and $859,000 for the three months ended March 31, 1998 of which approximately $565,000 and $492,000, respectively, was capitalized in property and equipment for rig construction. No interest costs were capitalized in 1996 or 1995. 6. REVENUE RECOGNITION Revenues generated from the Company's dayrate drilling contracts are recognized as services are performed and revenues generated from the Company's footage drilling contracts are recognized as a percentage of completion. For all drilling contracts under which the Company bears the risk of completion (such as turnkey contracts) revenues and expenses are recognized using the completed contracts method. When estimates of projected revenues and expenses indicate a loss, the total estimated loss is accrued. 7. NET EARNINGS (LOSS) PER SHARE Earnings per share are computed based on the weighted average number of basic and diluted shares outstanding during the period pursuant to SFAS No. 128. SFAS No. 128 simplifies the standards for computing earnings per share by replacing the presentation of primary earnings per share with a presentation of basic earnings per share and by simplifying the calculation of diluted earnings per share. A reconciliation of the numerator and denominator used in the calculation of earnings per share is as follows:
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 MARCH 31, 1998 -------------------------------------- ---------------------------------------- PER PER INCOME SHARES SHARE INCOME SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (IN THOUSANDS, EXCEPT PER SHARE DATA) Income before extraordinary item ......... $ 1,916 $ 1,757 ---------- ---------- Basic earnings per share ...................... 1,916 9,064 $ .21 1,757 18,184 $ .10 ---------- ---------- ---------- Effect of dilutive securities; Warrants and options .................... 2,436 304 ---------- ---------- Diluted earnings per share ...................... $ 1,916 11,500 $ .17 $ 1,757 18,488 $ .10 ========== ========== ========== ========== ========== ==========
Pro forma net earnings (loss) per share are presented to reflect the provision for income taxes for periods Anadarko was a partnership. Options to purchase 397,000 shares of common stock at $23 per share were granted in November 1997 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. The options, which expire on November 4, 2003, were still outstanding at December 31, 1997. F-10 135 8. INCOME TAXES Historical income taxes were not provided in the financial statements for earnings attributable to Anadarko since the partners would pay income taxes or receive as a deduction their distributive share of Anadarko's taxable income or loss. The proforma income tax expense for 1996 was calculated using an effective tax rate of 38%. The Company uses the liability method of accounting for deferred income taxes under SFAS No. 109, whereby deferred tax assets and liabilities are recognized based upon differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. 9. GOODWILL AND OTHER ASSETS Goodwill related to the acquisition of Trend and Bonray is being amortized over fifteen years. Amortization expense of goodwill of $375,062 and $217,992, respectively, has been recognized as of December 31, 1997 and March 31, 1998. Other assets consist of (i) organizational costs incurred for the organization of Bayard and (ii) debt issuance costs incurred on the term loan. Amortization expense for organization costs is recognized over five years and debt issuance costs over the life of the loan, which approximates five years, both on a straight-line basis. Amortization expense of $1.4 million, $63,000 and $114,000 has been recognized for the years ended December 31, 1997 and 1996 and for the three months ended March 31, 1998, respectively. On an ongoing basis, management reviews the valuation and amortization of goodwill and other intangibles to determine possible impairment. The recoverability of these assets is assessed by determining whether the carrying value can be recovered from undiscounted future cash flows. 10. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period; accordingly actual results could differ from those estimates. The Company has significant estimates for workers compensation liability due to the retention of $500,000 per occurrence. At December 31, 1997 and 1996 and for the three months ended March 31, 1998, estimates for this retention were $1.7 million, $20,000 and $1.9 million, respectively. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and investments which approximate fair value because of the short maturity of those instruments, a payable to an affiliate which approximates fair value due to the demand nature of this obligation, a floating rate term loan which approximates fair value because the interest rate adjusts to the market rate, and notes payable which approximate fair value because the interest rates on these notes reflects the borrowing terms currently available to the Company. 12. INTERIM FINANCIAL STATEMENTS AND DISCLOSURES In the opinion of management of Bayard Drilling Technologies, Inc. ("Bayard" or the "Company"), the unaudited interim financial statements for the three months ended March 31, 1998 and 1997 include all adjustments, consisting of normal recurring accruals, necessary to present fairly the Company's financial position as of March 31, 1998 and results of operations and cash flows for the three months ended March 31, 1998 and 1997. Results for the period ended March 31, 1998 are not necessarily indicative of the results to be expected for the entire fiscal year. For F-11 136 further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 13. STOCK BASED COMPENSATION The Company applies APB Opinion 25 in accounting for its stock option plans. Under this standard, compensation expense is only recognized for grants of options which include an exercise price less than the market price of the stock on the date of grant. Accordingly, based on the Company's grants for 1996, for the year ended December 31, 1997 and for the three months ended March 31, 1998, the Company recognized $0 and approximately $310,000 and $0, respectively, of deferred compensation and $0 and approximately $52,000 and $13,000, respectively, of compensation expense. For grants of options which include an exercise price equal to or greater than the market price of the stock on the date of grant, the Company has disclosed the pro forma effects of recording compensation based on fair value in Note N to the financial statements as allowed by Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation." NOTE C--ACQUISITIONS On May 1, 1997, the Company completed the acquisition of the common stock of Trend ("Trend Acquisition") for $18 million in cash and 250,000 shares of common stock which equates to $10.64 per share based on the appraisals of the fair market value of the property and equipment acquired of $21,532,000. The Company incurred costs of approximately $307,000 in connection with this acquisition. The Trend Acquisition was accounted for as a purchase. The following is an analysis of the allocation of the purchase price:
(IN THOUSANDS) 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 =========
On May 30, 1997, the Company acquired WD Equipment, L.L.C. (which owned six drilling rigs, but had no operations) from Ward Drilling Company, Inc. ("Ward Acquisition") for approximately $8 million in cash and 400,000 shares of common stock which equates to $8.95 per share based on the appraisal of the fair market value of the assets acquired of $11,931,000. The Company also issued warrants to purchase 200,000 shares of common stock at $10.00 per share. The warrant had an estimated fair market value of $294,000 at the agreement closing date and was recorded as an increase in property and equipment and additional paid in capital. On October 16, 1997, the Company completed the acquisition of Bonray ("Bonray Acquisition"), subject to certain working capital adjustments, for 3,015,000 shares of Common Stock, which equates to $11.86 per share based on the appraisals of the fair market value of the property and equipment acquired of $34,976,000. The Bonray Acquisition was accounted for as a purchase. The following is a preliminary analysis of the allocation of the purchase price: F-12 137
(IN THOUSANDS) 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 ========
The following is the unaudited pro forma combined results of operations as if Trend, Ward and Bonray had been acquired January 1, 1996 and 1997, respectively (in thousands):
YEAR ENDED DECEMBER 31, ------------------------- 1996 1997 Revenues .................................................. $ 47,952 $ 81,373 ========== ========== Net income (loss) ......................................... $ (1,848) $ 3,174 ========== ========== Net income (loss) per common share, basic ................. $ (.33) $ .35 ========== ========== Net income (loss) per common share, diluted ............... $ (.32) $ .28 ========== ==========
NOTE D--PROPERTY AND EQUIPMENT Major classes of property and equipment consist of the following:
THREE MONTHS DECEMBER 31, ENDED ---------------------- MARCH 31, 1996 1997 1998 (IN THOUSANDS) Drilling rigs and components .................. $ 42,303 $ 173,674 $ 199,884 Automobiles, trucks, and trailers ............. 431 2,041 2,101 Buildings and property ........................ -- 461 523 Furniture, fixtures, and other ................ 7 532 674 --------- --------- --------- 42,741 176,708 203,182 Less accumulated depreciation ............... 15,768 21,035 23,375 --------- --------- --------- $ 26,973 $ 155,673 $ 179,807 ========= ========= =========
NOTE E--CHANGE IN ESTIMATED LIVES Effective January 1, 1995, the Company changed the estimated remaining lives of its drilling rigs and other related drilling equipment to 84 months from remaining lives which ranged from 31 months to 113 months. The Company also changed the estimated remaining life of drill collars from 20 months to 36 months. These changes were made to more closely approximate the remaining useful lives of such assets. The effect of this change was to decrease the historical net loss by approximately $539,000 and to reduce the pro forma net loss by approximately $539,000 or $.05 per share (Note B(7)) for the year ended December 31, 1995. Effective January 1, 1996, the Company changed the estimated remaining lives of certain drilling component equipment from 84 months to 120 months and changed the estimated remaining life of drill collars and pipe from 36 months to 60 months. After review and study by the Company, the useful lives of drilling rigs acquired after January 1, 1996 were changed from 84 months to 144 months. These changes were made to more closely approximate the remaining useful lives of such assets. The effect of these changes was to increase the historical net earnings by approximately $405,000 and to increase pro forma net earnings by approximately $251,000, net of pro forma income taxes of $154,000, or $.02 per share for the year ended December 31, 1996. F-13 138 Effective July 1, 1997, the Company changed the estimated remaining lives of its drilling rigs and other related drilling equipment to 180 months from remaining lives of 144 months. These changes were made to more closely approximate the remaining useful lives of such assets. The effect of these changes was to increase earnings for the year ended December 31, 1997 by approximately $505,000, net of income taxes of $310,000, or $.04 per share, on a diluted basis. NOTE F--INCOME TAXES On October 28, 1996, Anadarko conveyed its operating assets to its wholly-owned subsidiary, BDC, which caused a change in tax status of the drilling operations from a partnership to a taxable corporation. A deferred tax asset was recognized for the temporary differences which existed at the date of conveyance together with a related valuation allowance. At December 31, 1997, the Company has net operating loss carry forwards of approximately $2 million, of which $418,000 and $1,582,000 will expire in 2011 and 2012, respectively, if unused. Income tax expense for the years ended December 31, 1995, 1996 and 1997 is summarized as follows:
1995 1996 1997 (IN THOUSANDS) Current ......................................................... $ -- $ -- $ -- Deferred ........................................................ -- 17 1,428 --------- --------- --------- $ -- $ 17 $ 1,428 ========= ========= =========
Components of net deferred income tax liabilities are as follows:
OCTOBER 28, DECEMBER 31, DECEMBER 31, 1996 1996 1997 (IN THOUSANDS) Deferred tax assets (liabilities) Operating loss carryforwards ................. $ -- $ 167 $ 760 Property and equipment ....................... 1,818 (515) (14,314) Total valuation allowance .................... (1,818) -- -- ---------- ---------- ---------- Net deferred tax liabilities ......... $ -- $ (348) $ (13,554) ========== ========== ==========
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:
1995 1996 1997 (IN THOUSANDS) Income tax expense (benefit) at federal statutory rate .... $ (75) $ 146 $ 1,069 State income taxes ........................................ -- -- 201 Amortization of goodwill .................................. -- -- 142 Other items ............................................... -- -- 16 Exclusion of partnership income taxes ..................... 75 (129) -- --------- --------- --------- $ -- $ 17 $ 1,428 ========= ========= =========
The Company's valuation allowance on tax assets was established October 28, 1996 due to a change in taxable status and decreased $1,818,000 during the period from October 28, 1996 to December 31, 1996. The Company was not a taxable entity in 1995. Effective December 1, 1996, the Company acquired assets with deferred tax liabilities of approximately $2 million in which the purchase price allocation resulted in the reduction of the Company's tax asset valuation allowance of approximately $1,724,000. In 1997 the Company acquired assets with deferred tax liabilities of approximately $13,080,000, which eliminated the Company's tax asset valuation. F-14 139 NOTE G--LONG-TERM DEBT AND SUBORDINATED NOTES Long-term debt at December 31, 1996 consisted of borrowings under loan agreements (the "Loan Agreements") which provide for a term loan (the "Term Loan") and a revolving loan (the "Revolving Loan"). The Term Loan of $7,000,000 bore interest at the Company's choice of LIBOR plus 4.25% (9.65% at December 31, 1996) or the prime rate of Chase Manhattan Bank, N.A. and requires monthly payments of principal and interest in amounts sufficient to repay borrowings at maturity on March 31, 2002. The Loan Agreements permit borrowings to a maximum of $20 million under the Term Loan if defined collateral provisions are met. The loan was collateralized by drilling equipment. The Loan Agreements also permit borrowings up to $4 million under the Revolving Loan through December 31, 1998 subject to a $2 million limitation if the borrowings under the Term Loan exceed $17 million. Starting in 1997, the Loan Agreements require the maintenance of defined collateral values, cash flow and liquidity ratios, financial reporting requirements, and the maintenance of total liabilities to tangible net worth not greater than 1.25 and imposes certain limitations on capital expenditures and incurrence of additional debt. In May 1997, the Company amended and increased the availability under the Loan Agreements. The Term Loan provides the Company up to $30.5 million for the purchase of additional land drilling rigs, the refurbishment of such rigs and equipment and for working capital purposes. The Revolving Loan provides the revolving credit loans of up to $10 million ($2 million of which is available for the issuance of letters of credit) for general corporate purposes. Amounts outstanding under the Revolving Loan (none at December 31, 1997) bear interest based on Fleet National Bank's prime rate plus 1.5% (approximately 10% at December 31) and mature in April 2000. Amounts outstanding under the Term Loan of approximately $27.1 million at December 31, 1997, bear interest, at the election of the Company, at floating rates equal to Chase Manhattan Bank's prime rate plus 2.0% or LIBOR plus 4.25% (approximately 10% at December 31) and mature in March 2002. The Loan Agreements are collateralized by substantially all of the assets of the Company, including drilling rigs, equipment and drilling contracts, and contain customary restrictive covenants (including covenants restricting the ability of the Company to pay dividends or encumber assets) and an affirmative covenant to maintain Total Available Liquidity (as defined in the Loan Agreements) of at least $4.5 million through December 31, 1997 and $3 million through December 31, 1998. Pursuant to the Loan Agreements, the Company must maintain certain financial ratios, including a Cash Flow Coverage ratio (as defined in the Loan Agreements) of at least 1.25 to 1 until December 1997, 1.5 to 1 in 1998 and 1.75 to 1 thereafter, and a ratio of Total Liabilities (as defined in the Loan Agreements) to Tangible Net Worth no greater than 1.25 to 1 in 1997 and 1 to 1 in 1998. Under the Loan Agreements the Company is obligated to pay certain fees, including an annual commitment fee in an amount equal to 0.5% of the unused portion of the commitment. Additionally, the Company issued Subordinated Notes due May 1, 2003 in the original principal amounts of $18 million and $2.52 million (the "Subordinated Notes") to Chesapeake Energy Corporation ("Chesapeake") and Energy Spectrum Partners LP ("Energy Spectrum"), respectively. The Subordinated Notes bear interest at either (i) 11% per annum, payable in cash or (ii) 12.875% per annum, payable in the form of additional Subordinated Notes, which interest is payable quarterly in arrears. On each quarterly interest payment date, the Company may make an election as to the interest rate to be applied for the previous quarter. The Subordinated Notes are redeemable, solely at the option of the Company, in whole or in part, at any time after May 31, 1998 at varying redemption prices. The Company must offer to redeem the Subordinated Notes upon the occurrence of certain events constituting a "Change of Control" (as defined in the Subordinated Notes) at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of redemption. The Subordinated Notes are convertible into Common Stock at the option of the Company, in whole or in part, in conjunction with a "Convertible Event" (as defined in the Subordinated Notes), which includes certain underwritten public offerings (including the Initial Public Offering), mergers, consolidations and other business combination transactions. The Subordinated Notes are general unsecured subordinated obligations of the Company that are subordinated in rights of payment to all existing and future senior indebtedness of the Company, pari passu with all existing and future subordinated indebtedness of the Company and senior in right of payment to all future junior subordinated indebtedness of the Company. At December 31, 1997, the amount of Subordinated Notes outstanding was approximately $2.5 million as the $18 million Subordinated Note to Chesapeake was extinguished in November 1997 with proceeds from the Initial Public Offering. See Note "J" for further discussion on the discount that was recorded related to this subordinate debt. F-15 140 The Company also has three notes totaling approximately $3.4 million at December 31, 1997, with a capital financing corporation. The debt bears interest at December 31, 1997 of 9.5% and is collateralized by certain equipment (top drives) of the Company. The debt matures in July, October and November of 2000. The note agreement does not specify any restrictive financial covenants that must be met but contains a cross default provision that states any default on the Company's Term or Revolving Notes constitutes a default on this note as well. The Company recorded an extraordinary loss of $4.0 million (net of income tax effect of $1.3 million) in the fourth quarter relating to the early extinguishment of certain subordinate debt in the amount of approximately $2.1 million and other payments in the amount of approximately $3.2 million by utilizing proceeds from the Company's Initial Public Offering completed in November 1997. At December 31, 1997, the aggregate yearly maturities on long-term obligations are as follows:
YEAR ENDING DECEMBER 31 - ---------------------------------------------------------------- 1998X .......................................................... $ 7,450,000 1999X .......................................................... 7,647,000 2000X .......................................................... 7,331,000 2001X .......................................................... 6,385,000 2002X .......................................................... 1,706,000 Thereafter ..................................................... 2,520,000 ----------- $33,039,000 ===========
NOTE H--RELATED PARTY TRANSACTIONS Before the corporate capitalization, AnSon Gas Corporation a wholly owned affiliate of APLP served as the managing general partner responsible for all management and operational functions of the Company and charged the Company for such expenses. The Company expensed approximately $198,000 and $390,000 for such services received in 1996 and 1995, respectively. Prior to December 31, 1996, the Company and its affiliates made advances to each other from time to time which generally had no specific repayment terms. In December 1996, Anadarko granted the Company a transferable option, exercisable at any time prior to June 30, 1998, to either purchase from Anadarko a storage yard located in Weatherford, Oklahoma (the "Weatherford Storage Yard") for a price of $1,000 in cash or lease from Anadarko, for any period specified by the Company through a date not later than December 31, 1999, the Weatherford Storage Yard for a lease price of $100 per year. In August 1997, the Company acquired from Anadarko approximately 5 acres of land also in Weatherford, Oklahoma, in consideration for the relinquishment by the Company of the option to acquire or lease the Weatherford Storage Yard. In May 1997, the Company paid Energy Spectrum a fee in the amount of $220,000 for financial advisory and other services rendered to the Company in connection with the completion of the Trend Acquisition, including the evaluation and negotiation of the Trend Acquisition and for assistance in the arrangement of alternative financial sources and structuring, negotiating and closing the amended financing arrangements with CIT and Fleet. The Company also reimbursed Energy Spectrum for expenses incurred in connection with the rendering of such services. The Company purchased drilling equipment and supplies from an affiliate totaling $2,862,000 and $779,000 in 1996 and 1995, respectively. The Company also transferred drilling equipment to an affiliate at the Company's basis totaling $29,000, net of accumulated depreciation, which resulted in a decrease in payable to affiliate. The Company has in the past purchased rigs and related equipment from U.S. Rig & Equipment, Inc., an affiliate of Roy T. Oliver, who served as a director of the Company until his resignation on August 13, 1997. During 1997, the Company purchased approximately $5.0 million from U.S. Rig & Equipment, Inc. Additionally, in August 1997, the Company sold one of its rigs to an affiliate of Mr. Oliver for $500,000. Additionally, in November 1997, the Company agreed F-16 141 to acquire six rigs and related drilling equipment for $14 million and such rigs will require additional refurbishment prior to placement into service. In connection therewith, the Company made a cash down payment of $3.5 million and closed the transaction in January 1998. The Company has engaged affiliates of APLP and other related affiliates for trucking services related to the movement of the Company's rigs on numerous occasions. During 1997 and the three months ended March 31, 1998, the Company utilized these affiliates in consideration for such trucking services of approximately $1.7 million. From December 13, 1996 through December 31, 1997, APLP made available to the Company certain of APLP's employees, office space and administrative equipment, such as computer and telephone systems. In consideration for such assistance, the Company has reimbursed APLP an aggregate of approximately $236,000. Interest expense incurred during the year ended December 31, 1997 and for the three months ended March 31, 1998 included approximately $680,000 and $71,000, respectively, to current or former affiliates. NOTE I--SIGNIFICANT CUSTOMERS During the year ended December 31, 1997, approximately 30% of revenues were generated from current or former affiliated customers. Except for six rigs under long term contracts with Chesapeake, dayrates billed to affiliated customers approximated those billed to nonaffiliated customers. During 1996, sales to two customers were, respectively, 75% (inclusive of $798,000 attributable to Chesapeake, which became an affiliate in December 1996) and 18% of drilling revenues. During 1995, sales to one customer totaled 36% of drilling revenue. NOTE J--STOCKHOLDER'S EQUITY AND OPTIONS In December 1996, the Company issued 2,000,000 shares of Common Stock to Anadarko for the operating assets of BDC, Anadarko's subsidiary. Further, the Company issued 2,000,000 shares of Common Stock to Energy Spectrum for $10 million cash. The Company also acquired six drilling rigs and related equipment by the issuance of 1,600,000 shares of Common Stock and put options on the Company's common stock. The drilling rigs were recorded in accordance with appraisals of the estimated fair value of the assets acquired ($9.5 million) and the net deferred income tax liability assumed. The estimated fair value of the put options are recorded as additional contributed capital to the Company. The Company executed in December 1996 certain drilling agreements to supply six drilling rigs to Chesapeake at rates equal to defined comparable market rates but not less than $5,000 per day per rig. The Company granted the operator an option to purchase 2,000,000 shares of Common Stock at $6 per share, subject to performance of the operator under the drilling agreement. The estimated fair value of the options of $1,100,000 was recorded as additional paid-in capital and a deferred charge to be amortized over a twelve month period consistent with the annual negotiations of contract terms. At December 31, 1997, the deferred charge was fully amortized, and the Company and Chesapeake were unable to agree on an appropriate rate adjustment related to these drilling agreements, therefore the Company exercised its option to terminate the Chesapeake Drilling Agreements. In February 1997, the Company sold 100,000 shares of Common Stock at $2.50 per share to the President of the Company, which are subject to the terms of a Restricted Stock Award Agreement. Deferred compensation in the amount of $250,000 was recorded related to this stock grant as the purchase price was below the fair market value of the Company's Common Stock at the date of grant. See--Note "N". On December 10, 1996, the Company granted the issuer of the Term Loan (Note G) warrants to immediately purchase up to 290,000 shares of the Company's Common Stock at $8 per share or up to 300,000 shares at $8 per share when total outstanding Common Stock exceeds 6,000,000 shares. The warrants expire at the earlier of December 13, 2001 or eighteen months after completion of the initial public stock offering by the Company. The warrant holder can also elect to receive in stock the excess of the stock market value over the warrant exercise price. These warrants have F-17 142 an estimated fair value of $219,000, which has been recorded as debt issue costs and is being amortized over the term of the loan. The Company purchased during May 1997, two drilling rigs from U.S. Rig & Equipment, Inc. for cash and granted options to purchase 100,000 shares of Common Stock at $8 per share. In connection with the issuance of Subordinated Notes executed in May 1997, the Company issued 1,140,000 shares of Common Stock at $7 per share. Additionally, the Company issued two series of detachable Warrants, designated as Series A Warrants and Series B Warrants. The Series A Warrants are exercisable at a price of $.01 per share and the Series B Warrants are exercisable at $7.50 per share. Both Warrants expire 72 months from issuance. The Company issued Series A Warrants and Series B Warrants representing the right to purchase 798,000 shares and 912,000 shares of Common Stock, respectively. The fair market value of these warrants at the agreement closing date was $6 million, $4,024,000 of which was attributable to the Subordinated Notes. The warrant value applicable to the Subordinated Notes was allocated between the Subordinated Notes and warrants and recorded as a discount to the Subordinated Notes and additional paid in capital. The remaining discount to be amortized at December 31, 1997 is approximately $429,000. The amortization of this discount has been included in interest expense. In June 1997, the Company granted options to employees to purchase 59,600 shares of Common Stock at $8 per share. Deferred compensation in the amount of $59,600 was recorded related to these stock options as the exercise price was below the fair market value of the Company's Common Stock at the date of grant. See--Note "N". In November 1997, the Company granted options to employees and executive officers to purchase 397,000 shares of Common Stock at $23 per share. During 1996 and 1997, the Company issued stock options to three executive officers pursuant to the 1997 Stock Option and Stock Award Plan to purchase 200,000, 50,000 and 50,000 shares of Common Stock, respectively, at an exercise price of $5, $5 and $10 per share, respectively. Except for 10,000 options exercised in April 1998, at an exercise price of $5 per share none of such options has been exercised, and all of such options remain outstanding. In October 1997, the Company consummated the Chesapeake Transactions, resulting in the cancellation of the Chesapeake Option, the payment to the Company of $9 million in cash by Chesapeake, the redemption of the $18 million principal amount of Subordinated Notes held by Chesapeake for an aggregate cash payment by the Company of $18.2 million and the issuance of 3,194,000 shares of Common Stock to Chesapeake. At the August 19, 1997 Board of Directors meeting, the number of authorized shares of Common Stock was increased from 10,000,000 to 100,000,000 and the number of authorized shares of preferred stock was increased from 2,000,000 to 20,000,000. Additionally, a two-for-one stock split effected as a stock dividend on August 22, 1997 was approved. All stock option data, per share earnings and references to common stock have been restated to give effect to the stock split. On July 31, 1997, Energy Spectrum exercised in full its Series A Warrants, at a price of $0.01 per share, for 98,000 shares of Common Stock. In April 1998, the Company redeemed in full the $2.52 million principal amount of Subordinated Notes issued to Energy Spectrum together with accrued interest of $47,740. In connection therewith, Energy Spectrum waived its rights to require the Company to redeem the Subordinated Notes at 110% of par value. This redemption coupled with the redemption of $18 million principal amount of Subordinated Notes from Chesapeake at the time of the Initial Public Offering, leaves no Subordinated Notes outstanding. NOTE K--COMMITMENTS AND CONTINGENCIES The Company has entered into two year employment agreements with three executive officers, which provide for the payment of the remaining term of each agreement upon a change of control. As of March 31, 1998, benefits under such agreements, assuming a change of control, would aggregate approximately $322,000. F-18 143 As of March 31, 1998, the Company had construction commitments totaling approximately $10 million for rigs in various stages of refurbishment. A shortage of drill pipe exists in the contract drilling industry in the United States. This shortage has caused the price of drill pipe to increase significantly over the past 30 months and has required orders for new drill pipe to be placed at least one year in advance of expected use. The price increase and the delay in delivery has caused the Company to substantially increase capital expenditures for drill pipe in recent months. In the event the shortage continues, the Company may be unable to obtain the drill pipe required to expand its contract drilling operations. The Company has committed approximately $9.0 million for drill pipe ordered which is subject to cancellation without penalty 90 days prior to the scheduled delivery date. NOTE L--SUBSEQUENT EVENTS A purported class action lawsuit is pending against the Company, certain directors and officers of the Company, the managing underwriters of the Initial Public Offering, and certain current and former stockholders of the Company, alleging violations of federal securities laws in connection with the Initial Public Offering. The lawsuit, Yuan v. Bayard Drilling Technologies, Inc., et al. ("Yuan"), was filed on February 3, 1998 in the United States District Court for the Western District of Oklahoma. The principal plaintiff in Yuan is Tom Yuan. The defendants in this case include the Company, Chesapeake, Energy Spectrum LLC, James E. Brown, David E. Grose, Carl B. Anderson, III, Merrill A. Miller, Jr., Sidney L. Tassin, Lew O. Ward, Mike Mullen, Roy T. Oliver, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers, Inc., Prudential Securities, Inc., Rauscher Pierce Refsnes, Inc. (a predecessor to Dain Rauscher Incorporated) and Raymond James & Associates, Inc. The plaintiffs in this lawsuit purport to sue on their own behalf and on behalf of all persons who purchased shares of Common Stock on or traceable to the Initial Public Offering. In the lawsuit, plaintiffs allege claims against all defendants under the Securities Act. The plaintiffs allege that the registration statement and prospectus for the Initial Public Offering contained materially false and misleading information and omitted to disclose material facts. In particular, the plaintiffs allege that such registration statement and prospectus failed to disclose financial difficulties of Chesapeake, the Company's largest customer, and the effects of such difficulties on Chesapeake's ability to continue to provide the Company with substantial drilling contracts. The petitions further allege that the Company failed to disclose pre-offering negotiations with R.T. Oliver Drilling, Inc., whom the plaintiffs allege was a related party, for the purchase of drilling rigs. In addition, the petitions allege that the Company failed to disclose that its growth strategy required costly refurbishment of older drilling rigs that would dramatically increase the Company's costs, which could not be sustained by internally generated cash flows. In each of these lawsuits, the plaintiffs are seeking rescission and damages. Two other suits, Khan v. Bayard Drilling Technologies, Inc., et al. ("Khan") and Burkett v. Bayard Drilling Technologies, Inc., et al. ("Burkett"), which were filed in District Court in and for Oklahoma County, State of Oklahoma on January 14, 1998 and February 2, 1998, respectively, and alleged essentially the same claims as Yuan, were dismissed without prejudice in May 1998 on a joint application filed by all parties. The plaintiffs in Khan and Burkett, along with others, have joined in Yuan's motion to be appointed as lead plaintiffs in the Yuan federal court suit. The Company is also involved in other litigation arising from time to time in the ordinary course of its business, including workers' compensation claims and disputes arising out of its drilling activities. Such disputes include a claim filed against Bayard and Sperry-Sun Drilling Services, Inc. on May 29, 1998 in the District Court of Oklahoma County in the State of Oklahoma. R.C. Taylor Companies, Inc., the plaintiff in that lawsuit, seeks actual and punitive damages for costs allegedly incurred in connection with a directional drilling project that utilized one of the Company's rigs. The Company believes the allegations in the lawsuits referenced above are without merit and is defending vigorously the claims brought against it. The Company is unable, however, to predict the outcome of these lawsuits or the costs to be incurred in connection with their defense and there can be no assurance that this litigation will be resolved in the Company's favor. An adverse result or prolonged litigation could have a material adverse effect on the Company's financial position or results of operations. F-19 144 Since the Consolidation Transactions and the Initial Public Offering of 11,040,000 shares of Common Stock, par value $0.01 per share of the Company, which was completed in November 1997, and prior to December 31, 1997, the Company agreed to purchase six additional rigs from R. T. Oliver for approximately $14 million in cash. The Oliver Acquisition was completed on January 9, 1998. The Company expects to refurbish and purchase complementary equipment, including drill pipe, for these rigs at an aggregate cost of approximately $28 million. NOTE M--EMPLOYEE BENEFIT PLAN The Company has a profit sharing plan for certain eligible employees who have attained the age of 21 and completed at least one year of service. Participants may contribute up to 15% (20% prior to October 1997) of compensation for any plan year. The Company's discretionary contribution is based on the participants' total years of service. The Company has made contributions of approximately $82,000 through March 31, 1998. NOTE N--BENEFIT AND COMPENSATION PLAN In April 1997, the Board of Directors approved the adoption of an Employee Stock Plan ("the Plan") whereby 1,600,000 shares of Common Stock are authorized for issuance under the Plan to officers and employees. The Plan permits the issuance of qualified or nonqualified stock options, as well as granting of certain other awards, including shares of restricted stock. Options granted become vested at the rate of 20% per year one year after being granted, with the options expiring six years from the original grant date. The exercise price for options granted through December 31, 1997 was based on the Company's estimate of the fair market value on the date of the grant. Through December 31, 1997, 756,600 options and 100,000 shares of restricted stock (denoted below) were issued under the Plan, 40,000 of which were exercisable at December 31, 1997 at a weighted average exercise price of $5. Activity pertaining to the Plan is as follows:
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE Outstanding at December 10, 1996 ...................................... -- -- Granted ............................................................. 200,000 $ 5.00 Exercised ........................................................... -- -- --------- Outstanding at January 1, 1997 ........................................ 200,000 $ 5.00 Granted ............................................................. 656,600 $ 16.16 Exercised ........................................................... -- -- --------- December 31, 1997 ................................................... 856,600 $ 13.55 =========
WEIGHTED AVERAGE FAIR MARKET WEIGHTED AVERAGE FAIR VALUE OF VALUE OF DEFERRED EXERCISE NUMBER OF REMAINING WEIGHTED AVERAGE STOCK OPTIONS ON COMMON STOCK COMPENSATION PRICE RANGE SHARES CONTRACTUAL LIFE EXERCISE PRICE DATE OF GRANT AT DATE OF GRANT COST $ 2.50 100,000(1) -- $ 2.50 $ 5.00 $ 5.00 $205,000 5.00 250,000 4.95 5.00 2.09 5.00 -- 8.00 59,600 5.46 8.00 4.18 9.00 53,000 10.00 50,000 5.54 10.00 3.59 9.00 -- 23.00 397,000 5.84 23.00 10.12 23.00 --
- ----------------- (1) Unvested restricted stock. The Company applies APB Opinion 25 in accounting for the Plan. Had compensation been determined on the basis of fair value pursuant to FASB Statement No. 123, net income and earnings per share would have been reduced as follows: F-20 145
DECEMBER 31, 1996 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss) (in thousands): As reported .............................. $ 267 $ (2,086) Pro forma (net of effective tax of 38%) .. 261 (2,677) Earnings per share, basic and fully diluted: As reported, basic ....................... .05 (.23) Pro forma, basic ......................... .05 (.30) As reported, diluted ..................... .05 (.18) Pro forma, diluted ....................... .05 (.23)
The fair value of each option granted is estimated using the Black- Scholes model. This model includes, among others, a variable of stock volatility. As the Company has not established a significant trading history, the volatility used in the model was .40 for options granted through June 30, 1997 and .43 for options granted since July 1, 1997 based on volatility of the stock price of a similar entity that has been publicly traded for several years. Dividend yield was estimated to remain at zero with risk free interest rates ranging between 5.72 and 6.31 percent. As there is no prior experience available to use in estimating an expected life for the options, an average of the time between the vesting and expiration dates of the options was used in determining the expected lives of the options ranging from 3.5 to 5.5 years. Fair value of options granted during 1997 and 1996 under the Plan were $4.6 million and $416,000, respectively. F-21 146 PRO FORMA CONSOLIDATED FINANCIAL DATA The following unaudited pro forma financial statements are derived from the historical financial statements of the Company included elsewhere in this Prospectus. The Pro Forma Combined Statements of Operations for the year ended December 31, 1997 gives effect to (i) the Trend Acquisition, the Ward Acquisition and the Bonray Acquisition (each defined herein), all of which occurred at various dates in 1997, as if such acquisitions occurred on January 1, 1997 and (ii) interest expense adjustment to reflect the retirement of certain Subordinated Notes from proceeds of the Initial Public Offering (iii) interest expense adjustments to reflect the prepayment of 25% ($6.2 million) of the outstanding principal amount of the Term Loan and (iv) the retirement of the outstanding principal amount of the Revolving Loan. There is no pro forma effect for the TransTexas Acquisition because the rigs were utilized solely by TransTexas for internal purposes and had no internal or external revenues. The Pro Forma Statement of Operations for the period ended March 31, 1998 reflect adjustments for the transactions in (iii) above and the retirement of the $2.52 million principal of Subordinated Notes. The Pro Forma Balance Sheet at March 31, 1998 reflects the repayment by the Company of 25% of the outstanding principal amount of the Term Loan, the retirement of the Subordinated Notes and, the sale of the Notes and the application of net proceeds to fund the purchase price of the TransTexas Acquisition, as if they had occurred on March 31, 1998. The unaudited pro forma combined financial information should be read in conjunction with the notes thereto and the historical financial statements of the Company including the notes thereto, which are included elsewhere in this Prospectus. The unaudited pro forma combined financial statements do not purport to be indicative of the results of operations that would actually have occurred if the transactions described had occurred as presented in such statements or that may occur in the future. In addition, future results may vary significantly from the results reflected in such statements due to general economic conditions, oil and gas commodity prices, the demand and prices for contract drilling services, changes in the number of rigs available for service, the Company's ability to successfully integrate the operations of the TransTexas Acquisition with its current business and several other factors, many of which are beyond the Company's control. See "Risk Factors." F-22 147 BAYARD DRILLING TECHNOLOGIES, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------------------------------------ TREND(a) WARD(a) BONRAY(a) FOUR MONTHS FIVE MONTHS NINE MONTHS ENDED ENDED ENDED APRIL 30, MAY 31, SEPTEMBER 30, BAYARD 1997 1997 1997 ------------ ------------ ------------ ------------ Revenues ..................... $ 55,747 $ 6,390 $ 4,957 $ 14,279 COSTS AND EXPENSES: Drilling costs ............. 40,705 4,845 3,914 10,240 Depreciation and amortization ............. 7,943 627 413 1,707 General and administrative ........... 1,868 515 197 860 ------------ ------------ ------------ ------------ Total costs and expenses ............... 50,516 5,987 4,524 12,807 ------------ ------------ ------------ ------------ Operating income ......... 5,231 403 433 1,472 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income ............ 597 -- 16 420 Interest expense and financing costs .................... (3,065) (47) (27) (471) Gain (loss) on sale of assets ................... 544 -- -- (57) Other ...................... 37 -- 31 (41) ------------ ------------ ------------ ------------ Total other income (expense) .............. (1,887) (47) 20 (149) ------------ ------------ ------------ ------------ Income (loss) before taxes .................... 3,344 356 453 1,323 ------------ ------------ ------------ ------------ Income tax expense (benefit) ................ 1,428 135 -- 563 ------------ ------------ ------------ ------------ Net income (loss) before extraordinary loss: ...... $ 1,916 $ 221 $ 453 $ 760 ============ ============ ============ ============ Earning (loss) per share, before extraordinary loss: basic .................... $ .21 ============ diluted .................. $ .17 ============ Weighted average shares outstanding: basic .................... 9,064 ============ diluted .................. 11,500 ============ PRO FORMA ------------------------------------------------------------------ ACQUISITION AND OTHER AS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED ------------ ------------ ------------ ------------ Revenues ..................... $ -- $ 81,373 $ -- $ 81,373 COSTS AND EXPENSES: Drilling costs ............. -- 59,704 -- 59,704 Depreciation and amortization ............. 386(b) 11,576 -- 11,576 500(c) General and administrative ........... -- 3,440 -- 3,440 ------------ ------------ ------------ ------------ Total costs and expenses ............... 886 74,720 -- 74,720 ------------ ------------ ------------ ------------ Operating income ......... (886) 6,653 -- 6,653 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income ............ -- 1,033 (726)(f) 307 Interest expense and financing costs .................... 1,172(d) (2,438) 779(g) (1,659) Gain (loss) on sale of assets ................... -- 487 -- 487 Other ...................... -- 27 -- 27 ------------ ------------ ------------ ------------ Total other income (expense) .............. 1,172 (891) 53 (838) ------------ ------------ ------------ ------------ Income (loss) before taxes .................... 286 5,762 53 5,815 ------------ ------------ ------------ ------------ Income tax expense (benefit) ................ 239(e) 2,365 20(h) 2,385 ------------ ------------ ------------ ------------ Net income (loss) before extraordinary loss: ...... $ 47 $ 3,397 $ 33 $ 3,430 ============ ============ ============ ============ Earning (loss) per share, before extraordinary loss: basic .................... $ .37 $ .38 ============ ============ diluted .................. $ .30 $ .30 ============ ============ Weighted average shares outstanding: basic .................... 9,064 9,064 ============ ============ diluted .................. 11,500 11,500 ============ ============
The accompanying notes are an integral part of these pro forma financial statements. F-23 148 BAYARD DRILLING TECHNOLOGIES, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
HISTORICAL PRO FORMA ---------- ---------------------------- BAYARD ADJUSTMENTS AS ADJUSTED Revenues ................................ $ 23,962 $ -- $ 23,962 COSTS AND EXPENSES: Drilling costs ........................ 17,221 -- 17,221 Depreciation and amortization ......... 3,169 -- 3,169 General and administrative ............ 755 -- 755 ---------- ---------- ---------- Total costs and expenses ...... 21,145 -- 21,145 ---------- ---------- ---------- Operating income .............. 2,817 -- 2,817 ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest income ....................... 496 (100)(f) 396 Interest expense and financing costs .. (367) 114(j) (253) Gain (loss) on sale of assets ......... 52 -- 52 Other ................................. 34 -- 34 ---------- ---------- ---------- Total other income (expense) .. 215 14 229 ---------- ---------- ---------- Income (loss) before taxes .............. 3,032 14 3,046 Income tax expense (benefit) ............ 1,275 (25)(k) 1,250 ---------- ---------- ---------- Net income (loss) ....................... $ 1,757 $ 39 $ 1,796 ========== ========== ========== Earning (loss) per share: basic ................................. $ .10 $ .10 ========== ========== diluted ............................... $ .10 $ .10 ========== ========== Weighted average shares outstanding: basic ................................. 18,184 18,184 ========== ========== diluted ............................... 18,488 18,488 ========== ==========
The accompanying notes are an integral part of these pro forma financial statements. F-24 149 BAYARD DRILLING TECHNOLOGIES, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1998 (IN THOUSANDS) ASSETS
HISTORICAL PRO FORMA ----------- -------------------------------- BAYARD(L) ADJUSTMENTS AS ADJUSTED Current Assets: Cash and investments ......................... $ 28,262 $ 13,439(i)(j) $ 41,701 Accounts receivable .......................... 23,112 -- 23,112 Other ........................................ 1,065 -- 1,065 ----------- ----------- ----------- Total current assets ................. 52,439 12,939 65,878 Property & Equipment, net .................... 179,807 75,000(i) 254,807 Goodwill, net ................................ 12,487 -- 12,487 Other ........................................ 1,861 3,250(i) 5,111 ----------- ----------- ----------- Total assets ......................... $ 246,594 $ 91,689 $ 338,283 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................. $ 14,028 $ -- $ 14,028 Accrued liabilities .......................... 4,749 -- 4,749 Current portion of long-term debt ............ 7,450 -- 7,450 ----------- ----------- Total current liabilities ............ 26,227 -- 26,227 ----------- ----------- Long-term debt ................................. 21,137 (6,200)(j) 14,937 ----------- ----------- ----------- Subordinated Notes ............................. 2,111 (2,111)(j) -- ----------- ----------- ----------- Senior Notes ................................... -- 100,000(i) 100,000 ----------- ----------- ----------- Other long term liabilities .................... 2,039 -- 2,039 ----------- ----------- Deferred income tax liabilities ................ 14,848 -- 14,848 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock ................................. 182 -- 182 Additional paid-in capital ................... 180,413 -- 180,413 Accumulated deficit .......................... (363) -- (363) ----------- ----------- Total stockholders' equity ........... 180,232 -- 180,232 ----------- ----------- ----------- Total liabilities and stockholders' equity ............................. $ 246,594 $ 91,689 $ 338,283 =========== =========== ===========
The accompanying notes are an integral part of these pro forma financial statements. F-25 150 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (TABLES IN THOUSANDS) (a) Represents the results of operations for Trend, Ward and Bonray prior to their acquisition by Bayard. Operations subsequent to the date of purchase of each of Trend, Ward and Bonray, May 1, May 30 and October 16, 1997, respectively, are included in the Bayard historical results. (b) To adjust depreciation expense on assets acquired in the Trend, Ward and Bonray Acquisitions using allocated purchase prices and based on estimated useful lives of 15 years calculated on a straight-line basis. (c) To record amortization of goodwill attributable to the Trend and Bonray Acquisitions over 15 years on a straight-line basis. (d) To eliminate interest expense on (i) an aggregate principal amount of $18 million of Subordinated Notes issued in the May Financing and (ii) the outstanding amount of the Revolving Loan, both paid off from proceeds of the Initial Public Offering. (e) To adjust income tax expense recognized by Bayard, Trend and Bonray to conform to the Company's pro forma income tax position. (f) To adjust interest income for interest earned on Initial Public Offering proceeds used for the repayment of debt. (g) To adjust historical interest expense for the repayment of debt on Notes as follows:
DECEMBER 31, 1997 ------------------------ INCURRED PRO FORMA Term Loan............................................... $2,163 $ 541 Subordinated Notes (Energy Spectrum).................... 238 238 ------ ----- $2,401 $ 779 ====== =====
(h) To record a provision for federal and state income tax at the rate of 41%. (i) To record (i) the issuance of $100 million of Notes generating net proceeds of approximately $96.75 million (net of $3.25 million of discount and associated costs of the Initial Offering) and (ii) the application of $75 million of the net proceeds to the Company from the Initial Offering to fund the purchase price of the TransTexas Acquisition. (j) To record (i) the repayment by the Company of 25% ($6.2 million) of the outstanding principal amount of the Term Loan and (ii) the repayment and retirement of the principal amount ($2.1 million, net of discount) of Subordinated Notes previously held by Energy Spectrum, both of which were paid with proceeds from the Initial Public Offering. (k) To adjust income tax expense recognized by Bayard to conform to the Company's pro forma income tax position. F-26 151 ================================================================================ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. TABLE OF CONTENTS
PAGE --- Disclosure Regarding Forward-Looking Statements ............................................................ iv Available Information ................................................... v Prospectus Summary ...................................................... 1 Risk Factors ............................................................ 15 The Company ............................................................. 25 The TransTexas Acquisition .............................................. 27 Use of Proceeds ......................................................... 28 Capitalization .......................................................... 29 Selected Consolidated Financial and Operating Data ........................................................ 30 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................................ 32 Business ................................................................ 39 Management .............................................................. 50 Principal Stockholders .................................................. 61 Certain Relationships and Related Transactions .......................................................... 64 The Exchange Offer ...................................................... 71 Description of Exchange Notes ........................................... 81 Certain U.S. Federal Tax Consequences to U.S. Holders .......................................................... 109 Certain U.S. Federal Tax Consequences to Non- U.S. Holders .......................................................... 110 Description of Certain Indebtedness ..................................... 112 Description of Capital Stock ............................................ 114 Plan of Distribution .................................................... 117 Legal Matters ........................................................... 117 Experts ................................................................. 117 Index to Financial Statements ........................................... F-1
================================================================================ ================================================================================ BAYARD DRILLING TECHNOLOGIES, INC. BAYARD DRILLING, L.L.C. BAYARD DRILLING, L.P. BONRAY DRILLING CORPORATION TREND DRILLING CO. ------------------------------------------- PROSPECTUS ------------------------------------------- OFFER TO EXCHANGE BAYARD DRILLING TECHNOLOGIES, INC. 11% SENIOR NOTES DUE 2005, SERIES B FOR ANY AND ALL OF ITS OUTSTANDING 11% SENIOR NOTE DUE 2005, SERIES A , 1998 ================================================================================ 152 PART II INFORMATION NOT REQUIRED IN PROSPECTUS All capitalized terms used and not defined in Part II of this Registration Statement shall have the meanings assigned to them in the Prospectus which forms a part of this Registration Statement. ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS. DELAWARE GENERAL CORPORATION LAW Section 145(a) of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145(b) of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145(c) of the DGCL provides that to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 145(d) of the DGCL provides that any indemnification under subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of Section 145. Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 145(e) of the DGCL provides that expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in Section 145. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. II-1 153 Section 145(f) of the DGCL provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 145(g) of the DGCL provides that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his capacity as such, whether or not the corporation would have the power to indemnify him against such liability under Section 145. RESTATED CERTIFICATE OF INCORPORATION Article Thirteenth of the Restated Certificate of Incorporation of the Company (the "Certificate"), a copy of which is filed as Exhibit 3.1 to the Registration Statement, provides as follows: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law, as the same exists or as such provision may hereafter be amended, supplemented or replaced, or (4) for any transaction from which the director derived an improper personal benefit. Any repeal or amendment of this Article Thirteenth by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation arising from an act or omission occurring prior to the time of such repeal or amendment. In addition to the circumstances in which a director of the Corporation is not personally liable as set forth in the foregoing provisions of this Article Thirteenth, a director shall not be liable to the Corporation or its stockholders to such further extent as permitted by any law hereafter enacted, including without limitation any subsequent amendment to the Delaware General Corporation Law. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law that might otherwise permit a lesser or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law or by this Restated Certificate, the affirmative vote of the holders of not less than 66 2/3% in voting power of the shares of the Corporation then entitled to be voted in an election of directors, voting together as a single class, shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article Thirteenth. Article Twelfth of the Certificate provides as follows: The Corporation shall indemnify any person who was, is, or is threatened to be made a party to a proceeding (as hereinafter defined) by reason of the fact that he or she (1) is or was a director or officer of the Corporation or (2) while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, limited liability company, association, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, entity or organization to the fullest extent permitted under the Delaware General Corporation Law, as the same exists or may hereafter be amended. Such right shall be a contract right and as such shall run to the benefit of any director or officer who is elected and accepts the position of director or officer of the Corporation or elects to continue to serve as a director or officer of the Corporation while this Article Twelfth is in effect. Any repeal or amendment of this Article Twelfth shall be prospective only and shall not limit the rights of any such director or officer or the obligations of the Corporation with respect to any claim arising from or related to the services of such director or officer in any of the foregoing capacities prior to any such repeal or amendment to this Article Twelfth. Such right shall include the right to be paid by the Corporation expenses (including attorneys' fees) incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the Delaware General Corporation Law, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Corporation within 60 days after a written claim has been received by the II-2 154 Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification is not permitted under the Delaware General Corporation Law, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its board of directors or any committee thereof or independent legal counsel, or stockholders) to have made its determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances nor an actual determination by the Corporation (including its board of directors or any committee thereof, independent legal counsel or stockholders) that such indemnification is not permissible shall be a defense to the action or create a presumption that such indemnification is not permissible. In the event of the death of any person having a right of indemnification under the foregoing provisions, such right shall inure to the benefit of his or her heirs, executors, administrators and personal representatives. The rights conferred above shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, resolution of stockholders or directors, agreement or otherwise. The Corporation may additionally indemnify any employee or agent of the Corporation to the fullest extent permitted by law. As used herein, the term "proceeding" means any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding. BYLAWS Article Eight of the Amended and Restated Bylaws of the Company (the "Bylaws"), a copy of which is filed as Exhibit 3.2 to the Registration Statement provides as follows: Each person who at any time shall serve or shall have served as a director, officer, employee or agent of the Corporation (including any predecessor of the Corporation), or any person who is or was serving at the written request of the Corporation (in accordance with written procedures adopted from time to time by the Board of Directors) as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, shall be entitled to (a) indemnification and (b) the advancement of expenses incurred by such person from the Corporation as, and to the fullest extent, permitted by Section 145 of the Delaware General Corporation Law or any successor statutory provision, as from time to time amended. The foregoing right of indemnification and to the advancement of expenses shall not be deemed exclusive of any other rights to which those to be indemnified may be entitled as a matter of law or under any agreement, vote of stockholders or disinterested directors of the Corporation, or other arrangement. The Corporation may purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, employee or agent of the Corporation or who is or was serving at the written request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise against any liability asserted against and incurred by such person in such capacity or arising out of such person's status in such capacity, whether or not the Corporation would have the power to indemnify such person against that liability under this Article Eight or the Delaware General Corporation Law. INDEMNIFICATION AGREEMENTS The Company has entered into Indemnification Agreements (the "Indemnification Agreements") with its directors and certain of its officers (the "Indemnitees"), a form of which is filed as Exhibit 10.20 to the Registration Statement. Under the terms of the Indemnification Agreements, the Company has generally agreed to indemnify, and advance expenses to, each Indemnitee to the fullest extent permitted by applicable law on the date of such agreements and to such greater extent as applicable law may thereafter permit. In addition, the Indemnification Agreements contain II-3 155 specific provisions pursuant to which the Company has agreed to indemnify each Indemnitee (i) if such person is, by reason of his or her status as a director, nominee for director, officer, agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise with which such person was serving at the request of the Company (any such status being hereinafter referred to as a "Corporate Status"), made or threatened to be made a party to any threatened, pending or completed action, suit, arbitration, alternative dispute resolution mechanism, investigation or other proceeding (each, a "Proceeding"), other than a Proceeding by or in the right of the Company, (ii) if such person is, by reason of his or her Corporate Status, made or threatened to be made a party to any Proceeding brought by or in the right of the Company to procure a judgment in its favor, except that no indemnification shall be made in respect of any claim, issue or matter in such Proceeding as to which such Indemnitee shall have been adjudged to be liable to the Company if applicable law prohibits such indemnification (unless and only to the extent that a court shall otherwise determine), (iii) against expenses actually and reasonably incurred by such person or on his or her behalf in connection with any Proceeding to which such Indemnitee was or is a party by reason of his or her Corporate Status and in which such Indemnitee is successful, on the merits or otherwise, (iv) against expenses actually and reasonably incurred by such person or on his or her behalf in connection with a Proceeding to the extent that such Indemnitee is, by reason of his or her Corporate Status, a witness or otherwise participates in any Proceeding at a time when such person is not a party in the Proceeding, and (v) against expenses actually and reasonably incurred by such person in any judicial adjudication of or any award in arbitration to enforce his or her rights under the Indemnification Agreements. Furthermore, under the terms of the Indemnification Agreements, the Company has agreed to pay all reasonable expenses incurred by or on behalf of an Indemnitee in connection with any Proceeding, whether brought by or in the right of the Company or otherwise, in advance of any determination with respect to entitlement to indemnification and within 15 days after the receipt by the Company of a written request from such Indemnitee for such payment. In the Indemnification Agreements, each Indemnitee has agreed that he or she will reimburse and repay the Company for any expenses so advanced to the extent that it shall ultimately be determined that he or she is not entitled to be indemnified by the Company against such expenses. The Indemnification Agreements also include provisions that specify the procedures and presumptions which are to be employed to determine whether an Indemnitee is entitled to indemnification thereunder. In some cases, the nature of the procedures specified in the Indemnification Agreements varies depending on whether there has occurred a "Change of Control" (as defined in the Indemnification Agreements) of the Company. STOCKHOLDERS AND VOTING AGREEMENT The Stockholders and Voting Agreement, a copy of which is filed as Exhibit 9.1 to the Registration Statement, provides that the Certificate, Bylaws and other organizational documents of the Company and each of its subsidiaries shall at all times, to the fullest extent permitted by law, provide for indemnification of, advancement of expenses to, and limitation of the personal liability of, the members of the Board of Directors of the Company and the members of the boards or similar managing bodies of subsidiaries of the Company. Additionally, such agreement provides that any Energy Spectrum NonVoting Observer (as defined in the Stockholders and Voting Agreement) shall be entitled to indemnification from the Company to the maximum extent permitted by law, as though such person were a director of the Company or any of its subsidiaries. Any amendment, repeal or modification of this provision may not be adverse to any member of the Board of Directors of the Company, any Energy Spectrum Non-Voting Observer or any member of the boards of directors or other similar managing bodies of any subsidiary of the Company, without the consent of a majority of the members of the Board of Directors. The above discussion of the Certificate, Bylaws, Stockholders and Voting Agreement and Section 145 of the DGCL is not intended to be exhaustive and is respectively qualified in its entirety by the Certificate, Bylaws, Stockholders and Voting Agreement, Underwriting Agreement and such statute. II-4 156 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 -- Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 3.2 -- Amended and Restated Bylaws of the Company, as adopted August 19, 1997 (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 4.1 -- Specimen Stock Certificate for the Common Stock, par value $0.01 per share, of the Company (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 4.2 -- Indenture, dated as of June 26, 1998, by and among the Company and Bayard Drilling, L.L.C., Bayard Drilling, L.P., Bonray Drilling Corporation and Trend Drilling Co., as guarantors, and U.S. Trust Company of Texas, N.A., as trustee.* 4.3 -- Registration Rights Agreement, dated as of June 26, 1998, by and among the Company, Bayard Drilling, L.L.C., Bayard Drilling, L.P., Bonray Drilling Corporation, Trend Drilling Co., Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, Dain Rauscher Wessels and Lehman Brothers Inc.* 5.1 -- Opinion of Baker & Botts, L.L.P. regarding the validity of the securities being registered.* 9.1 -- Second Amended and Restated Stockholders and Voting Agreement, dated as of October 16, 1997, by and among the Company and the several stockholders that are signatories thereto (incorporated by reference to Exhibit 9.1 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 9.2 -- First Amendment to Second Amended and Restated Stockholders and Voting Agreement, dated as of November 3, 1997, by and among the Company and the several stockholders that are signatories hereto. 10.1 -- 1997 Stock Option and Stock Award Plan of the Company (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.2 -- Forms of Non-Qualified Stock Option Agreements under the 1997 Stock Option and Stock Award Plan (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.3 -- Master Agreement, dated as of November 26, 1996, by and among the Company and the stockholders of the Company that are signatories thereto (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.4 -- Master Drilling Agreement, dated as of December 10, 1996, by and among the Company, Chesapeake Energy Corporation and Chesapeake Operating, Inc. (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.5 -- Form of Chesapeake Drilling Agreement, by and between Chesapeake Operating, Inc., as Operator, and the Company, as Contractor (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333- 34451). 10.6 -- Securities Purchase Agreement, dated as of April 30, 1997, by and among the Company, Energy Spectrum Partners LP and Chesapeake Energy Corporation (the "May Securities Purchase Agreement") (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.7 -- Form of Subordinated Note of the Company issued pursuant to the May Securities Purchase Agreement (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.8 -- Form of Series B Warrant to Purchase Common Stock of the Company issued pursuant to the May Securities Purchase Agreement (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.9 -- Ward Drilling Company, Inc. Warrant to Purchase Common Stock of the Company, dated May 30, 1997 (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.10 -- Preferential Right to Transport Agreement, dated as of May 30, 1997, by and between the Company and Geronimo Trucking Company (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333- 34451). 10.11 -- RR&T, Inc. Warrant to Purchase Common Stock of the Company, dated May 1, 1997 (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.12 -- Mike Mullen Warrant to Purchase Common Stock of the Company, dated May 1, 1997 (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.13 -- Amended and Restated Loan and Security Agreement, dated as of June 18, 1998 by and among Fleet Capital Corporation, the Company and Bayard Drilling, L.P.* II-5 157 10.14 -- Second Amended and Restated Loan Agreement, dated as of June 18, 1998, by and among The CIT Group/Equipment Financing, Inc. and Fleet Capital Corporation, as Lenders, and the Company, as Borrower.* 10.15 -- Employment Agreement, dated as of December 10, 1996, by and between the Company and James E. Brown (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.16 -- Restricted Stock Award Agreement, dated as of December 10, 1996, by and between the Company and James E. Brown (incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.17 -- Employment Agreement, dated as of January 1, 1997, by and between the Company and Ed Jacob (incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.18 -- Employment Agreement, dated as of July 16, 1997, by and between the Company and David E. Grose (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.19 -- Letter Agreement, dated as of August 20, 1997, by and between the Company and Chesapeake Energy Corporation (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.20 -- Form of Indemnification Agreement entered into by the Company and each of the directors and certain officers of the Company in connection with the Initial Public Offering (incorporated by reference to Exhibit 10.26 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.21 -- Agreement and Plan of Merger, dated as of October 9, 1997, by and among DLB Oil & Gas, Inc., the Company, Bonray Acquisition Corp. and Bonray Drilling Corporation (incorporated by reference to Exhibit 10.27 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.22 -- 1997 Non-Employee Directors' Stock Option Plan of the Company (incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.23 -- Form of Nonqualified Option Agreement under the 1997 Non-Employee Directors' Option Plan of the Company (incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.24 -- Registration Rights Agreement, dated as of October 16, 1997, by and among the Company, DLB Oil & Gas, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.25 -- Letter Agreement, dated as of October 3, 1997, by and between the Company and The CIT Group/Equipment Financing, Inc. (incorporated by reference to Exhibit 10.31 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333- 34451). 10.26 -- Second Amended and Restated Registration Rights Agreement, dated as of October 30, 1997, by and among the Company and the stockholders of the Company that are signatories thereto (incorporated by reference to Exhibit 10.32 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.27 -- Stock Transfer Restriction Agreement, dated as of November 3, 1997, by and between the Company and Donaldson, Lufkin & Jenrette Securities Corporation. 10.28 -- Asset Purchase Agreement, dated as of November 25, 1997, by and between the Company and R.T. Oliver Drilling, Inc. 10.29 -- Asset Purchase Agreement, dated as of May 26, 1998, by and among Bayard Drilling, L.P., Bayard Drilling Technologies, Inc. and TransTexas Gas Corporation (incorporated by reference to Exhibit 10.29 to the Company's Current Report on Form 8-K filed on June 2, 1998). 10.30 -- Drilling Alliance Agreement, dated as of June 26, 1998, by and between Bayard Drilling, L.P. and TransTexas Gas Corporation (incorporated by reference to Exhibit 10.30 to the Company's Current Report on Form 8-K filed on July 9, 1998). 10.31 -- Purchase Agreement, dated as of June 19, 1998, by and among the Company, Bayard Drilling, L.L.C., Bayard Drilling, L.P., Bonray Drilling Corporation, Trend Drilling Co., Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, Dain Rauscher Wessels and Lehman Brothers Inc.* 10.32 -- Waiver of Certain Rights Under Second Amended and Restated Stockholders and Voting Agreement, dated June 2, 1998, by Charles E. Davidson, Mark Liddell and Mike Liddell.* 16.1 -- Letter re: Change in certifying Accountant (incorporated by reference to Exhibit 16.1 to the Company's Form 10-K for the year ended December 31, 1997). 21.1 -- Subsidiaries of the Company.* 23.1 -- Consent of PricewaterhouseCoopers LLP.* 23.2 -- Consent of Grant Thornton LLP.* 23.3 -- Consent of Baker & Botts, L.L.P. (included in the opinion filed as Exhibit 5.1 to this Registration Statement).* 24.1 -- Powers of Attorney (included in the signature page of the Registration Statement).* 25.1 -- Statement of Eligibility of Trustee on Form T-1.* 99.1 -- Form of Letter of Transmittal.* II-6 158 99.2 -- Form of Notice of Guaranteed Delivery.* 99.3 -- Form of Tender Instructions.* * Filed herewith. (b) FINANCIAL STATEMENT SCHEDULES None. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of the requirements for a registration statement under the Securities Act of 1933 on Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (2) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (3) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 20 of the requirements for a registration statement under the Securities Act of 1933 on Form S-4 or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (4) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) of the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; II-7 159 (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (5) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (6) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-8 160 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Oklahoma City, State of Oklahoma, on July 22, 1998. BAYARD DRILLING TECHNOLOGIES, INC. By: /s/ James E. Brown --------------------------- James E. Brown Chairman of the Board, President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and officers of Bayard Drilling Technologies, Inc., a Delaware corporation, which is filing a Registration Statement on Form S-1 with the Securities and Exchange Commission under the provisions of the Securities Act of 1933, as amended (the "Securities Act"), hereby constitutes and appoints James E. Brown and David E. Grose, III, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, and in any and all capacities, to sign and file (i) any and all amendments (including post-effective amendments) to this Registration Statement, with all exhibits thereto, and other documents in connection therewith, and (ii) a registration statement, and any and all amendments thereto, relating to the offering covered hereby filed pursuant to Rule 462(b) under the Securities Act, with the Securities and Exchange Commission, it being understood that said attorneys-in-fact and agents, and each of them, shall have full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and that each of the undersigned hereby ratifies and confirms all that said attorneys-in-fact as agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ James E. Brown Chairman of the Board, President and Chief July 22, 1998 -------------------------------------- Executive Officer (Principal Executive James E. Brown Officer) /s/ David E. Grose, III Vice President and Chief Financial Officer July 22, 1998 -------------------------------------- (Principal Financial and Accounting David E. Grose, III Officer) /s/ Carl B. Anderson, III Director July 22, 1998 -------------------------------------- Carl B. Anderson, III /s/ Mark Liddell Director July 22, 1998 -------------------------------------- Mark Liddell
II-9 161 /s/ Sidney L. Tassin Director July 22, 1998 -------------------------------------- Sidney L. Tassin /s/ Lew O. Ward Director July 22, 1998 -------------------------------------- Lew O. Ward /s/ Merrill A. Miller, Jr. Director July 22, 1998 -------------------------------------- Merrill A. Miller, Jr.
II-10 162 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 -- Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 3.2 -- Amended and Restated Bylaws of the Company, as adopted August 19, 1997 (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 4.1 -- Specimen Stock Certificate for the Common Stock, par value $0.01 per share, of the Company (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 4.2 -- Indenture, dated as of June 26, 1998, by and among the Company and Bayard Drilling, L.L.C., Bayard Drilling, L.P., Bonray Drilling Corporation and Trend Drilling Co., as guarantors, and U.S. Trust Company of Texas, N.A., as trustee.* 4.3 -- Registration Rights Agreement, dated as of June 26, 1998, by and among the Company, Bayard Drilling, L.L.C., Bayard Drilling, L.P., Bonray Drilling Corporation, Trend Drilling Co., Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, Dain Rauscher Wessels and Lehman Brothers Inc.* 5.1 -- Opinion of Baker & Botts, L.L.P. regarding the validity of the securities being registered.* 9.1 -- Second Amended and Restated Stockholders and Voting Agreement, dated as of October 16, 1997, by and among the Company and the several stockholders that are signatories thereto (incorporated by reference to Exhibit 9.1 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 9.2 -- First Amendment to Second Amended and Restated Stockholders and Voting Agreement, dated as of November 3, 1997, by and among the Company and the several stockholders that are signatories hereto. 10.1 -- 1997 Stock Option and Stock Award Plan of the Company (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.2 -- Forms of Non-Qualified Stock Option Agreements under the 1997 Stock Option and Stock Award Plan (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.3 -- Master Agreement, dated as of November 26, 1996, by and among the Company and the stockholders of the Company that are signatories thereto (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.4 -- Master Drilling Agreement, dated as of December 10, 1996, by and among the Company, Chesapeake Energy Corporation and Chesapeake Operating, Inc. (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.5 -- Form of Chesapeake Drilling Agreement, by and between Chesapeake Operating, Inc., as Operator, and the Company, as Contractor (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333- 34451). 10.6 -- Securities Purchase Agreement, dated as of April 30, 1997, by and among the Company, Energy Spectrum Partners LP and Chesapeake Energy Corporation (the "May Securities Purchase Agreement") (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.7 -- Form of Subordinated Note of the Company issued pursuant to the May Securities Purchase Agreement (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.8 -- Form of Series B Warrant to Purchase Common Stock of the Company issued pursuant to the May Securities Purchase Agreement (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.9 -- Ward Drilling Company, Inc. Warrant to Purchase Common Stock of the Company, dated May 30, 1997 (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.10 -- Preferential Right to Transport Agreement, dated as of May 30, 1997, by and between the Company and Geronimo Trucking Company (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333- 34451). 10.11 -- RR&T, Inc. Warrant to Purchase Common Stock of the Company, dated May 1, 1997 (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.12 -- Mike Mullen Warrant to Purchase Common Stock of the Company, dated May 1, 1997 (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.13 -- Amended and Restated Loan and Security Agreement, dated as of June 18, 1998 by and among Fleet Capital Corporation, the Company and Bayard Drilling, L.P.* 10.14 -- Second Amended and Restated Loan Agreement, dated as of June 18, 1998, by and among The CIT Group/Equipment Financing, Inc. and Fleet Capital Corporation, as Lenders, and the Company, as Borrower.* 10.15 -- Employment Agreement, dated as of December 10, 1996, by and between the Company and James E. Brown (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451).
163 10.16 -- Restricted Stock Award Agreement, dated as of December 10, 1996, by and between the Company and James E. Brown (incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.17 -- Employment Agreement, dated as of January 1, 1997, by and between the Company and Ed Jacob (incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.18 -- Employment Agreement, dated as of July 16, 1997, by and between the Company and David E. Grose (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.19 -- Letter Agreement, dated as of August 20, 1997, by and between the Company and Chesapeake Energy Corporation (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.20 -- Form of Indemnification Agreement entered into by the Company and each of the directors and certain officers of the Company in connection with the Initial Public Offering (incorporated by reference to Exhibit 10.26 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.21 -- Agreement and Plan of Merger, dated as of October 9, 1997, by and among DLB Oil & Gas, Inc., the Company, Bonray Acquisition Corp. and Bonray Drilling Corporation (incorporated by reference to Exhibit 10.27 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.22 -- 1997 Non-Employee Directors' Stock Option Plan of the Company (incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.23 -- Form of Nonqualified Option Agreement under the 1997 Non-Employee Directors' Option Plan of the Company (incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.24 -- Registration Rights Agreement, dated as of October 16, 1997, by and among the Company, DLB Oil & Gas, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.25 -- Letter Agreement, dated as of October 3, 1997, by and between the Company and The CIT Group/Equipment Financing, Inc. (incorporated by reference to Exhibit 10.31 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333- 34451). 10.26 -- Second Amended and Restated Registration Rights Agreement, dated as of October 30, 1997, by and among the Company and the stockholders of the Company that are signatories thereto (incorporated by reference to Exhibit 10.32 to the Company's Registration Statement on Form S-1 dated November 4, 1997, Registration No. 333-34451). 10.27 -- Stock Transfer Restriction Agreement, dated as of November 3, 1997, by and between the Company and Donaldson, Lufkin & Jenrette Securities Corporation. 10.28 -- Asset Purchase Agreement, dated as of November 25, 1997, by and between the Company and R.T. Oliver Drilling, Inc. 10.29 -- Asset Purchase Agreement, dated as of May 26, 1998, by and among Bayard Drilling, L.P., Bayard Drilling Technologies, Inc. and TransTexas Gas Corporation (incorporated by reference to Exhibit 10.29 to the Company's Current Report on Form 8-K filed on June 2, 1998). 10.30 -- Drilling Alliance Agreement, dated as of June 26, 1998, by and between Bayard Drilling, L.P. and TransTexas Gas Corporation (incorporated by reference to Exhibit 10.30 to the Company's Current Report on Form 8-K filed on July 9, 1998). 10.31 -- Purchase Agreement, dated as of June 19, 1998, by and among the Company, Bayard Drilling, L.L.C., Bayard Drilling, L.P., Bonray Drilling Corporation, Trend Drilling Co., Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, Dain Rauscher Wessels and Lehman Brothers Inc.* 10.32 -- Waiver of Certain Rights Under Second Amended and Restated Stockholders and Voting Agreement, dated June 2, 1998, by Charles E. Davidson, Mark Liddell and Mike Liddell.* 16.1 -- Letter re: Change in certifying Accountant (incorporated by reference to Exhibit 16.1 to the Company's Form 10-K for the year ended December 31, 1997). 21.1 -- Subsidiaries of the Company.* 23.1 -- Consent of PricewaterhouseCoopers LLP.* 23.2 -- Consent of Grant Thornton LLP.* 23.3 -- Consent of Baker & Botts, L.L.P. (included in the opinion filed as Exhibit 5.1 to this Registration Statement).* 24.1 -- Powers of Attorney (included in the signature page of the Registration Statement).* 25.1 -- Statement of Eligibility of Trustee on Form T-1.* 99.1 -- Form of Letter of Transmittal.* 99.2 -- Form of Notice of Guaranteed Delivery.* 99.3 -- Form of Tender Instructions.*
- -------------------- * Filed herewith. EX-4.2 2 INDENTURE DATED AS OF JUNE 26, 1998 1 EXHIBIT 4.2 BAYARD DRILLING TECHNOLOGIES, INC. AND GUARANTORS $100,000,000 11% Senior Notes due 2005 ------------------------- INDENTURE Dated as of June 26, 1998 ------------------------- U. S. TRUST COMPANY OF TEXAS, N.A. Trustee 2 CROSS-REFERENCE TABLE Reconciliation and fee between The Trust Indenture Act, as amended, and the Indenture dated as of June 26, 1998.
TIA Indenture Section Section ------- ------- 310(a)(1) . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . N.A. (a)(4) . . . . . . . . . . . . . . . . . . . N.A. (a)(5) . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . 7.08; 7.10 (c) . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . 2.07 (b) . . . . . . . . . . . . . . . . . . . . . 12.06 (c) . . . . . . . . . . . . . . . . . . . . . 12.06 313(a) . . . . . . . . . . . . . . . . . . . 7.06 (b)(1) . . . . . . . . . . . . . . . . . . . N.A. (b)(2) . . . . . . . . . . . . . . . . . . . 7.06 (c) . . . . . . . . . . . . . . . . . . . . . 7.06, 12.05 (d) . . . . . . . . . . . . . . . . . . . . . 7.06 314(a) . . . . . . . . . . . . . . . . . . . 4.02; 4.20; 12.08 (b) . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . 12.01, 12.02 (c)(2) . . . . . . . . . . . . . . . . . . . 12.01; 12.02 (c)(3) . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . N.A. (e) . . . . . . . . . . . . . . . . . . . . . 12.02 (f) . . . . . . . . . . . . . . . . . . . . . N.A. 315(a) . . . . . . . . . . . . . . . . . . . 7.01 (b) . . . . . . . . . . . . . . . . . . . . . 7.05; 11.02 (c) . . . . . . . . . . . . . . . . . . . . . 7.01 (d) . . . . . . . . . . . . . . . . . . . . . 7.01 (e) . . . . . . . . . . . . . . . . . . . . . 6.11 316(a)(last sentence) . . . . . . . . . . . . 2.09 (a)(1)(A) . . . . . . . . . . . . . . . . . . 6.05 (a)(1)(B) . . . . . . . . . . . . . . . . . . 6.04 (a)(2) . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . 6.07 (c) . . . . . . . . . . . . . . . . . . . . . 10.05 317(a)(1) . . . . . . . . . . . . . . . . . . 6.03; 6.08 (a)(2) . . . . . . . . . . . . . . . . . . . 6.09 (b) . . . . . . . . . . . . . . . . . . . . . 2.04 318(a) . . . . . . . . . . . . . . . . . . . 12.04 N.A. Means Not Applicable.
- --------------- Note: This Cross-Reference Table shall not, for any purposes, be deemed to be part of this Indenture. 3 TABLE OF CONTENTS
Page ---- ARTICLE 1 - Definitions and Incorporation by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. Incorporation by Reference of Trust Indenture Act . . . . . . . . . . . . . . . . . 17 SECTION 1.03. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 2 - The Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.01. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.02. Execution and Authentication . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.03. Registrar and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 2.04. Paying Agent To Hold Money in Trust . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.05. Global Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.06. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.07. Holder Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 2.08. Replacement Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 2.09. Outstanding Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 2.10. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 2.11. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 2.12. Payment of Interest; Interest Rights Preserved . . . . . . . . . . . . . . . . . . 29 SECTION 2.13. Authorized Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 2.14. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 2.15. Persons Deemed Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE 3 - Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 3.01. Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 3.02. Selection of Securities To Be Redeemed . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 3.03. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 3.04. Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 3.05. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 3.06. Securities Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 3.07. Optional Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE 4 - Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.01. Payment of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.02. Commission Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.03. Limitation on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.04. Limitation on Subsidiary Indebtedness and Preferred Stock . . . . . . . . . . . . . 33 SECTION 4.05. Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 4.06. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 4.07. Limitation on Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 4.08. Limitation on Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . 39 SECTION 4.09. Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 4.10. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 4.11. Limitation on Guarantees by Guarantors . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 4.12. Unrestricted Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 4.13. Limitation on Sale and Lease-Back Transactions . . . . . . . . . . . . . . . . . . 42 SECTION 4.14. Limitation on Line of Business . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.15. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.16. Money for the Security Payments to be Held in Trust . . . . . . . . . . . . . . . . 42
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Page ---- SECTION 4.17. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.18. Maintenance of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.19. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 4.20 Certificate; Notice of Default or Event of Default . . . . . . . . . . . . . . . . 43 SECTION 4.21. Further Instruments and Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 4.22. Prohibition on Company and Guarantors Becoming Investment Companies . . . . . . . . 43 SECTION 4.23. Stay, Extension and Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE 5 - Consolidation, Merger, Conveyance, Lease or Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 5.01. Consolidation, Merger, Conveyance, Lease or Transfer . . . . . . . . . . . . . . . 44 SECTION 5.02. Officers' Certificate and Opinion of Counsel . . . . . . . . . . . . . . . . . . . 44 SECTION 5.03. Substitution of Surviving Entity . . . . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE 6 - Defaults and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 6.02. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 6.03. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 6.05. Control by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.06. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.07. Rights of Holders to Receive Payment . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.08. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.09. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 6.12. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 6.13. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 6.14. Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE 7 - Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 7.01. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 7.02. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 7.03. Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 7.05. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 7.06. Reports by Trustee to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 7.07. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 7.08. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 7.09. Successor Trustee by Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 7.11. Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . 55 ARTICLE 8 - Satisfaction and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 8.01. Satisfaction and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 8.02. Application of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 8.03. Repayment to the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 8.04. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ARTICLE 9 - Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 9.01. Company's Option to Effect Defeasance or Covenant Defeasance. . . . . . . . . . . . 57 SECTION 9.02. Defeasance and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 9.03. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 9.04. Conditions to Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . . . . 57 SECTION 9.05. Deposited Money and U.S. Government Obligations to be Held in Trust; Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . 58
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Page ---- SECTION 9.06. Repayment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 9.07. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ARTICLE 10 - Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 10.01. Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 10.02. With Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 10.03. Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 10.04. Compliance with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 10.05. Revocation and Effect of Consents and Waivers . . . . . . . . . . . . . . . . . . . 61 SECTION 10.06. Notation on or Exchange of Securities . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 10.07. Trustee To Execute Supplemental Indentures . . . . . . . . . . . . . . . . . . . . 61 SECTION 10.08. Payment for Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 ARTICLE 11 - Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 11.01. Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 11.02. Limitation on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 11.03. Execution and Delivery of Guarantees . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 11.04. When a Guarantor May Merge, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 11.05. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 11.06. Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 11.07. Release of Guarantor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 11.08. Execution of Supplemental Indenture for Future Guarantors . . . . . . . . . . . . . 65 ARTICLE 12 - Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 12.01. Compliance Certificates and Opinions . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 12.02. Form of Documents Delivered to Trustee . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 12.03. Acts of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 12.04. Trust Indenture Act Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 12.05. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 12.06. Communication by Holders with Other Holders . . . . . . . . . . . . . . . . . . . . 68 SECTION 12.07. Rules by Trustee, Paying Agent and Registrar . . . . . . . . . . . . . . . . . . . 69 SECTION 12.08. Payments on Business Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 12.09. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 12.10. No Recourse Against Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 12.11. Submission to Jurisdiction; Appointment of Agent for Service of Process; Waiver Immunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 12.12. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 12.13. Multiple Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 12.14. Table of Contents; Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 12.15. No Adverse Interpretation of Other Agreements . . . . . . . . . . . . . . . . . . . 70
-iii- 6 EXHIBIT A Form of Global Security EXHIBIT B-1 Form of Certificate For Exchange or Registration of Transfer From U.S. Global Note To Reg S Global Note EXHIBIT B-2 Form of Certificate For Exchange or Registration of Transfer From Reg S Global Note To U.S. Global Note EXHIBIT B-3 Form of Certificate For Exchange or Registration of Transfer of Certificated Security EXHIBIT B-4 Form of Certificate For Exchange or Registration of Transfer From U.S. Global Note or Reg S Permanent Global Note To Certificated Security EXHIBIT B-5 Form of Certificated Security EXHIBIT C Form of Supplemental Indenture -iv- 7 INDENTURE dated as of June 26, 1998, among Bayard Drilling Technologies, Inc., a Delaware corporation (the "Company"), certain of the Company's subsidiaries signatory hereto (each, a "Guarantor," collectively, the "Guarantors") and U. S. Trust Company of Texas, N.A., as trustee (the "Trustee"). RECITALS: The Company has duly authorized the creation and issuance of its 11% Senior Notes due 2005, Series A (the "Series A Notes") of substantially the tenor and amount hereinafter set forth; and to provide therefor and for, if and when issued as further evidence of the Company's indebtedness and in substitution for the Series A Notes pursuant to this Indenture and the Registration Rights Agreement (as defined herein), the Company's 11% Senior Notes due 2005, Series B (the "Series B Notes," and together with the Series A Notes, the "Securities"), the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when executed by the Company and authenticated and delivered by the Trustee hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid instrument of the Company and the Guarantors, in accordance with their respective terms, have been done. NOW, THEREFORE, the Company, each Guarantor, jointly and severally, and the Trustee agree as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Securities: ARTICLE 1 Definitions and Incorporation by Reference SECTION 1.01. Definitions. "Acquired Indebtedness" means, with respect to any specified Person (a) Indebtedness of any other Person existing at the time such other Person merged with or into or became a subsidiary of such specified Person, including Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a subsidiary of such specified Person, but excluding Indebtedness which is extinguished, retired or repaid in connection with such other Person merging with or into or becoming a subsidiary of such specified Person, and (b) Indebtedness existing and secured by an asset acquired by such specified Person but not incurred in contemplation of such acquisition. "Act," when used with respect to any Holder, has the meaning set forth in Section 12.03. "Adjusted Net Assets" of a Guarantor at any date means the amount by which the fair value of the properties and assets of such Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under its Guarantee, of such Guarantor at such date. "Affiliate" of any specified Person means another Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided, however, that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. "Agent Member" has the meaning specified in Section 2.05(a). "Applicable Procedures" means, with respect to any transfer or exchange of beneficial interests in a Global Security, the rules and procedures of the Depositary, Euroclear and Cedel that apply to such transfer or exchange. 8 "Asset Sale" means any direct or indirect sale, conveyance, transfer, lease or other disposition (including, without limitation, by way of merger or consolidation or by means of a Sale and Lease-Back Transaction) by the Company or any Subsidiary to any Person other than the Company, a Guarantor or a Subsidiary, in one transaction, or a series of related transactions, of (i) any Capital Stock of any Subsidiary (except for directors' qualifying shares or minority interests sold to other Persons solely due to local law requirements that there be more than one stockholder or local ownership, but which are not in excess of what is required for such purpose), or (ii) any other Property or assets of the Company or any Subsidiary, other than (A) sales of drill-string components and obsolete or worn out equipment in the ordinary course of business or other assets that, in the Company's reasonable judgment, are no longer used or useful in the conduct of the business of the Company and its Subsidiaries, (B) any drilling contract, charter or other lease of Property or other assets entered into by the Company or any Subsidiary in the ordinary course of business, (C) a Restricted Payment or Restricted Investment permitted under the provisions of Section 4.05 of this Indenture, (D) a Change of Control, (E) a sale, lease, consolidation, merger, continuance or the disposition of all or substantially all of the assets of the Company and the Subsidiaries, taken as a whole, in compliance with the provisions of Section 5.01 of this Indenture, (F) any trade or exchange by the Company or any Subsidiary of one or more drilling rigs for one or more other drilling rigs of like kind owned or held by another Person, provided that (x) the Fair Value of the rig or rigs traded or exchanged by the Company or such Subsidiary (including cash or cash equivalents to be delivered by the Company or such Subsidiary) is reasonably equivalent to the Fair Value of the drilling rig or rigs (together with cash or cash equivalents to be received by the Company or such Subsidiary) or other assets having a Fair Market Value in excess of $10.0 million as determined by written appraisal by a nationally (or industry) recognized investment banking firm or appraisal firm and (y) such exchange is approved by a majority of the disinterested directors of the Company and (G) any transfer of assets pursuant to a Permitted Investment. An Asset Sale shall include the requisition of title to, seizure of or forfeiture of any Property or assets, or any actual or constructive total loss or an agreed or compromised total loss of any Property or assets. "Asset Sale Offer" has the meaning specified in Section 4.07(b). "Asset Sale Offer Purchase Date" has the meaning specified in Section 4.07(c). "Asset Sale Offer Purchase Price" has the meaning specified in Section 4.07(b). "Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction means, at any date of determination, the present value (discounted at the interest rate borne by the Securities, compounded annually) of the total obligations of the lessee for rental payments (other than amounts required to be paid on account of property taxes, maintenance, repairs, insurance, assessments, utilities, operating and labor costs and other items which do not constitute payments for property rights) during the remaining term of the lease (or to the first date on which the lessee is permitted to terminate such lease without the payment of a penalty) included in such Sale and Lease-Back Transaction (including any period for which such lease has been extended). "Average Life" means, as of any date, with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (x) the number of years from such date to the date of each scheduled principal payment (including any sinking fund or mandatory redemption payment requirements) of such debt security multiplied in each case by (y) the amount of such principal payment by (ii) the sum of all such principal payments. "Board of Directors" means the Board of Directors of the Company or any Subsidiary, as applicable, or any committee thereof duly authorized to act on behalf of such Board. "Board Resolutions" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company or any Subsidiary, as applicable, to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions are authorized or obligated by law or executive order or regulation to close in the City of New York and the City of Dallas, Texas and, with respect to any payment of cash or delivery of securities, the place of such payment or delivery. -2- 9 "Capital Lease Obligation" means, at any time as to any Person with respect to any Property leased by such Person as lessee, the amount of the liability with respect to such lease that would be required at such time to be capitalized and accounted for as a capital lease on the balance sheet of such Person prepared in accordance with GAAP. "Capital Stock" in any Person means any and all shares, interests, membership interests, partnership interests, participations or other equivalents in the equity interest (however designated) in such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to acquire any equity interest in such Person. "Cash Proceeds" means, with respect to any Asset Sale by any Person, the aggregate consideration received for such Asset Sale by such Person in the form of cash or cash equivalents (including any amounts of insurance or other proceeds received in connection with an Asset Sale of the type described in the last sentence of the definition thereof), including payments in respect of deferred payment obligations when received in the form of cash or cash equivalents (except to the extent that such obligations are financed or sold with recourse to such Person or any subsidiary thereof). "Cedel" means Cedel Bank, societe anonyme. "Certificated Security" has the meaning specified in Section 2.01(b). "Change of Control" means (i) a determination by the Company that any Person or group (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the Voting Stock of the Company other than Permitted Holders; (ii) the Company is merged with or into or consolidated with another corporation and, immediately after giving effect to the merger or consolidation, less than 50% of the outstanding voting securities entitled to vote generally in the election of directors or persons who serve similar functions of the surviving or resulting entity are then beneficially owned (within the meaning of Rule 13d-3 of the Exchange Act) in the aggregate by (x) the stockholders of the Company immediately prior to such merger or consolidation, or (y) if the record date has been set to determine the stockholders of the Company entitled to vote on such merger or consolidation, the stockholders of the Company as of such a record date; (iii) the Company, either individually or in conjunction with one or more Subsidiaries, sells, conveys, transfers or leases, or the Subsidiaries sell, convey, transfer or lease, all or substantially all of the assets of the Company or the Company and the Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of the Subsidiaries, to any Person (other than a Wholly Owned Subsidiary); (iv) the liquidation or dissolution of the Company; or (v) the first day on which a majority of the individuals who constitute the Board of Directors of the Company are not Continuing Directors. "Change of Control Offer" has the meaning specified in Section 4.09(a). "Change of Control Payment Date" has the meaning specified in Section 4.09(b)(ii). "Change of Control Purchase Price" has the meaning specified in Section 4.09(a). "Commission" means the United States Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of this instrument, such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Consolidated Interest Coverage Ratio" means as of the date of the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio (the "Transaction Date"), the ratio of (i) the lesser of the aggregate amount of EBITDA of the Company and its consolidated Subsidiaries for either (a) the four fiscal quarters immediately prior to the applicable Transaction Date for which financial information in respect thereof is available or (b) the immediately preceding fiscal quarter for which financial information in respect thereof is available multiplied by four -3- 10 (the period yielding such lesser amount shall be the "Determination Period"), to (ii) the aggregate Consolidated Interest Expense of the Company and its consolidated Subsidiaries that is anticipated to accrue during a period consisting of the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent thereto (based upon the pro forma amount and maturity of, and interest payments in respect of, Indebtedness of the Company and its consolidated Subsidiaries expected by the Company to be outstanding on the Transaction Date), assuming for the purposes of this measurement the continuation of market interest rates prevailing on the Transaction Date and base interest rates in respect of floating interest rate obligations equal to the base interest rates on such obligations in effect as of the Transaction Date, provided that if the Company or any of its consolidated Subsidiaries is a party to any Interest Swap Obligation that would have the effect of changing the interest rate on any Indebtedness of the Company or any of its consolidated Subsidiaries for such four-quarter period (or portion thereof), the resulting rate shall be used for such four-quarter period (or portion thereof); provided, further, that any Consolidated Interest Expense of the Company with respect to Indebtedness incurred or retired by the Company or any of its Subsidiaries during the fiscal quarter in which the Transaction Date occurs shall be calculated as if such debt was incurred or retired on the first day of the fiscal quarter in which the Transaction Date occurs; provided, further, that if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio would have the effect of increasing or decreasing EBITDA in the future and if such increase or decrease is readily quantifiable and is attributable to such transaction, EBITDA shall be calculated on a pro forma basis as if such transaction had occurred on the first day of the four fiscal quarters referred to in clause (i) of this definition, and if, during the same four fiscal quarters, (x) the Company or any of its consolidated Subsidiaries shall have engaged in any Asset Sale, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which are the subject of such Asset Sale for such period calculated on a pro forma basis as if such Asset Sale and any related retirement of Indebtedness had occurred on the first day of such period or (y) after the Issue Date, the Company or any of its consolidated Subsidiaries shall have acquired any material assets other than in the ordinary course of business, EBITDA and Consolidated Interest Expense shall be calculated on a pro forma basis as if such acquisition had occurred on the first day of such period. "Consolidated Interest Expense" means, with respect to any Person for any period, without duplication (A) the sum of (i) the aggregate amount of cash and noncash interest expense (including capitalized interest) of such Person and its subsidiaries for such period as determined on a consolidated basis in accordance with GAAP in respect of Indebtedness (including, without limitation, (v) any amortization of debt discount, (w) net costs associated with Interest Swap Obligations (including any amortization of discounts), (x) the interest portion of any deferred payment obligation calculated in accordance with the effective interest method, (y) all accrued interest and (z) all commissions, discounts and other fees and charges owed with respect to letters of credit, bankers acceptances or similar facilities) paid or accrued, or scheduled to be paid or accrued, during such period; (ii) dividends on Preferred Stock or Redeemable Stock of such Person (and Preferred Stock or Redeemable Stock of its subsidiaries if paid to a Person other than such Person or its subsidiaries) declared and payable in cash; (iii) the portion of any rental obligation of such Person or its subsidiaries in respect of any Capital Lease Obligation allocable to interest expense in accordance with GAAP; (iv) the portion of any rental obligation of such Person or its subsidiaries in respect of any Sale and Lease-Back Transaction allocable to interest expense (determined as if such were treated as a Capital Lease Obligation); and (v) to the extent any debt of any other Person is guaranteed by such Person or any of its subsidiaries, the aggregate amount of interest paid, accrued or scheduled to be paid or accrued, by such other Person during such period attributable to any such debt, less (B) to the extent included in (A) above, amortization or write-off of deferred financing costs of such Person and its subsidiaries during such period and any charge related or any premium or penalty paid in connection with redeeming or retiring any Indebtedness of such Person and its subsidiaries prior to its stated maturity; in the case of both (A) and (B) above, after elimination of intercompany accounts among such Person and its subsidiaries and as determined in accordance with GAAP. For purposes of clause (ii) above, dividend requirements attributable to any Preferred Stock or Redeemable Stock shall be deemed to be an amount equal to the amount of dividend requirements on such Preferred Stock or Redeemable Stock times a fraction, the numerator of which is one the denominator of which is one minus the applicable combined federal, state, local and foreign income tax rate of the Company and its Subsidiaries (expressed as a decimal), on a consolidated basis, for the fiscal year immediately preceding the date of the transaction giving rise to the need to calculate Consolidated Interest Expense. "Consolidated Net Income" of any Person means, for any period, the aggregate net income (or net loss, as the case may be) of such Person and its subsidiaries for such period on a consolidated basis, determined in accordance with -4- 11 GAAP, provided that there shall be excluded therefrom, without duplication, (i) any net income of any Unrestricted Subsidiary, except that the Company's or any Subsidiary's interest in the net income of such Unrestricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash or cash equivalents actually distributed by such Unrestricted Subsidiary during such period to the Company or a Subsidiary as a dividend or other distribution, (ii) gains and losses, net of taxes, from Asset Sales or reserves relating thereto, (iii) the net income of any Person that is not a subsidiary or that is accounted for by the equity method of accounting which shall be included only to the extent of the amount of dividends or distributions paid to such Person or its subsidiaries, (iv) items (but not loss items) classified as extraordinary, unusual or nonrecurring (other than the tax benefit, if any, of the utilization of net operating loss carryforwards or alternative minimum tax credits), (v) the net income (but not net loss) of any Person acquired by such specified Person or any of its subsidiaries in a pooling-of-interests transaction for any period prior to the date of such acquisition, (vi) any gain or loss, net of taxes, realized on the termination of any employee pension benefit plan, (vii) the net income (but not net loss) of any subsidiary of such specified Person to the extent that the transfer to that Person of that income is not at the time permitted, directly or indirectly, by any means (including by dividend, distribution, advance or loan or otherwise), by operation of the terms of its charter or any agreement with a Person other than with such specified Person, instrument held by a Person other than by such specified Person, judgment, decree, order, statute, law, rule or governmental regulations applicable to such subsidiary or its stockholders, except for any dividends or distributions actually paid by such subsidiary to such Person, (viii) with regard to a non-Wholly Owned Subsidiary, any aggregate net income (or loss) in excess of such Person's or such subsidiary's pro rata share of such non-Wholly Owned Subsidiary's net income (or loss) and (ix) the cumulative effect of any changes in accounting principles. "Consolidated Net Worth" of any Person means, as of any date, the sum of the Capital Stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) on a consolidated basis at such date less amounts attributable to Redeemable Stock of such Person or any of its subsidiaries with each item determined in accordance with GAAP. "Continuing Director" means an individual who (i) is a member of the Board of Directors of the Company and (ii) either (A) was a member of the Board of Directors of the Company on the Issue Date or (B) whose nomination for election or election to the Board of Directors of the Company was approved by vote of at least a majority of the directors then still in office who were either directors on the Issue Date or whose election or nomination for election was previously so approved. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 2001 Ross Avenue, Suite 2700, Dallas, Texas 75201-2936. "Covenant Defeasance" has the meaning specified in Section 9.03. "Currency Hedge Obligations" means, at any time as to any Person, the obligations of such Person at such time which were incurred in the ordinary course of business pursuant to any foreign currency exchange agreement, option or future contract or other similar agreement or arrangement designed to protect against or manage such Person's or any of its subsidiaries' exposure to fluctuations in foreign currency exchange rates. "Default" means any event, act or condition the occurrence of which is, or after notice or the passage time or both would be, an Event of Default. "Defaulted Interest" has the meaning specified in Section 2.12. "Defeasance" has the meaning specified in Section 9.02. "Depositary" means The Depository Trust Company, its nominees and their respective successors. "DTC" has the meaning specified in Section 2.03 hereof. -5- 12 "Determination Period" has the meaning specified under clause (i) of the definition of "Consolidated Interest Coverage Ratio." "EBITDA" means, with respect to any Person for any period, the sum of, without duplication, the amounts for such period, taken as a single accounting period, of the Consolidated Net Income of such Person for such period, plus to the extent reflected in the income statement of such Person for such period from which Consolidated Net Income is determined, without duplication, (i) Consolidated Interest Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization expense, (v) any charge related to any premium or penalty paid in connection with redeeming or retiring any Indebtedness prior to its stated maturity and (vi) any other non-cash charges minus, to the extent reflected in such income statement, any non-cash credits that had the effect of increasing Consolidated Net Income of such Person for such period. "Event of Default" has the meaning specified in Section 6.01. "Excess Proceeds" has the meaning specified in Section 4.07(a). "Exchange Act" means the Securities and Exchange Act of 1934, as amended. "Exchange Offer" means the registration by the Company under the Securities Act of all the Series B Notes pursuant to a registration statement under which the Company offers each Holder of Series A Notes the opportunity to exchange all Series A Notes held by such Holder for Series B Notes in an aggregate principal amount equal to the aggregate principal amount of Series A Notes held by such Holder, all in accordance with the terms and conditions of the Registration Rights Agreement. "Euroclear" means the Euroclear System for which Morgan Guaranty Trust Company of New York, Brussels office, is the operator and depositary. "Exchange Global Security" means one or more Global Securities that do not and are not required to bear the Private Placement Legend. "Fair Market Value" means, with respect to consideration or other amount received or to be received pursuant to any transaction by any Person, the fair market value of such consideration or other amount as determined in good faith by the Board of Directors of the Company. "Fair Value" means, with respect to any asset or Property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. "GAAP" means, at any date, United States generally accepted accounting principles, consistently applied, as set forth in the opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants ("AICPA") and statements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be designated by the AICPA, that are applicable to the circumstances as of the date of determination; provided, however, that all calculations made for purposes of determining compliance with the provisions set forth in the Indenture shall utilize GAAP in effect at the Issue Date. "Global Security" means, individually and collectively, the Reg S Global Notes, the U.S. Global Notes and the Exchange Global Security. "Guarantee" means an unconditional guaranty of the Securities given by any Subsidiary pursuant to the provisions of Article 11 of this Indenture. "Guarantor" means each Subsidiary of the Company that is required to guarantee the Company's Obligations under the Securities and this Indenture pursuant to the provisions of Article 11 of this Indenture and any other Subsidiary of the Company that executes a supplemental indenture in which such Subsidiary agrees to guarantee the Company's -6- 13 Obligations under the Securities and this Indenture; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its respective Guarantee is released in accordance with the terms thereof. "Holder" means the Person in whose name a Security is registered on the Registrar's books. "incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, suffer to exist, incur (by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or other obligation or the recording, as required pursuant to GAAP, of any such Indebtedness or obligation on the balance sheet of such Person (and "incurrence," "incurred," "incurrable" and "incurring" shall have meanings correlative to the foregoing); provided that a change in GAAP that results in an obligation of such Person that exists at such time becoming Indebtedness shall not be deemed an incurrence of such Indebtedness. Indebtedness otherwise incurred by a Person before it becomes a Subsidiary shall be deemed to have been incurred at the time at which it becomes a Subsidiary. "Indebtedness" as applied to any Person means, at any time, without duplication, whether recourse is to all or a portion of the assets of such Person, and whether or not contingent, (i) any obligation of such Person for borrowed money; (ii) any obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, excluding accounts payable and accrued liabilities arising made in the ordinary course of business; (iii) any obligation of such Person for all or any part of the purchase price of Property or for the cost of Property constructed or of improvements thereto (including any obligation under or in connection with any letter of credit related thereto), other than accounts payable incurred and accrued liabilities arising in respect of Property and services purchased in the ordinary course of business; (iv) any obligation of such Person upon which interest charges are customarily paid (other than accounts payable incurred in the ordinary course of business); (v) any obligation of such Person under conditional sale or other title retention agreements relating to purchased Property; (vi) any obligation of such Person issued or assumed as the deferred purchase price of Property (other than accounts payable incurred in the ordinary course of business; (vii) any Capital Lease Obligation or Attributable Indebtedness pursuant to any Sale and Lease-Back Transaction of such Person; (viii) any obligation of any other Person secured by (or for which the obligee thereof has an existing right, contingent or otherwise, to be secured by) any Lien on Property owned or acquired, whether or not any obligation secured thereby has been assumed, by such Person; (ix) any obligation of such Person in respect of any letter of credit supporting any obligation of any other Person described in clauses (i) through (viii); (x) the maximum fixed repurchase price of any Redeemable Stock of such Person (or if such Person is a Subsidiary, any Preferred Stock of such Person); (xi) the notional amount of any Interest Swap Obligation or Currency Hedge Obligation of such Person at the time of determination; and (xii) any obligation under a bond, note, payment guarantee or similar instrument which is in economic effect a guarantee, regardless of its characterization (other than an endorsement in the ordinary course of business), with respect to any Indebtedness of another Person, to the extent guaranteed. For purposes of the preceding sentence, the maximum fixed repurchase price of any Redeemable Stock or subsidiary Preferred Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock or subsidiary Preferred Stock as if such Redeemable Stock or subsidiary Preferred Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture Supplement; provided, however, that if such Redeemable Stock or subsidiary Preferred Stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Redeemable Stock or subsidiary Preferred Stock. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any guarantees at such date; provided that for purposes of calculating the amount of any non-interest bearing or other discount security, such Indebtedness shall be deemed to be the principal amount thereof that would be shown on the balance sheet of the issuer dated such date prepared in accordance with GAAP but that such security shall be deemed to have been incurred only on the date of the original issuance thereof. "Indenture" means this Indenture as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this Indenture and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this Indenture, and any such supplemental indenture, respectively. "Indirect Participant" means a Person who holds a beneficial interest in a Global Security through a Participant. -7- 14 "interest" means interest payable on the Securities pursuant to paragraph 1 of the Securities, including additional interest payable under the circumstances described in the Registration Rights Agreement and interest payable, if any, under Section 2.12 of this Indenture. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities, which date shall be June 30 and December 31 of each year. "Interest Swap Obligation" means, with respect to any Person, the obligation of such Person pursuant to any interest rate swap agreement, interest rate cap, collar or floor agreement or other similar agreement or arrangement designed to protect against or manage such Person's or any of its subsidiaries' exposure to fluctuations in interest rates. "Investment" means, with respect to any Person, any direct or indirect investment in another Person, whether by means of a share purchase, capital contribution, loan, advance (other than advances to employees for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or similar credit extension constituting Indebtedness of such other Person, and any guarantee of Indebtedness of any other Person; provided that the term "Investment" shall not include any transaction involving the purchase or other acquisition (including by way of merger) of Property (including Capital Stock) by the Company or any Subsidiary in exchange for Capital Stock (other than Redeemable Stock) of the Company. The amount of any Person's Investment shall be the original cost of such Investment to such Person, plus the cost of all additions thereto paid by such Person, and minus the amount of any portion of such Investment repaid or loaned to such Person as a repayment of principal or a return of capital, as the case may be, but without any other adjustments for increases or decreases in value, or write-ups, writedowns, or write-offs with respect to such Investment. In determining the amount of any Investment involving a transfer of any Property or assets other than cash, such Property or assets shall be valued at its Fair Value at the time of such transfer as determined in good faith by the board of directors (or comparable body) of the Person making such transfer. The Company shall be deemed to make an "Investment" in the amount of the Fair Value of the Assets of a Subsidiary at the time such Subsidiary is designated an Unrestricted Subsidiary. "Issue Date" means the date on which the Securities are first authenticated and delivered under this Indenture. "Initial Purchasers" means, collectively, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., BT Alex. Brown and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated. "Joint Venture" means any Person (other than a Guarantor) designated as such by a resolution of the Board of Directors of the Company and as to which (i) the Company, any Guarantor or any Joint Venture owns less than 50% of the Capital Stock of such Person; (ii) no more than 10 unaffiliated Persons own of record any Capital Stock of such Person; (iii) at all times, each such Person owns the same proportion of each class of Capital Stock of such Person outstanding at such time; (iv) no Indebtedness of such Person is or becomes outstanding other than Non-Recourse Indebtedness; (v) there exist no consensual encumbrances or restrictions on the ability of such Person to (x) pay, directly or indirectly, dividends or make any other distributions in respect of its Capital Stock to the holders of its Capital Stock or (y) pay any Indebtedness or other obligation owed to the holders of its Capital Stock or (z) make any Investment in the holders of its Capital Stock, in each case other than the types of consensual encumbrances or restrictions that would be permitted under the provisions of Section 4.06 of this Indenture if such Person were a Subsidiary; and (vi) the business engaged in by such Person is a Related Business. "Lien" means any mortgage, pledge, hypothecation, charge, assignment, deposit arrangement, encumbrance, security interest, lien (statutory or other), or preference, priority or other security or similar agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any agreement to give or grant a Lien or any lease, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. -8- 15 "Loan Agreements" means the Term Loan, the Revolving Loan and three notes totaling approximately $2.9 million outstanding at May 15, 1998 secured by certain of the Company's equipment. "Maturity" means the date on which the principal of a Security becomes due and payable as provided therein or in this Indenture, whether at the Stated Maturity or the Change of Control Payment Date or purchase date established pursuant to the terms of this Indenture for an Asset Sale Offer or by declaration of acceleration, call for redemption or otherwise. "Moody's" means Moody's Investors Service, Inc., or, if Moody's Investors Service, Inc. shall cease rating the specified debt securities and such ratings business with respect thereto shall have been transferred to a successor Person, such successor person; provided that if Moody's Investors Service, Inc. ceases rating the specified debt securities and its ratings business with respect thereto shall not have been transferred to any successor Person or such successor Person is S&P, then "Moody's" shall mean any other nationally recognized rating agency (other than S&P) that rates the specified debt securities selected by the Trustee. "Net Available Proceeds" means, as to any Asset Sale, the Cash Proceeds therefrom, net of all legal and title expenses, commissions and other fees and expenses incurred (including, without limitation, fees and expenses of legal counsel and accountants and fees, expenses, discounts or commissions of underwriters, placement agents and investment bankers), and all Federal, state, foreign, recording and local taxes payable or provided for as a consequence of such Asset Sale, net of all payments made to any Person other than the Company or a Subsidiary on any Indebtedness which is secured by such assets, in accordance with the terms of any Lien upon or with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale and, as for any Asset Sale by a Subsidiary, net of the equity interest in such Cash Proceeds of any holder of Capital Stock of such Subsidiary (other than the Company, any other Subsidiary or any Affiliate of the Company or any such other Subsidiary) and net of appropriate amounts to be provided by the Company or any Subsidiary of the Company, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Company or any Subsidiary of the Company, as the case may be, after such Asset Sale including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Non-Recourse Indebtedness" means Indebtedness or that portion of Indebtedness of an Unrestricted Subsidiary or a foreign Subsidiary not constituting a Guarantor as to which (a) neither the Company nor any other Subsidiary (other than an Unrestricted Subsidiary or a Subsidiary of such foreign Subsidiary) (i) provides credit support constituting Indebtedness or (ii) is directly or indirectly liable for such Indebtedness and (b) no default with respect to such Indebtedness (including any rights which the holders thereof may have to take enforcement action against an Unrestricted Subsidiary or such foreign Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or its other Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Obligations" means, with respect to any Indebtedness, any obligation thereunder, including, without limitation, principal, premium and interest (including post petition interest thereon), penalties, fees, costs, expenses, indemnifications, reimbursements, damages and other liabilities. "Obligors" means the Company and the Guarantors, collectively; "Obligor" means the Company or any Guarantor. "Offering Memorandum" means the Confidential Offering Memorandum, dated June 19, 1998, relating to the Company's offering and placement of the Series A Notes. "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the President, the Chief Executive Officer, the Chief Operating Officer or a Vice President, and by the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company or a Subsidiary and delivered to the Trustee, which shall comply with this Indenture. -9- 16 "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company, a Guarantor or the Trustee. "Order" means a written order signed in the name of the Company by an Officer and delivered to the Trustee. "Participant" means, with respect to DTC, Euroclear or Cedel, a Person who has an account with DTC, Euroclear or Cedel, respectively (and, with respect to DTC, shall include Euroclear and Cedel). "Paying Agent" has the meaning specified in Section 2.03. "Permitted Holders" means the parties to the Stockholders and Voting Agreement by and among Energy Spectrum Partners LP, AnSon Partners Limited Partnership, Carl B. Anderson, III, Charles E. Davidson, Mark Liddell and Mike Liddell. "Permitted Indebtedness" means (a) Indebtedness of the Company under the Securities; (b) Indebtedness under the Loan Agreements; (c) Indebtedness (and any guarantee thereof) under one or more credit or revolving Loan Agreements with a bank or syndicate of banks or financial institutions or other lenders, as such may be amended, modified, revised, extended, replaced, or refunded from time to time, provided that at the date such Indebtedness is incurred and after giving effect to the incurrence of such Indebtedness, the aggregate amount of all Indebtedness outstanding at such time under this clause (c) shall not exceed $50,000,000, less any amounts derived from Asset Sales and applied to the required permanent reduction of Senior Debt (and a permanent reduction of the related commitment to lend or amount available to be reborrowed in the case of a revolving Loan Agreement) under such Loan Agreements as contemplated by the provisions of Section 4.07 of this Indenture; (d) Indebtedness of the Company or any Subsidiary under Interest Swap Obligations, provided that (i) such Interest Swap Obligations are related to payment obligations on Indebtedness otherwise permitted under the provisions of Section 4.03 of this Indenture and (ii) the notional principal amount of such Interest Swap Obligations does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligations relate; (e) Indebtedness of the Company or any Subsidiary under Currency Hedge Obligations, provided that (i) such Currency Hedge Obligations are related to payment obligations on Indebtedness otherwise permitted under the provisions of Section 4.03 of this Indenture or to the foreign currency cash flows reasonably expected to be generated by the Company and the Subsidiaries and (ii) the notional principal amount of such Currency Hedge Obligations does not exceed the principal amount of the Indebtedness and the amount of the foreign currency cash flows to which such Currency Hedge Obligations relate; (f) Indebtedness of the Company or any Subsidiary outstanding on the Issue Date; (g) the Guarantees of the Securities (and any assumption of the Obligations guaranteed thereby); (h) Indebtedness of the Company or any Subsidiary in respect of bid performance bonds, surety bonds, appeal bonds and letters of credit or similar arrangements issued for the account of the Company or any Subsidiary, in each case in the ordinary course of business and other than for an obligation for money borrowed; (i) Indebtedness of the Company to a Guarantor or other Wholly Owned Subsidiary and Indebtedness of a Guarantor or other Wholly Owned Subsidiary to the Company or another Guarantor or other Wholly Owned Subsidiary; provided that upon any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Guarantor ceasing to be a Guarantor or such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary, as the case may be, or any other subsequent transfer of any such Indebtedness (except to the Company or a Guarantor or other Wholly Owned Subsidiary), such Indebtedness shall be deemed, in each case, to be incurred and shall be treated as an incurrence for purposes of Section 4.03 of this Indenture at the time the Guarantor in question ceased to be a Guarantor or the Wholly Owned Subsidiary in question ceased to be a Wholly Owned Subsidiary; (j) Subordinated Indebtedness of the Company to an Unrestricted Subsidiary; (k) Indebtedness of the Company in connection with a purchase of the Securities pursuant to a Change of Control Offer, provided that the aggregate principal amount of such Indebtedness does not exceed 101% of the aggregate principal amount at Stated Maturity of the Securities purchased pursuant to such Change of Control Offer; provided, further, that such Indebtedness (A) has an Average Life equal to or greater than the remaining Average Life of the Securities and (B) does not mature prior to one year following the Stated Maturity of the Securities; (l) Permitted Refinancing Indebtedness; (m) Permitted Subsidiary Refinancing Indebtedness; and (n) additional Indebtedness in an aggregate principal amount not in excess of $5,000,000 at any one time outstanding. So as to avoid duplication in determining the amount of Permitted Indebtedness under any clause of this definition, guarantees permitted to be incurred pursuant to this Indenture of, or Obligations permitted to be incurred pursuant to this Indenture in respect of letters of credit supporting, Indebtedness otherwise included in the determination of such amount shall not also be included. For -10- 17 purposes of determining compliance with Sections 4.03 and 4.04, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness or is entitled to be incurred pursuant to Sections 4.03 and 4.04, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with Sections 4.03 and 4.04 and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to Sections 4.03 and 4.04. "Permitted Investments" means (a) certificates of deposit, bankers acceptances, time deposits, Eurocurrency deposits and similar types of Investments routinely offered by commercial banks organized in the United States with final maturities of one year or less issued by commercial banks organized in the United States having capital and surplus in excess of $100,000,000 (or being a member or subsidiary of a bank holding system with aggregate combined capital and surplus of at least $100,000,000); (b) commercial paper issued by any corporation, if such commercial paper has credit ratings of at least "A-1" or its equivalent by S&P or at least "P-I" or its equivalent by Moody's; (c) U.S. Government Obligations with a maturity of four years or less; (d) repurchase obligations for instruments of the type described in clause (c) with any bank meeting the qualifications specified in clause (a) above; (e) shares of money market mutual or similar funds having assets in excess of $100,000,000; (f) payroll advances in the ordinary course of business; (g) other advances and loans to officers and employees of the Company or any Subsidiary, so long as the aggregate principal amount of such advances and loans does not exceed $500,000 at any one time outstanding; (h) Investments represented by that portion of the proceeds from Asset Sales that is not required to be Cash Proceeds pursuant to Section 4.07 of this Indenture; (i) Investments made by the Company in Guarantors or in its other Wholly Owned Subsidiaries (or any Person that will be a Wholly Owned Subsidiary as a result of such Investment) or by a Subsidiary in the Company or in one or more Guarantors or other Wholly Owned Subsidiaries (or any Person that will be a Wholly Owned Subsidiary as a result of such Investment); (j) Investments in stock, obligations or securities received in settlement of debts owing to the Company or any Subsidiary as a result of bankruptcy or insolvency proceedings or upon the foreclosure, perfection or enforcement of any Lien in favor of the Company or any Subsidiary, in each case as to debt owing to the Company or any Subsidiary that arose in the ordinary course of business of the Company or any such Subsidiary or otherwise in the Company's reasonable credit judgment; (k) certificates of deposit, bankers acceptances, time deposits, Eurocurrency deposits and similar types of Investments routinely offered by commercial banks organized in the United States with final maturities of one year or less and in an aggregate amount not to exceed $5,000,000 at any one time outstanding with a commercial bank organized in the United States having capital and surplus in excess of $75,000,000; (l) Interest Swap Obligations with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding; (m) Currency Hedge Obligations, provided that such Currency Hedge Obligations constitute Permitted Indebtedness permitted by clause (d) of the definition thereof; (n) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility, worker's compensation and performance and other similar deposits in the ordinary course of business; and (o) Investments pursuant to any agreement or obligation of the Company or any Subsidiary in effect on the Issue Date. "Permitted Liens" means (a) Liens in existence on the Issue Date; (b) Liens created for the benefit of the Securities and/or the Guarantees; (c) Liens on Property of a Person existing at the time such Person is merged or consolidated with or into the Company or a Subsidiary (and not incurred as a result of, or in anticipation of, such transaction), provided that any such Lien relates solely to such Property; (d) Liens on Property existing at the time of the acquisition thereof (and not incurred as a result of, or in anticipation of such transaction), provided that any such Lien relates solely to such Property; (e) Liens incurred or pledges and deposits made in connection with worker's compensation, unemployment insurance and other social security benefits, statutory obligations, bid, surety or appeal bonds, performance or tender bonds or leases or other obligations of a like nature incurred in the ordinary course of business; (f) Liens, imposed by law or arising by operation of law, including, without limitation, landlords', mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors Liens and Liens for master's and crew's wages and other similar maritime Liens, and incurred in the ordinary course of business for sums not delinquent or being contested in good faith, if such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made with respect thereof; (g) zoning restrictions, easements, licenses, covenants, reservations, restrictions on the use of real property and defects, irregularities and deficiencies in title to real property that do not, individually or in the aggregate, materially affect the ability of the Company or any Subsidiary to conduct its business presently conducted; (h) Liens for taxes or assessments or other governmental charges or levies not yet due and payable, or the validity of which is being contested by the Company or a Subsidiary in good faith and by appropriate proceedings upon stay of execution or the enforcement thereof and for which adequate reserves in accordance with GAAP or other appropriate provision has been -11- 18 made; (i) Liens to secure Indebtedness incurred for the purpose of financing all or a part of the purchase price or construction cost of Property acquired or constructed after the Issue Date, provided that (1) the principal amount of Indebtedness secured by such Liens shall not exceed 100% of the lesser of cost or Fair Market Value of the Property so acquired or constructed plus transaction costs related thereto, (2) such Liens shall not encumber any other assets or Property of the Company or any Subsidiary (other than the proceeds thereof and accessions and upgrades thereto) and (3) such Liens shall attach to such Property within 180 days of the date of the completion of the construction or acquisition of such Property; (j) Liens securing Capital Lease Obligations, provided, further, that such Liens secure Capital Lease Obligations which, when combined with (1) the outstanding secured Indebtedness of the Company and its Subsidiaries (other than Indebtedness secured by Liens described under clauses (b) and (i) hereof) and (2) the aggregate principal amount of all other Capital Lease Obligations of the Company and Subsidiaries, does not exceed $5,000,000 at any one time outstanding; (k) Liens to secure any extension, renewal, refinancing or refunding (or successive extensions, renewals, refinancings or refundings), in whole or in part, of any Indebtedness secured by Liens referred to in the foregoing clauses (a), (c) and (d), provided, further, that such Lien does not extend to any other Property of the Company or any Subsidiary and the principal amount of the Indebtedness secured by such Lien is not increased; (l) any charter or lease; (m) leases or subleases of real property to other Persons; (n) Liens securing Permitted Indebtedness described in clause (b) of the definition thereof; (o) judgment liens not giving rise to an Event of Default so long as any appropriate legal proceedings which may have been initiated for the review of such judgment shall not have been finally terminated or the period within which such proceeding may be initiated shall not have expired; (p) rights of off-set of banks and other Persons; (q) liens in favor of the Company; (r) other deposits made to secure liability to insurance carriers under insurance or self insurance arrangements; (s) Liens securing reimbursement obligations under letters of credit, provided in each case that such Liens cover only the title documents and related goods (and any proceeds thereof) covered by the related letter of Credit and (t) Liens or equitable encumbrances deemed to exist by reason of a negative pledge or other arrangements to refrain from permitting Liens. "Permitted Refinancing Indebtedness" means Indebtedness of the Company, incurred in exchange for, or the net proceeds of which are used to renew, extend, refinance, refund or repurchase, outstanding Indebtedness of the Company which outstanding Indebtedness was incurred in accordance with, or is otherwise permitted by, the terms of clauses (a) and (e) of the definition of "Permitted Indebtedness," provided that (i) if the Indebtedness being renewed, extended, refinanced, refunded or repurchased is pari passu with or subordinated in right of payment (without regard to its being secured) to the Securities, then such new Indebtedness is pari passu with or subordinated in right of payment (without regard to its being secured) to, as the case may be, the Securities at least to the same extent as the Indebtedness being renewed, extended, refinanced, refunded or repurchased, (ii) such new Indebtedness is scheduled to mature later than the Indebtedness being renewed, extended, refinanced, refunded or repurchased, (iii) such new Indebtedness has an Average Life at the time such Indebtedness is incurred that is greater than the Average Life of the Indebtedness being renewed, extended, refinanced, refunded or repurchased, and (iv) such new Indebtedness is in aggregate principal amount (or, if such Indebtedness is issued at a price less than the principal amount thereof, the aggregate amount of gross proceeds therefrom is) not in excess of the aggregate principal amount then outstanding of the Indebtedness being renewed, extended, refinanced, refunded or repurchased (or if the Indebtedness being renewed, extended, refinanced, refunded or repurchased was issued at a price less than the principal amount thereof, then not in excess of the amount of liability in respect thereof determined in accordance with GAAP) plus the amount of reasonable fees, expenses and premium, if any, incurred by the Company or such Subsidiary in connection therewith. "Permitted Subsidiary Refinancing Indebtedness" means Indebtedness of any Subsidiary, incurred in exchange for, or the net proceeds of which are used to renew, extend, refinance, refund or repurchase, outstanding Indebtedness of such Subsidiary which outstanding Indebtedness was incurred in accordance with, or is otherwise permitted by, the terms of clauses (e) and (f) of the definition of "Permitted Indebtedness," provided that (i) if the Indebtedness being renewed, extended, refinanced, refunded or repurchased is pari passu with or subordinated in right of payment (without regard to its being secured) to the Guarantee of such Subsidiary, then such new Indebtedness is pari passu with or subordinated in right of payment (without regard to its being secured) to, as the case may be, the Guarantee of such Subsidiary at least to the same extent as the Indebtedness being renewed, extended, refinanced refunded or repurchased, (ii) such new Indebtedness is scheduled to mature later than the Indebtedness being renewed, extended, refinanced, refunded or repurchased, (iii) such new Indebtedness has an Average Life at the time such Indebtedness is incurred that is greater than the Average Life of the Indebtedness being renewed, extended, refinanced, refunded or repurchased, and (iv) such new Indebtedness is in an aggregate principal amount (or, if such Indebtedness is issued at a price less than the -12- 19 principal amount thereof, the aggregate amount of gross proceeds therefrom is) not in excess of the aggregate principal amount then outstanding of the Indebtedness being renewed, extended, refinanced, refunded or repurchased (or if the Indebtedness being renewed, extended, refinanced, refunded or repurchased was issued at a price less than the principal amount thereof, then not in excess of the amount of liability in respect thereof determined in accordance with GAAP) plus the amount of reasonable fees, expenses and premium, if any, incurred by the Company or such Subsidiary in connection therewith. "Person" means any individual, corporation, limited liability company, partnership, joint venture, incorporated or unincorporated association, joint stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind. "Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends and/or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of at least one other class of such Person. "Private Placement Legend" has the meaning set forth in Section 2.06(e)(i) hereto. "Proceeding" has the meaning specified in Section 12.11(a). "Process Agent" has the meaning specified in Section 12.11(a). "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, excluding Capital Stock in any other Person. "Qualified Equity Offering" means an offering of Capital Stock (other than Redeemable Stock) of the Company for cash, whether pursuant to an effective registration statement under the Securities Act (other than on Form S-8) or any private placement of Capital Stock (other than Redeemable Stock) of the Company which offering or placement is consummated after the Issue Date. "Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule 144A under the Securities Act. "Record Date" means, for the interest payable on any Interest Payment Date, the date specified in Section 2.12. "Redeemable Stock" means, with respect to any Person, any equity security that by its terms or otherwise is required to be redeemed, or is redeemable at the option of the holder thereof, at any time prior to one year following the Stated Maturity of the Securities or is exchangeable into Indebtedness of such Person or any of its subsidiaries. "Redemption Date" means, when used with respect to any Security or part thereof to be redeemed hereunder, the date fixed for redemption of such Securities pursuant to the terms of the Securities and this Indenture. "Redemption Price" means, when used with respect to any Security or part thereof to be redeemed hereunder, the price fixed for redemption of such Security pursuant to the terms of the Securities and this Indenture, plus accrued and unpaid interest thereon, if any to the Redemption Date. "Reg S Global Note" means a permanent global senior note that contains the text referred to in footnotes 1 and 3 and the additional schedule referred to in footnote 4 to the form of the Security attached hereto as Exhibit A, and that is deposited with the Security Custodian and registered in the name of the Depositary or its nominee, representing the Series A Notes sold in reliance on Regulation S. "Regulation S" means Regulation S under the Securities Act (including any successor regulation thereto), as it may be amended from time to time. "Registrar" has the meaning specified in Section 2.03. -13- 20 "Registration Rights Agreement" means the A/B Exchange Registration Rights Agreement, dated as June 26, 1998, by and among the Company, the Guarantors and each of the purchasers named on the signature pages thereto, as such agreement may be amended, modified or supplemented from time to time. "Related Business" means the contract drilling business and activities incidental thereto and any business related, complementary or ancillary thereto. "Replacement Asset" means a Property or asset that, as determined by the Board of Directors of the Company as evidenced by a Board Resolution, is used or is useful in a Related Business. "Responsible Officer" means, when used with respect to the Trustee, any officer assigned to the Corporate Trust Office, including any vice president, assistant vice president, assistant secretary or any other officer of the Trustee to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Investment" means any Investment in any Person, including an Unrestricted Subsidiary or the designation of a Subsidiary as an Unrestricted Subsidiary, other than a Permitted Investment. "Restricted Payment" means to (i) declare or pay any dividend on, or make any distribution in respect of, or purchase, redeem, retire or otherwise acquire for value, any Capital Stock of the Company or any Affiliate of the Company, or warrants, rights or options to acquire such Capital Stock, other than (x) dividends payable solely in the Capital Stock (other than Redeemable Stock) of the Company or such Affiliate, as the case may be, or in warrants, rights or options to acquire such Capital Stock and (y) dividends or distributions by a Subsidiary to the Company or to a Wholly Owned Subsidiary; (ii) make any principal payment on, or redeem, repurchase, defease (including an in-substance or legal defeasance) or otherwise acquire or retire for value (including pursuant to mandatory repurchase covenants), prior to any scheduled principal payment, scheduled sinking fund payment or other stated maturity, Indebtedness of the Company or any Subsidiary which is subordinated (whether pursuant to its terms or by operation of law) in right of payment to the Securities or the Guarantees, as applicable; or (iii) make any Restricted Investment in any Person. "Retired Indebtedness or Stock" has the meaning specified in Section 4.04. "Rule 144A" means Rule 144A under the Securities Act (including any successor regulation thereto), as it may be amended from time to time. "S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., or if Standard & Poor's Ratings Group shall cease rating the specified debt securities and such ratings ceases with respect thereto shall have been transferred to a successor Person, such successor Person, provided that if Standard & Poor's Ratings Group ceases rating the specified debt securities and its ratings business with respect thereto shall not have been transferred to any successor Person or such successor Person is Moody's, then "S&P" shall mean any other nationally recognized rating agency selected by the Trustee. "Sale and Lease-Back Transaction" means, with respect to any Person, any direct or indirect arrangement pursuant to which Property is sold or transferred by such Person or a subsidiary of such Person and is thereafter leased back from the purchaser or transferee thereof by such Person or one of its subsidiaries. "Securities" means the Series A Notes and Series B Notes issued pursuant to this Indenture, as the same may be amended and supplemented from time to time. "Securities Custodian" means the Trustee, as custodian for the Depositary with respect to the Securities in global form, or any successor entity thereto. "Securities Act" means the Securities Act of 1933, as amended. "Security Register" has the meaning specified in Section 2.03. -14- 21 "Senior Debt" means any Indebtedness incurred by the Company, unless the instrument under which such Indebtedness is incurred expressly provides that it is subordinated in right of payment to the Securities, provided that Senior Debt will not include (a) any liability for federal, state, local or other taxes owed or owing, (b) any Indebtedness owing to any Subsidiaries of the Company, (c) any trade payables or (d) any Indebtedness that is incurred in violation of this Indenture. "Series A Notes" means the Company's 11% Series A Senior Notes due 2005, as the same may be amended or supplemented from time to time in accordance with the terms thereof, that are issued pursuant to this Indenture. "Series B Notes" means the Company's 11% Series B Senior Notes due 2005, as the same may be amended or supplemented from time to time in accordance with the terms thereof, that are issued pursuant to this Indenture in exchange for the Series A Notes in the Exchange Offer. "Significant Subsidiary" means a Subsidiary that is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act. "Special Record Date" means a date fixed by the Trustee pursuant to Section 2.12 for the payment of Defaulted Interest. "Stated Maturity" when used with respect to a Security or any installment of interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable. "Subordinated Indebtedness" means any Indebtedness of the Company or any Guarantor that is subordinated in right of payment to the Securities or the Guarantees, as the case may be, and does not mature prior to the Stated Maturity of the Securities. "subsidiary" means, with respect to any Person, (i) any corporation more than 50% of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person, or by one or more other subsidiaries of such Person, or by such Person and one or more other subsidiaries of such Person, (ii) any general partnership, limited liability company, joint venture or similar entity, more than 50% of the outstanding partnership, membership or similar interest of which is owned, directly or indirectly, by such Person, or by one or more other subsidiaries of such Person, or by such Person and one or more other subsidiaries of such Person and (iii) any limited partnership of which such Person or any subsidiary of such Person is a general partner. For purposes of this definition, any directors' qualifying shares or investments by foreign nationals mandated by applicable law shall be disregarded in determining the ownership of a Subsidiary. "Subsidiary" means a subsidiary of the Company other than an Unrestricted Subsidiary. "Surviving Entity" has the meaning specified in Section 5.01. "Transaction Date" has the meaning specified within the definition of "Consolidated Interest Coverage Ratio." "Transfer Restricted Security" means a Security bearing a Private Placement Legend. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended, as in force at the date as of which this Indenture was executed, except as provided in Section 10.04. "Trust Officer" means any officer or assistant officer within the corporate trust department of the Trustee assigned by the Trustee to administer its corporate trust matters. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provision of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. -15- 22 "U.S. Global Note" means a permanent Global Security that contains the text referred to in footnotes 1 and 3 and the additional schedule referred to in footnote 4 to the form of the Security attached hereto as Exhibit A, and that is deposited with the Security Custodian and registered in the name of the Depositary or its nominee, representing Securities sold in reliance on Rule 144A or in reliance on another exemption from the registration requirements of the Securities Act. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged; (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) above, are not callable or redeemable at the option of the issuers thereof; or (iii) depository receipts issued by a bank or trust company as custodian with respect to any such U.S. Government Obligations or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation evidenced by such depository receipt. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "Unrestricted Subsidiary" means any subsidiary of the Company that the Company has classified as an Unrestricted Subsidiary and that has not been reclassified as a Subsidiary pursuant to the terms of this Indenture. "Voting Stock" means with respect to any Person, securities of any class or classes of Capital Stock in such Person entitling the holder thereof (whether at all times or at the times that such class of Capital Stock has voting power by reason of the happening of any contingency) to vote in the election of members of the board of directors or comparable body of such Person. "Wholly Owned Subsidiary" means any Subsidiary to the extent (i) all of the Capital Stock or other ownership interests in such Subsidiary, other than any directors' qualifying shares mandated by applicable law, is owned directly or indirectly by the Company or (ii) such Subsidiary is organized in a foreign jurisdiction and is required by the applicable laws and regulations of such foreign jurisdiction to be partially owned by the government of such foreign jurisdiction or individual or corporate citizens of such foreign jurisdiction in order for such Subsidiary to transact business in such foreign jurisdiction, provided that the Company, directly or indirectly, owns the remaining Capital Stock or ownership interest in such Subsidiary and, by contract or otherwise, controls the management and business of such Subsidiary and derives the economic benefits of ownership of such Subsidiary to substantially the same extent as if such Subsidiary were a wholly owned Subsidiary. SECTION 1.02. Incorporation by Reference of Trust Indenture Act. This Indenture is subject to the mandatory provisions of the TIA which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "indenture securities" means the Securities. "indenture security holder" means a Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule have the meanings assigned to them by such definitions. -16- 23 SECTION 1.03. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) "including" means including without limitation; (5) words in the singular include the plural and words in the plural include the singular; (6) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (7) provisions apply to successive events and transactions; (8) references to agreements and other instruments include subsequent amendments and waivers but only to the extent not prohibited by this Indenture; (9) unless otherwise expressly provided herein, the principal amount of any Preferred Stock shall be the greater of (i) the maximum liquidation value of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory repurchase price with respect to such Preferred Stock; and (10) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement of successor sections or rules adopted by the Commission from time to time. -17- 24 ARTICLE 2 The Securities SECTION 2.01. Form and Dating. (a) The Securities, with the notation of the Guarantees endorsed thereon and the Trustee's certificate of authentication thereon, shall be substantially in the form of Exhibit A and Exhibit B-5, each which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have such notations, legends or endorsements stamped, printed, lithographed or engraved thereon as required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Security shall be dated the date of its authentication. The terms and provisions contained in the Securities and the Guarantee set forth in Exhibit A and Exhibit B-5 shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Guarantors, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. (b) Series A Notes, with the notations of the Guarantees endorsed thereon, shall be issued in the form of one or more permanent Global Securities in definitive fully registered form without coupons. Securities offered and sold to QIBs in reliance on Rule 144A shall be issued initially in the form of the U.S. Global Notes, which shall be deposited on behalf of the purchasers of the Securities represented thereby with the Securities Custodian, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee as hereinafter provided. Series A Notes offered and sold in reliance on Regulation S shall be issued initially in the form of the Reg S Global Note, which shall be deposited on behalf of the purchasers of the Securities represented thereby with the Securities Custodian, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Cedel, duly executed by the Company and authenticated by the Trustee as hereinafter provided. During the "40-day distribution compliance period" (as defined in Regulation S) (the "40-day Distribution Compliance Period") beneficial interests in the Reg S Global Note shall be held only through Euroclear or Cedel, and, pursuant to the Depositary's procedures, Indirect Participants that hold a beneficial interest in the Reg S Global Note shall not be able to transfer such interest to a person that takes delivery thereof in the form of an interest in the U.S. Global Notes. Following the termination of the 40-day Distribution Compliance Period, beneficial interests in the Reg S Global Notes shall be exchanged for beneficial interests in U.S. Global Notes and beneficial interests in the U.S. Global Notes shall be exchanged for beneficial interests in the Reg S Global Notes, pursuant to the Applicable Procedures. The aggregate principal amount of the Reg S Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. Each Global Security shall represent such of the outstanding Securities as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Securities from time to time endorsed on Schedule A thereto and that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges, redemptions and transfers of interests. Any endorsement of Schedule A of a Global Security to reflect the amount of any increase or decrease in the amount of outstanding Securities represented thereby shall be made by the Trustee or the Securities Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "Management Regulations" and "Instructions to Participants" of Cedel shall be applicable to interests in the Reg S Global Notes that are held by Participants through Euroclear or Cedel. The Trustee shall have no obligation to notify Holders of any such procedures or to monitor or enforce compliance with the same. Except as set forth in Section 2.06 hereof, the Global Securities may be transferred, in whole and not in part, only to another nominee of the Depositary or to a successor of the Depositary or its nominee. -18- 25 (c) This paragraph 2.01(c) shall apply only to Global Securities deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this paragraph, authenticate and deliver the Global Securities that (i) shall be registered in the name of the Depositary or the nominee of the Depositary and (ii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions or held by the Securities Custodian. Participants shall have no rights either under this Indenture with respect to any Global Securities held on their behalf by the Depositary or by the Securities Custodian as custodian for the Depositary or under such Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Participants, the operation of customary practices of such Depositary governing the exercise of the rights of an owner of a beneficial interest in any Global Security. (d) Any certificated Security that may be issued pursuant to Section 2.06(b) or (c) shall be issued in the form of a note in definitive, fully registered form, without coupons, substantially in the form set forth in Exhibit B-5 hereto (each a "Certificated Security"). Upon issuance, any such Certificated Security shall be duly executed by the Company, with the endorsement of Guarantees thereon executed by the Guarantors, and authenticated by the Trustee as hereinafter provided. SECTION 2.02. Execution and Authentication. The aggregate principal amount at Stated Maturity of Securities outstanding at any time shall not exceed $100,000,000 except as provided in Section 2.08 hereof. Two executive officers of the Company shall sign the Securities for the Company by manual or facsimile signature. The Company's seal shall be impressed, affixed, imprinted or reproduced on the Securities and may be in facsimile form. The Securities shall have the notation relating to the Guarantees executed by each Guarantor in the manner provided for in Section 11.03 hereof and endorsed thereon. If an executive officer of the Company whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. Notwithstanding any other provision hereof, the Trustee shall authenticate and deliver Securities only upon receipt by the Trustee of an Officers' Certificate and Opinion of Counsel complying with Sections 12.01 and 12.02 hereof with respect to satisfaction of all conditions precedent contained in this Indenture to authentication and delivery of such Securities. Upon compliance by the Company with the provisions of the previous paragraph, the Trustee shall, upon receipt of an Order requesting such action, authenticate Securities for original issuance in an aggregate principal amount at Stated Maturity not to exceed $100,000,000 in the form of the Global Security. Such Order shall specify the amount of Securities to be authenticated and the date on which the Securities are to be authenticated and shall further provide instructions concerning registration, amounts for each Holder and delivery. Series B Notes may be issued only in exchange for a like principal amount of Series A Notes pursuant to an Exchange Offer. Upon the occurrence of any event specified in Section 2.06(a) hereof and compliance by the Company with the provisions of the paragraph preceding the immediately preceding paragraph, the Company shall execute and the Trustee shall authenticate and deliver to each beneficial owner identified by the Depositary, in exchange for such beneficial owner's interest in the Global Security, Certificated Securities representing Securities theretofore represented by the Global Security. A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence, and the only evidence, that the Security has been authenticated under this Indenture. -19- 26 The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate the Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. If the Securities are to be issued in the form of one or more Global Securities, then the Company shall execute and the Trustee shall authenticate and deliver one or more Global Securities that shall represent and shall be in minimum denominations of $1,000. SECTION 2.03. Registrar and Paying Agent. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Securities (the "Security Register") and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents; provided, however, that so long as U. S. Trust Company of Texas, N.A. shall be the Trustee, without the consent of the Trustee, there shall be no more than one Registrar or Paying Agent. The term "Paying Agent" includes any additional paying agent. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Company initially appoints the Trustee as Registrar and Paying Agent in connection with the Securities. The Company may, upon written notice to the Trustee, change the designation of the Trustee as Registrar or Paying Agent and appoint another Person to act as Registrar for purposes of this Indenture except that, for the purposes of Article 3, Article 12 and Sections 4.07 and 4.09, none of the Company, any Guarantor, any Restricted Subsidiary or any Affiliate of the Company or of any Guarantor shall act as Paying Agent. If any Person other than the Trustee acts as Registrar, the Trustee shall have the right at any time, upon reasonable notice, to inspect or examine the Security Register and to make such inquiries of the Registrar as the Trustee shall in its discretion deem necessary or desirable in performing its duties hereunder. Upon surrender for registration of transfer of any Security at an office or agency of the Company designated for such purpose, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denomination or denominations, of like tenor and aggregate principal amount, all as requested by the transferor. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company, the Trustee or the Registrar) be duly endorsed, or be accompanied by a duly executed instrument of transfer in form satisfactory to the Company, the Trustee and the Registrar, by the Holder thereof or such Holder's attorney duly authorized in writing. The Company initially appoints the Depository Trust Company ("DTC") to act as the Depositary with respect to the Global Securities. Cede & Co. has been appointed as the nominee of DTC. SECTION 2.04. Paying Agent To Hold Money in Trust. Prior to each due date of the principal, premium, if any, and interest on any Security, the Company shall deposit with the Paying Agent a sum sufficient to pay such principal, premium, if any, and interest when so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium, if any, of or interest on the Securities and -20- 27 shall notify the Trustee of any default by the Company in making any such payment. If the Company or a Subsidiary acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 2.05. Global Securities. (a) So long as a Global Security is registered in the name of the Depositary or its nominee, beneficial owners, members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to the Global Security held on their behalf by the Depositary or the Trustee as its custodian, and the Depositary may be treated by the Company, the Guarantors, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes. Notwithstanding the foregoing, nothing herein shall (i) prevent the Company, the Guarantors, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or (ii) impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of Securities. (b) The Holder of a Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests in such Global Securities through Agent Members, to take any action which a Holder of Securities is entitled to take under this Indenture or the Securities. (c) Whenever, as a result of an optional redemption of Securities by the Company, a Change of Control Offer, an Asset Sale Offer, or an exchange pursuant to the second sentence of Section 2.06(a) hereof, a Global Security is redeemed, repurchased or exchanged in part, such Global Security shall be surrendered by the Holder thereof to the Trustee who shall cause an adjustment to be made to Schedule A attached thereto so that the principal amount at Stated Maturity of such Global Security will be equal to the portion of such Global Security not redeemed, repurchased or exchanged and shall thereafter return such Global Security to such Holder, provided that each such Global Security shall be in a principal amount at Stated Maturity of $1,000 or an integral multiple thereof. SECTION 2.06. Transfer and Exchange. (a) Transfer and Exchange of Global Securities. The transfer and exchange of beneficial interests in Global Securities shall be effected through the Depositary, in accordance with this Indenture and the Applicable Procedures, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Beneficial interests in a Global Security may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Global Security in accordance with the transfer restrictions set forth in the legend in subsection (e) of this Section 2.06. Transfers of beneficial interests in the Global Securities to Persons required to take delivery thereof in the form of an interest in another Global Security shall be permitted as follows: (i) U.S. Global Note to Reg S Global Note. Prior to the expiration of the 40-day Distribution Compliance Period, an owner of a beneficial interest in a U.S. Global Note deposited with the Depositary (or the Securities Custodian) will not be permitted to transfer its interest to a Person who wishes to take delivery thereof in the form of an interest in the Reg S Global Note. If, at any time after the expiration of the 40-day Distribution Compliance Period, an owner of a beneficial interest in a U.S. Global Note deposited with the Depositary (or the Securities Custodian) wishes to transfer its beneficial interest in such U.S. Global Note to a Person who is required or permitted to take delivery thereof in the form of an interest in a Reg S Global Note, such owner shall, subject to the Applicable Procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest in a Reg S Global Note as provided in this Section 2.06(a)(i). Upon receipt by the Trustee of (1) instructions given in accordance with the Applicable Procedures from a Participant directing the Trustee to credit or cause to be credited a beneficial interest in the Reg S Global Note in an amount equal to the beneficial interest in the U.S. Global Note to be exchanged, (2) a written order given in accordance with the Applicable Procedures -21- 28 containing information regarding the Participant account of the Depositary and the Euroclear or Cedel account to be credited with such increase, and (3) a certificate in the form of Exhibit B-1 hereto given by the owner of such beneficial interest stating that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Securities and pursuant to and in accordance with Rule 903 or Rule 904 of Regulation S, then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at Maturity of the applicable U.S. Global Note and to increase or cause to be increased the aggregate principal amount at Maturity of the applicable Reg S Global Note by the principal amount at Maturity of the beneficial interest in the U.S. Global Note to be exchanged or transferred, to credit or cause to be credited to the account of the Person specified in such instructions, a beneficial interest in the Reg S Global Note equal to the reduction in the aggregate principal amount at Maturity of the U.S. Global Note, and to debit, or cause to be debited, from the account of the Person making such exchange or transfer the beneficial interest in the U.S. Global Note that is being exchanged or transferred. (ii) Reg S Global Note to U.S. Global Note. Prior to the expiration of the 40-day Distribution Compliance Period, an owner of a beneficial interest in a Reg S Global Note deposited with the Depositary (or the Securities Custodian) will not be permitted to transfer its interest to a Person who wishes to take delivery thereof in the form of an interest in a U.S. Global Note. If, at any time, after the expiration of the 40-day Distribution Compliance Period, an owner of a beneficial interest in a Reg S Global Note deposited with the Depositary or with the Securities Custodian wishes to transfer its beneficial interest in such Reg S Global Note to a Person who is required or permitted to take delivery thereof in the form of an interest in a U.S. Global Note, such owner shall, subject to the Applicable Procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest in a U.S. Global Note as provided in this Section 2.06(a)(ii). Upon receipt by the Trustee of (1) instructions from Euroclear or Cedel, if applicable, and the Depositary, directing the Trustee, as Registrar, to credit or cause to be credited a beneficial interest in the U.S. Global Note equal to the beneficial interest in the Reg S Global Note to be exchanged, such instructions to contain information regarding the Participant account with the Depositary to be credited with such increase, (2) a written order given in accordance with the Applicable Procedures containing information regarding the participant account of the Depositary and (3) a certificate in the form of Exhibit B-2 attached hereto given by the owner of such beneficial interest stating (A) if the transfer is pursuant to Rule 144A, that the Person transferring such interest in a Reg S Global Note reasonably believes that the Person acquiring such interest in a U.S. Global Note is a QIB and is obtaining such beneficial interest in a transaction meeting the requirements of Rule 144A and any applicable blue sky or securities laws of any state of the United States, (B) that the transfer complies with the requirements of Rule 144 under the Securities Act or (C) if the transfer is pursuant to any other exemption from the registration requirements of the Securities Act, that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Securities and pursuant to and in accordance with the requirements of the exemption claimed, such statement to be supported by an Opinion of Counsel from the transferee or the transferor in form and substance reasonably acceptable to the Company and to the Registrar and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction, then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of such Reg S Global Note and to increase or cause to be increased the aggregate principal amount at maturity of the applicable U.S. Global Note by the principal amount at maturity of the beneficial interest in the Reg S Global Note to be exchanged or transferred, and the Trustee, as Registrar, shall instruct the Depositary, concurrently with such redemption, to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the applicable U.S. Global -22- 29 Note equal to the reduction in the aggregate principal amount at maturity of such Reg S Global Note and to debit or cause to be debited from the account of the Person making such transfer the beneficial interest in the Reg S Global Note that is being exchanged or transferred. (b) Transfer and Exchange of Certificated Securities. When Certificated Securities are presented by a Holder to the Registrar with a request to register the transfer of the Certificated Securities or to exchange such Certificated Securities for an equal principal amount of Certificated Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested only if the Certificated Securities are presented or surrendered for registration of transfer or exchange, are endorsed and contain a signature guarantee or are accompanied by a written instrument of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney and contains a signature guarantee, duly authorized in writing and the Registrar received the following documentation (all of which may be submitted by facsimile): in the case of Certificated Securities that are Transfer Restricted Securities, such request shall be accompanied by the following additional information and documents, as applicable: (A) if such Transfer Restricted Security is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, or such Transfer Restricted Security is being transferred to the Company, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); or (B) if such Transfer Restricted Security is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or in an offshore transaction pursuant to and in compliance with Rule 904 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); or (C) if such Transfer Restricted Security is being transferred in reliance on any other exemption from the registration requirements of the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto) and an Opinion of Counsel from such Holder or the transferee reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act. (c) Transfer of a Beneficial Interests in Global Securities for Certificated Securities. (i) The Global Securities that are Transfer Restricted Securities or the Exchange Global Securities, as the case may be, shall be exchanged by the Company for one or more Certificated Securities representing Series A Notes or Series B Notes, as the case may be, if (x) the Depositary (i) has notified the Company that it is unwilling or unable to continue as, or ceases to be, a "Clearing Agency" registered under Section 17A of the Exchange Act and (ii) a successor to the Depositary registered as a "Clearing Agency" under Section 17A of the Exchange Act is not able to be appointed by the Company within 90 calendar days or (y) the Depositary is at any time unwilling or unable to continue as Depositary and a successor to the Depositary is not able to be appointed by the Company within 90 calendar days or (iii) the Company, at its option, delivers a notice in the form of an Officers' Certificate that it elects to cause the issuance of Certificated Securities. If an Event of Default occurs and is continuing, the Company shall, at the request of the Holder thereof, exchange all or part of a Global Security that is a Transfer Restricted Security or an Exchange Global Security, as the case may be, for one or more Certificated Securities representing Series A Notes or Series B Notes, as the case may be; provided that the principal amount of each of such Certificated Securities, and such Global Security, after such exchange, shall be $1,000 or an integral multiple thereof. Whenever a Global Security is exchanged -23- 30 as a whole for one or more Certificated Securities, it shall be surrendered by the Holder thereof to the Trustee for cancellation. Whenever a Global Security is exchanged in part for one or more Certificated Securities, it shall be surrendered by the Holder thereof to the Trustee and the Trustee shall make the appropriate notations to Schedule A thereof pursuant to Section 2.01 hereof. All Certificated Securities or Series B Notes, as the case may be, issued in exchange for a Global Security or any portion thereof shall be registered in such names, and delivered, as the Depositary shall instruct the Trustee. Any Certificated Securities issued pursuant to this Section 2.06(c)(i) shall include the Private Placement Legend, except as otherwise provided for by Section 2.06 hereof. Interests in a Global Security may not be exchanged for Certificated Securities other than as provided in this Section 2.06. If a beneficial interest in a Transfer Restricted Security is being transferred, the following additional documents and information must be submitted (including by facsimile): (A) if such beneficial interest is being transferred to the Person designated by the Depositary as being the beneficial owner, a certification to that effect from such Person (in substantially the form of Exhibit B-4 hereto); (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or in an offshore transaction pursuant to and in compliance with Rule 904 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto); and (C) if such beneficial interest is being transferred in reliance on any other exemption from the registration requirements of the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto) and an Opinion of Counsel from the transferee or the transferor reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act, in which case the Trustee or the Securities Custodian, at the direction of the Trustee, shall, in accordance with the standing instructions and procedures existing between the Depositary and the Securities Custodian, cause the aggregate principal amount of U.S. Global Notes or Reg S Global Notes, as applicable, to be reduced accordingly and, following such reduction, the Company shall execute and, the Trustee shall authenticate and deliver to the transferee a Certificated Security in the appropriate principal amount. (ii) Certificated Securities issued in exchange for a beneficial interest in a U.S. Global Note or Reg S Global Note, as applicable, pursuant to this Section 2.06(c) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its Participants or Indirect Participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Certificated Securities to the Persons in whose names such Securities are so registered. Following any such issuance of Certificated Securities, the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of the applicable Global Security to reflect the transfer. (d) Restrictions on Transfer and Exchange of Global Securities. Notwithstanding any other provision of this Indenture (other than the provisions set forth in subsection (e) of this Section 2.06), a Global Security may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Any Holder of a beneficial interest in a Global Security shall, by acceptance of such Global Security, agree that transfers of beneficial interests in such Global Security may be effected only through a book entry system maintained by the Holder of such Global Security (or its agent), and that ownership of a beneficial interest in the Securities represented hereby shall be required to be reflected in book entry form. Interests of beneficial owners in a Global Security may be transferred in accordance with the rules and procedures of the Depositary (or its successors). -24- 31 (e) Legends. (i) Except as permitted by the following paragraphs (ii), (iii) and (iv), each Security certificate evidencing Global Securities and Certificated Securities (and all Securities issued in exchange therefor or substitution thereof) shall bear a legend (the "Private Placement Legend") in substantially the following form: THIS NOTE (OR ITS PREDECESSOR) AND ANY GUARANTEE HEREOF HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER: (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), OR (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, IF REQUESTED BY THE COMPANY) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING. (ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Security) pursuant to Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act: (A) in the case of any Transfer Restricted Security that is a Certificated Security, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted -25- 32 Security for a Certificated Security that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security upon receipt of a certification from the transferring Holder substantially in the form of Exhibit B-4 hereto; and (B) in the case of any Transfer Restricted Security represented by a Global Security, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof; provided, however, that with respect to any request for an exchange of a Transfer Restricted Security that is represented by a Global Security for a Certificated Security that does not bear the legend set forth in (i) above, which request is made in reliance upon Rule 144, the Holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 (such certification to be substantially in the form of Exhibit B-4 hereto). (iii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Security) in reliance on any exemption from the registration requirements of the Securities Act (other than exemptions pursuant to Rule 144A or Rule 144 under the Securities Act) in which the Holder or the transferee provides an Opinion of Counsel to the Company and the Registrar in form and substance reasonably acceptable to the Company and the Registrar (which Opinion of Counsel shall also state that the transfer restrictions contained in the legend are no longer applicable): (A) in the case of any Transfer Restricted Security that is a Certificated Security, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Certificated Security that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security; and (B) in the case of any Transfer Restricted Security represented by a Global Security, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof. (iv) By its acceptance of any Initial Security represented by a certificate bearing the Private Placement Legend, each Holder of, and beneficial owner of an interest in, such Initial Security acknowledges the restrictions on transfer of such Initial Security set forth in the Private Placement Legend and under the heading "Notice to Investors" in the Offering Memorandum and agrees that it will transfer such Initial Security only in accordance with the Private Placement Legend and the restrictions set forth under the heading "Notice to Investors" in the Offering Memorandum. (v) Notwithstanding the foregoing, upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate (i) one or more unrestricted Global Securities in aggregate principal amount equal to the principal amount of the restricted beneficial interests validly tendered and not properly withdrawn by Persons that certify in the letter of transmittal delivered in the Exchange Offer that they are not (x) broker-dealers, (y) Persons participating in the distribution of the Series B Notes or (z) Persons who are affiliates (as defined in Rule 144 under the Securities Act) of the Company and accepted for exchange in the Exchange Offer and (ii) Certificated Securities that do not bear the Private Placement Legend in an aggregate principal amount equal to the principal amount of the Certificated Securities that are Transfer Restricted Securities accepted for exchange in the Exchange Offer. Concurrently -26- 33 with the issuance of such Securities, the Trustee shall cause the aggregate principal amount of the applicable Global Securities to be reduced accordingly and the Company shall execute and the Trustee shall authenticate and deliver to the Persons designated by the Holders of Certificated Securities so accepted Certificated Securities in the appropriate principal amount. (f) Cancellation and/or Adjustment of Global Securities. At such time as all beneficial interests in Global Securities have been exchanged for Certificated Securities, redeemed, repurchased or canceled, all Global Securities shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Security is exchanged for Certificated Securities, redeemed, repurchased or canceled, the principal amount of Securities represented by such Global Security shall be reduced accordingly and an endorsement shall be made on such Global Security, by the Trustee or the Securities Custodian, at the direction of the Trustee, to reflect such reduction. (g) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Securities and Certificated Securities at the Registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any stamp or transfer tax or similar governmental charge payable in connection therewith (other than any such stamp or transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 4.07, 4.09 and 10.06 hereto). (iii) All Global Securities and Certificated Securities issued upon any registration of transfer or exchange of Global Securities or Certificated Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Securities or Certificated Securities surrendered upon such registration of transfer or exchange. (iv) The Registrar shall not be required: (A) to issue, to register the transfer of or to exchange Securities during a period beginning at the opening of fifteen (15) Business Days before the day of any selection of Securities for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part, or (C) to register the transfer of or to exchange a Security between a Record Date and the next succeeding Interest Payment Date. (v) Prior to due presentment for the registration of a transfer of any Security, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Securities and for all other purposes, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. (iv) The Trustee shall authenticate Global Securities and Certificated Securities in accordance with the provisions of Section 2.02 hereof. SECTION 2.07. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list (which may be -27- 34 conclusively relied upon by the Trustee) in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders and the Company shall otherwise comply with TIA Section 312(a). SECTION 2.08. Replacement Securities. If a mutilated Security is surrendered to the Registrar or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trustee. If required by the Trustee or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Security is replaced. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company, in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section 2.08, the Company may require the payment by the Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section 2.08 in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section 2.08 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 2.09. Outstanding Securities. Securities outstanding at any time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. If a Security is replaced pursuant to Section 2.08, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser, in which event the replacement Security shall cease to be outstanding, subject to the provisions of Section 8-405 of the Uniform Commercial Code. A mutilated Security ceases to be outstanding upon surrender of such Security and replacement thereof pursuant to Section 2.08. If the Paying Agent (other than the Company, a Guarantor or an Affiliate of the Company or a Guarantor) segregates and holds in trust, in accordance with this Indenture, on a Redemption Date or Maturity date money sufficient to pay all principal, premium, if any, interest and any other amounts payable on that date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, then on and after that date such Securities (or such portions thereof) shall cease to be outstanding and interest on them shall cease to accrue. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent or any amendment, modification or other change to this Indenture, Securities held or beneficially owned by the Company or Guarantor or an Affiliate of the Company or a Guarantor of the Company or by agents of any of the foregoing shall be disregarded, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent or any amendments, modification or other change to this Indenture, only Securities which a Responsible Officer actually knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith shall not be disregarded if the pledgee establishes to the satisfaction of the Trustee such pledgee's right so to act with respect to the Securities and that the pledgee is not the Company, a Guarantor or an Affiliate of the Company or of a Guarantor or any of their agents. The Trustee may require an Officers' Certificate listing Securities owned by the Company, or a Guarantor or an Affiliate of the Company or a Guarantor or by any agents of the foregoing. -28- 35 SECTION 2.10. Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and upon Order the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and upon Order the Trustee shall authenticate definitive Securities and deliver them in exchange for temporary Securities. SECTION 2.11. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. Upon Order, the Trustee and no one else shall cancel and destroy (subject to the record retention requirements of the Exchange Act) all Securities surrendered for registration of transfer, exchange, payment or cancellation and deliver a certificate of such destruction to the Company. The Company may not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancellation. SECTION 2.12. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date, shall be paid to the Person in whose name such Security is registered at the close of business on the Record Date for such interest payment, which shall be the June 15 or December 15 (whether or not a Business Day) immediately preceding such Interest Payment Date. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered Holder on the relevant Record Date, and, except as hereinafter provided, such Defaulted Interest and any interest payable on such Defaulted Interest may be paid by the Company, at its election, as provided in clause (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest, and any interest payable on such Defaulted Interest, to the Persons in whose names the Securities are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on the Securities and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as provided in this clause (a). Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be sent, first class mail, postage prepaid, to each Holder at such Holder's address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names the Securities are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (b). (b) The Company may make payment of any Defaulted Interest, and any interest payable on such Defaulted Interest, on the Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of, or in exchange for, or in lieu of, or in substitution for, any other Security, shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 2.13. Authorized Denominations. The Securities shall be issuable in denominations of $1,000 and any integral multiple thereof. -29- 36 SECTION 2.14. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. SECTION 2.15. Persons Deemed Holders. The Company, the Trustee, any Paying Agent and any authenticating agent may treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payments of principal of, premium, if any, or interest on such Security and for all other purposes. None of the Company, the Trustee, any Paying Agent or any authenticating agent shall be affected by any notice to the contrary. ARTICLE 3 Redemption SECTION 3.01. Notices to Trustee. If the Company elects to redeem Securities pursuant to Section 3.07, it shall notify the Trustee in writing of the Redemption Date, the principal amount of Securities to be redeemed, the Redemption Price and the Section of this Indenture and the paragraph of the Securities pursuant to which the redemption will occur. The Company shall give each notice to the Trustee provided for in this Section at least 60 days before the Redemption Date unless the Trustee consents to a shorter period. Such notice shall be accompanied by an Officers' Certificate and an Opinion of Counsel from the Company to the effect that such redemption will comply with the conditions herein and in the Securities. SECTION 3.02. Selection of Securities To Be Redeemed. If less than all the Securities are to be redeemed at any time, the Trustee shall select the Securities to be redeemed on a pro rata basis, or by any other method which the Trustee shall determine to be fair and appropriate and which complies with any securities exchange and other applicable requirements, provided that the Trustee may select for redemption in part only Securities in denominations larger than $1,000. In selecting Securities to be redeemed pursuant to this Section 3.02, the Trustee shall make such adjustments, reallocations and eliminations as it shall deem proper so that the principal amount at Stated Maturity of each Security to be redeemed shall be $1,000 or an integral multiple thereof, by increasing, decreasing or eliminating any amount less than $1,000 which would be allocable to any Holder. If the Securities to be redeemed are Certificated Securities, the Certificated Securities to be redeemed shall be selected by the Trustee by prorating, as nearly as may be, or by any other method which the Trustee shall determine to be fair and appropriate and which complies with any securities exchange and other applicable requirements, the principal amount of Certificated Securities to be redeemed among the Holders of Certificated Securities registered in their respective names. The Trustee in its discretion may determine the particular Securities (if there are more than one) registered in the name of any Holder which are to be redeemed, in whole or in part. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be redeemed. SECTION 3.03. Notice of Redemption. At least 30 days but not more than 60 days before a date for redemption of Securities, the Company shall mail a notice of redemption by first-class mail to each Holder of Securities to be redeemed at its registered address. The notice shall identify the Securities (including CUSIP numbers) to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; -30- 37 (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (5) if any Global Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the Redemption Date, the Global Security, with a notation on Schedule A thereof adjusting the principal amount thereof to be equal to the unredeemed portion, will be returned to the Holder thereof; (6) if any Certificated Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the Redemption Date, a new Certificated Security or Certificated Securities in principal amount equal to the unredeemed portion will be issued; (7) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed; (8) that, unless the Company defaults in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, interest on Securities (or portion thereof) called for redemption ceases to accrue on and after the Redemption Date; (9) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities; (10) the paragraph of the Securities and the Section of the Indenture pursuant to which the Securities are being called for redemption; and (11) any other information necessary to enable Holders to comply with the notice of redemption. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event, the Company shall provide the Trustee with the information required by this Section at least 45 days before the Redemption Date. SECTION 3.04. Effect of Notice of Redemption. Once notice of redemption is mailed, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price stated in the notice. Upon surrender to the Paying Agent, such Securities shall be paid at the Redemption Price stated in the notice, plus accrued interest to the Redemption Date. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 3.05. Deposit of Redemption Price. No later than 10:00 a.m. (New York City time) on the Redemption Date, the Company shall deposit with the Paying Agent (or, if the Company or a Subsidiary is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the Redemption Price of and accrued interest on all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which have been delivered by the Company to the Trustee for cancellation. So long as the Company complies with the preceding paragraph and the other provisions of this Article 3, interest on the Securities to be redeemed on the applicable Redemption Date shall cease to accrue from and after such date and such Securities or portions thereof shall be deemed not to be entitled to any benefit under this Indenture except to receive payment of the Redemption Price on the Redemption Date. If any Security called for redemption shall not be so paid upon surrender for redemption, then, from Redemption Date until such principal is paid, interest shall be paid on the unpaid principal and, to the extent permitted by law, on any accrued but unpaid interest thereon, in each case at the rate prescribed therefor by this Indenture and such Securities. SECTION 3.06. Securities Redeemed in Part. Upon surrender and cancellation of a Certificated Security that is redeemed in part, the Company shall issue and the Trustee shall authenticate and deliver to the surrendering -31- 38 Holder (at the Company's expense) a new Certificated Security equal in principal amount to the unredeemed portion of the Certificated Security surrendered and canceled, provided that each such Certificated Security shall be in a principal amount at Stated Maturity of $1,000 or an integral multiple thereof. Upon surrender of a Global Security that is redeemed in part, the Paying Agent shall forward such Global Security to the Trustee who shall make a notation on Schedule A thereof to reduce the principal amount of such Global Security to an amount equal to the unredeemed portion of such Global Security, as provided in Section 2.05 hereof. SECTION 3.07. Optional Redemption. (a) Except as set forth in subsection (b) of this Section 3.07, the Company shall not have the option to redeem the Securities pursuant to this Section 3.07 prior to June 30, 2003. On or after such date, the Company shall have the option to redeem the Securities , in whole or in part upon not less than 30 days' nor more than 60 days' notice, at the Redemption Prices (expressed as percentages of principal amount at Stated Maturity), if redeemed during the 12-month period beginning June 30 of the years indicated below, in each case, together with any interest accrued and unpaid to the Redemption Date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date):
Year Percentage ---- ---------- 2003 105.5000% 2004 and thereafter 100.0000%
(b) Notwithstanding the foregoing, at any time on or before June 30, 2001, the Company may, at its option, redeem up to a maximum of 35% of the aggregate principal amount at Stated Maturity of the Securities with the net cash proceeds of one or more Qualified Equity Offerings at a Redemption Price equal to 111% of the principal amount thereof, plus accrued and unpaid interest thereon to the Redemption Date; provided that at least $65,000,000 of the aggregate principal amount at Stated Maturity of the Securities shall remain outstanding immediately after the occurrence of any such redemption; and provided, further, that each such redemption shall occur within 90 days of the closing of such Qualified Equity Offering. -32- 39 ARTICLE 4 Covenants SECTION 4.01. Payment of Securities. The Company shall promptly pay the principal of, premium, if any, on and interest on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal, premium and interest shall be considered paid on the date due if on or before 10:00 a.m., New York City time, on such date the Trustee or a Paying Agent, other than the Company or a Guarantor, or an Affiliate of the Company or a Guarantor, holds in New York, New York in accordance with this Indenture money sufficient to pay all principal, premium and interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Holders on that date pursuant to the terms of this Indenture. The Company shall pay interest (including post-petition interest in any proceeding under any applicable bankruptcy law) on overdue principal and premium, if any, at the rate borne by the Securities to the extent lawful; and it shall pay interest (including post-petition interest in any proceeding under any applicable bankruptcy law on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. Commission Reports. So long as any Securities are outstanding, whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, or any successor provision thereto, the Company shall file with the Commission the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to such Section 13(a) or 15(d) or any successor provision thereto if the Company were subject thereto, such documents to be filed with the Commission on or prior to the respective dates (the "Required Filing Dates") by which the Company would have been required to file them. The Company shall also (whether or not it is required to file reports with the Commission), within 30 days of each Required Filing Date, (i) transmit by mail to all holders of Securities, as their names and addresses appear in the Security Register, without cost to such holders or Persons, and (ii) file with the Trustee, copies of the annual reports, quarterly reports and other documents (without exhibits) which the Company has filed or would have filed with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act, any successor provisions thereto or this Section 4.02. The Company shall not be required to file any report, document or other information with the Commission if the Commission does not permit such filing. SECTION 4.03. Limitation on Indebtedness. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, incur any Indebtedness (including Acquired Indebtedness) unless, after giving pro forma effect to the incurrence of such Indebtedness, the Consolidated Interest Coverage Ratio for the Determination Period preceding the Transaction Date is at least 2.5 to 1.0. Notwithstanding the foregoing, the Company or any Subsidiary (subject to the provisions of Section 4.04) may incur Permitted Indebtedness. Any Indebtedness of a Person existing at the time at which such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed incurred by such Subsidiary at the time at which it becomes a Subsidiary. SECTION 4.04. Limitation on Subsidiary Indebtedness and Preferred Stock. Subject to the provisions of Section 4.03, the Company will not permit any Subsidiary to, directly or indirectly, incur any Indebtedness or issue any Preferred Stock except: (i) Indebtedness or Preferred Stock issued to and held by the Company, a Guarantor or a Wholly Owned Subsidiary, so long as any transfer of such Indebtedness or Preferred Stock to a Person other than the Company, Guarantor or a Wholly Owned Subsidiary will be deemed to constitute an incurrence of such Indebtedness or Preferred Stock by the issuer thereof as of the date of such transfer; (ii) Acquired Indebtedness or Preferred Stock of a Subsidiary issued and outstanding prior to the date on which such Subsidiary was acquired by the Company (other than Indebtedness or Preferred Stock issued in connection with or in anticipation of such acquisition); (iii) Indebtedness or Preferred Stock outstanding on the Issue Date; -33- 40 (iv) Indebtedness described in clauses (b), (c), (d), (e), (f), (g), (h), (k) and (n) under the definition of "Permitted Indebtedness"; (v) Permitted Subsidiary Refinancing Indebtedness of such Subsidiary; (vi) Indebtedness or Preferred Stock issued in exchange for, or the proceeds of which are used to refinance, repurchase or redeem, Indebtedness or Preferred Stock described in clauses (i) and (iii) of this Section (the "Retired Indebtedness or Stock"), provided that the Indebtedness or the Preferred Stock so issued has (A) a principal amount or liquidation value, as the case may be, not in excess of the principal amount or liquidation value of the Retired Indebtedness or Stock plus related expenses for redemption and issuance, (B) a final redemption date later than the stated maturity or final redemption date (if any) of the Retired Indebtedness or Stock and (C) an Average Life at the time of issuance of such Indebtedness or Preferred Stock that is greater than the Average Life of the Retired Indebtedness or Stock; (vii) Indebtedness of a Subsidiary which represents the assumption by such Subsidiary of Indebtedness of another Subsidiary in connection with a merger of such Subsidiaries, provided that no Subsidiary or any successor (by way of merger) thereto existing on the Issue Date shall assume or otherwise become responsible for any Indebtedness of an entity which is not a Subsidiary on the Issue Date, except to the extent that a Subsidiary would be permitted to incur such Indebtedness under this Section; (viii) Non-Recourse Indebtedness incurred by a foreign Subsidiary not constituting a Guarantor; and (ix) Indebtedness incurred to finance all or a part of the purchase price or construction, repair or improvement cost of Property acquired, constructed, repaired or improved after the Issue Date. SECTION 4.05. Limitation on Restricted Payments. (a) The Company will not, and will not permit any of its Subsidiaries to, make any Restricted Payment, unless at the time of and after giving effect to the proposed Restricted Payment, (i) no Default shall have occurred and be continuing (or would immediately result therefrom), (ii) the Company could incur at least $1.00 of additional Indebtedness under the tests described in the first sentence of Section 4.03 of this Indenture and (iii) the aggregate amount of all Restricted Payments declared or made on or after the Issue Date by the Company or any Subsidiary shall not exceed the sum of (A) 50% (or if such Consolidated Net Income shall be a deficit, minus 100% of such deficit) of the aggregate Consolidated Net Income accrued during the period beginning on the first day of the fiscal quarter in which the Issue Date falls and ending on the last day of the fiscal quarter for which internal financial statements are available ending immediately prior to the date of such proposed Restricted Payment, minus 100% of the amount of any writedowns, write-offs and other negative extraordinary charges not otherwise reflected in Consolidated Net Income during such period, plus (B) an amount equal to the aggregate net cash proceeds received by the Company, subsequent to the Issue Date, from the issuance or sale (other than to a Subsidiary) of shares of its Capital Stock (excluding Redeemable Stock, but including Capital Stock issued upon the exercise of options, warrants or rights to purchase Capital Stock (other than Redeemable Stock) of the Company) and the liability (expressed as a positive number) as expressed on the face of a balance sheet in accordance with GAAP in respect of any Indebtedness of the Company or any of its Subsidiaries, or the carrying value of Redeemable Stock, which has been converted into, exchanged for or satisfied by the issuance of shares of Capital Stock (other than Redeemable Stock) of the Company, subsequent to the Issue Date, plus (C) 100% of the net reduction in Restricted Investments, subsequent to the Issue Date, in any Person, resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of Property (but only to the extent such interest, dividends, repayments or other transfers of Property are not included in the calculation of Consolidated Net Income), in each case to the Company or any Subsidiary from any Person (including, without limitation, from Unrestricted Subsidiaries) or from redesignations of Unrestricted Subsidiaries as Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed in the case of any Person the amount of Restricted Investments previously made by the Company or any Subsidiary in such Person and in each such case which was treated as a Restricted Payment, plus $10,000,000. -34- 41 (b) The foregoing provisions will not prevent (i) the payment of any dividend on Capital Stock of any class within 60 days after the date of its declaration if at the date of declaration such payment would be permitted by this Indenture; (ii) any repurchase or redemption of Capital Stock or Subordinated Indebtedness of the Company or a Subsidiary made by exchange for Capital Stock of the Company (other than Redeemable Stock), or out of the net cash proceeds from the substantially concurrent issuance or sale (other than to a Subsidiary) of Capital Stock of the Company (other than Redeemable Stock), provided that the net cash proceeds from such sale are excluded from computations under Section 4.05(a)(iii)(B) above to the extent that such proceeds are applied to purchase or redeem such Capital Stock or Subordinated Indebtedness; (iii) so long as no Default shall have occurred and be continuing or should occur as a consequence thereof, any repurchase or redemption of Subordinated Indebtedness of the Company or a Subsidiary solely in exchange for, or out of the net cash proceeds from the substantially concurrent sale of, new Subordinated Indebtedness of the Company or a Subsidiary, so long as such Subordinated Indebtedness is permitted under Section 4.03 of this Indenture and (1) is subordinated to the Securities at least to the same extent as the Subordinated Indebtedness so exchanged, purchased or redeemed, (2) has a stated maturity later than the stated maturity of the Subordinated Indebtedness so exchanged, purchased or redeemed and (3) has an Average Life at the time incurred that is greater than the remaining Average Life of the Subordinated Indebtedness so exchanged, purchased or redeemed; (iv) Investments in any Joint Ventures and foreign Subsidiaries not constituting Guarantors in an aggregate amount not to exceed $5,000,000; (v) the payment of any dividend or distribution by a Subsidiary of the Company or any of its Wholly Owned Subsidiaries; (vi) so long as no Default or Event of Default shall have occurred and be continuing or should occur as a consequence thereof, the repurchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any employee of the Company or any of its Subsidiaries, provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock pursuant to the terms of an employee benefit plan or employment or similar agreement shall not exceed $500,000 in any calendar year; and (vii) the acquisition of Capital Stock by the Company in connection with the exercise of stock options or stock appreciation rights by way of cashless exercise or in connection with the satisfaction of withholding tax obligations. Notwithstanding the foregoing, the amount available for Investments in Joint Ventures and foreign Subsidiaries pursuant to clause (iv) of the preceding sentence may be increased by the aggregate amount received by the Company and its Subsidiaries from a Joint Venture or a foreign Subsidiary on or before such date resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances or other transfers of Property made to such Joint Venture or foreign Subsidiary (but only to the extent such interest, dividends, repayments or other transfers of Property are not included in the calculation of Consolidated Net Income). Restricted Payments permitted to be made as described in the first sentence of this Section 4.05(b) will be excluded in calculating the amount of Restricted Payments thereafter, except that any such Restricted Payments permitted to be made pursuant to clauses (i), (iv), (v) (but only to the extent paid to someone other than the Company or any of its Wholly Owned Subsidiaries) and (vi) will be included in calculating the amount of Restricted Payments thereafter. (c) For purposes of this Section 4.05, if a particular Restricted Payment involves a non-cash payment, including a distribution of assets, then such Restricted Payment shall be deemed to be an amount equal to the cash portion of such Restricted Payment, if any, plus an amount equal to the Fair Market Value of the non-cash portion of such Restricted Payment. SECTION 4.06. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Subsidiary, directly or indirectly, to create, enter into any agreement with any Person or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind which by its terms restricts the ability of any Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on its Capital Stock to the Company or any Subsidiary, (b) pay any Indebtedness owed to the Company or any Subsidiary, (c) make loans or advances to the Company or any Subsidiary or (d) transfer any of its Property or assets to the Company or any Subsidiary except any encumbrance or restriction contained in any agreement or instrument: (i) existing on the Issue Date; (ii) relating to any Property or assets acquired after the Issue Date, so long as such encumbrance or restriction relates only to the Property or assets so acquired and is not and was not created in anticipation of such acquisition; -35- 42 (iii) relating to any Acquired Indebtedness of any Subsidiary at the date on which such Subsidiary was acquired by the Company or any Subsidiary (other than Indebtedness incurred in anticipation of such acquisition); (iv) effecting a refinancing of Indebtedness incurred pursuant to an agreement referred to in the foregoing clauses (i) through (iii), so long as the encumbrances and restrictions contained in any such refinancing agreement are no more restrictive than the encumbrances and restrictions contained in such agreements; (v) constituting customary provisions restricting subletting or assignment of any lease of the Company or any Subsidiary or provisions in license agreements or similar agreements that restrict the assignment of such agreement or any rights thereunder; (vi) constituting restrictions on the sale or other disposition of any Property securing Indebtedness as a result of a Permitted Lien on such Property; (vii) constituting any temporary encumbrance or restriction with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or Property and assets of, such Subsidiary; or (viii) existing under or by reason of applicable law, rules or regulations, or any order or ruling by any governmental authority; (ix) constituting customary restrictions on cash or other deposits imposed by customers under contracts entered into in the ordinary course of business; (x) constituting restrictions with respect to a Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all of the capital stock or assets of such Subsidiary pending the closing of such sale or disposition; or (xi) constituting provisions contained in agreements or instruments relating to Indebtedness which prohibit the transfer of all or substantially all of the assets of the obligor thereunder unless the transferee shall assume the obligations of the obligor under such agreement or instrument. SECTION 4.07. Limitation on Asset Sales. (a) The Company will not engage in, and will not permit any Subsidiary to engage in, any Asset Sale unless (a) except in the case of an Asset Sale resulting from the requisition of title to, seizure or forfeiture of any Property or assets or any actual or constructive total loss or an agreed or compromised total loss, the Company or such Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property; and (b) at least 75% of such consideration consists of Cash Proceeds (or the assumption of Indebtedness of the Company or such Subsidiary relating to the Capital Stock or Property or asset that was the subject of such Asset Sale and the unconditional release of the Company or such Subsidiary from such Indebtedness); and (c) the Company delivers to the Trustee an Officers' Certificate certifying that such Asset Sale complies with clauses (a) and (b); provided, however that any Asset Sale pursuant to a condemnation, appropriation or other similar taking, including by deed in lieu of condemnation, or pursuant to the foreclosure or other enforcement of a Permitted Lien or exercise by the related lienholder of rights with respect thereto, including by deed or assignment in lieu of foreclosure, shall not be required to satisfy the conditions set forth in clauses (a) and (b) of this sentence. The Company or such Subsidiary, as the case may be, may apply the Net Available Proceeds from each Asset Sale (x) to the acquisition of one or more Replacement Assets, or (y) to repurchase or repay Senior Debt (with a permanent reduction of availability in the case of revolving credit borrowings); provided that such acquisition or such repurchase or repayment shall be made within 365 days after the consummation of the relevant Asset Sale; provided, further, however, that the amount of (A) any liabilities (as shown on the Company's or such Subsidiary's most recent balance sheet or in the notes thereto) of the Company or any Subsidiary that are assumed by the transferee of any such assets and (B) any notes or other obligations received by the Company or any such Subsidiary from such transferee that are converted by the Company or such Subsidiary into cash (to the extent of the case received) within 90 days of such Asset Sale, shall be deemed to be cash for purposes of this -36- 43 provision. Any Net Available Proceeds from any Asset Sale that are not used to so acquire Replacement Assets or to repurchase or repay Senior Debt within 365 days after consummation of the relevant Asset Sale constitute "Excess Proceeds." (b) When the aggregate amount of Excess Proceeds exceeds $10,000,000, the Company shall within 30 days thereafter be required to make an offer to all Holders of Securities and other Indebtedness that ranks by its terms pari passu in right of payment with the Securities and the terms of which contain substantially similar requirements with respect to the application of net proceeds from asset sales as are contained in this Indenture (an "Asset Sale Offer") to purchase on a pro rata basis the maximum principal amount of Securities, that is an integral multiple of $1,000, that may be purchased out of the Excess Proceeds, at an offer price in cash (the "Asset Sale Offer Purchase Price") in an amount equal to 100% of the principal amount at Stated Maturity thereof plus accrued and unpaid interest thereon, if any, to the Asset Sale Offer Purchase Date, in accordance with the procedures set forth in Section 4.07(c). (c) Within 30 days of the date that the amount of Excess Proceeds exceeds $10,000,000, the Company, or the Trustee at the request and expense of the Company, shall send to each Holder by first class mail, postage prepaid, a notice prepared by the Company stating: (i) that an Asset Sale Offer is being made pursuant to this Section 4.07 and that all Securities properly tendered will be accepted for payment, subject to proration in the event that the amount of Excess Proceeds is less than the aggregate Asset Sale Offer Purchase Price of all Securities properly tendered pursuant to the Asset Sale Offer; (ii) the Asset Sale Offer Purchase Price, the amount of Excess Proceeds that are available to be applied to purchase tendered Securities, and the date Securities are to be purchased pursuant to the Asset Sale Offer (the "Asset Sale Offer Purchase Date"), which date shall be a date no earlier than 30 days and not later than 40 days subsequent to the date such notice is mailed; (iii) that any Securities or portions thereof not properly tendered or accepted for payment will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the Asset Sale Offer Purchase Price with respect thereto, all Securities or portions thereof accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest from and after the Asset Sale Offer Purchase Date; (v) that any Holder electing to have any Securities or portions thereof purchased pursuant to the Asset Sale Offer will be required to surrender such Securities, with the form entitled "Option of Holder to Elect Purchase" on the reverse of such Securities completed, to the Paying Agent at the address specified in the notice, prior to the close of business on the third Business Day preceding the Asset Sale Offer Purchase Date; (vi) that any Holder shall be entitled to withdraw such election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Asset Sale Offer Purchase Date, a telegram, telex, facsimile transmission or letter, setting forth the name of the Holder, the principal amount of Securities delivered for purchase, and a statement that such Holder is withdrawing such Holder's election to have such Securities or portions thereof purchased pursuant to the Asset Sale Offer; (vii) that any Holder electing to have Securities purchased pursuant to the Asset Sale Offer must specify the principal amount at Stated Maturity that is being tendered for purchase, which principal amount must be $1,000 or an integral multiple thereof; (viii) if Certificated Securities have been issued pursuant to Section 2.06(a), that any Holder of Certificated Securities whose Certificated Securities are being purchased only in part will be issued new Certificated Securities equal in principal amount at Stated Maturity to the unpurchased -37- 44 portion of the Certificated Security or Securities surrendered, which unpurchased portion will be equal in principal amount at Stated Maturity to $1,000 or an integral multiple thereof; (ix) that the Trustee will return to the Holder of a Global Security that is being purchased in part, such Global Security with a notation on Schedule A thereof adjusting the principal amount at Stated Maturity thereof to be equal to the unpurchased portion of such Global Security; and (x) the instructions and any other information necessary to enable any Holder to tender Securities and to have such Securities purchased, or to withdraw such tender, pursuant to this Section 4.07. (d) If the aggregate Asset Sale Offer Purchase Price of the Securities surrendered by Holders exceeds the amount of Excess Proceeds as indicated in the notice required by Section 4.07(c) hereof, the Trustee shall select the Securities to be purchased on a pro rata basis based on the principal amount of the Securities tendered, with such adjustments as may be deemed appropriate by the Trustee and to comply with any securities exchange and other applicable requirements, so that only Securities in denominations of $1,000 or integral multiples thereof shall be purchased. (e) On or before the Asset Sale Offer Purchase Date, the Company shall (i) accept for payment any Securities or portions thereof properly tendered and selected for purchase pursuant to the Asset Sale and Section 4.07(d) hereof; (ii) irrevocably deposit with the Paying Agent, by 10:00 a.m., New York City time, on such date, in immediately available funds, an amount equal to the Asset Sale Offer Purchase Price in respect of all Securities or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee the Securities so accepted together with an Officers' Certificate listing the Securities or portions thereof tendered to the Company and accepted for payment. The Paying Agent shall promptly send by first class mail, postage prepaid, to each Holder of Securities or portions thereof so accepted for payment, payment in an amount equal to the Asset Sale Offer Purchase Price for such Securities or portions thereof. The Company shall publicly announce the results of the Asset Sale Offer on or as soon as practicable after the Asset Sale Offer Purchase Date. For purposes of this Section 4.07, the Trustee shall act as the Paying Agent. (f) Upon surrender and cancellation of a Certificated Security that is purchased in part, the Company shall promptly issue and the Trustee shall authenticate and deliver to the surrendering Holder of such Certificated Security a new Certificated Security equal in principal amount to the unpurchased portion of such surrendered Certificated Security; provided that each such new Certificated Security shall be in a principal amount at Stated Maturity of $1,000 or an integral multiple thereof. Upon surrender of a Global Security that is purchased in part pursuant to an Asset Sale Offer, the Paying Agent shall forward such Global Security to the Trustee who shall make a notation on Schedule A thereof to reduce the principal amount of such Global Security to an amount equal to the unpurchased portion of such Global Security, as provided in Section 2.05 hereof. (g) Upon completion of an Asset Sale Offer (including payment of the Asset Sale Offer Purchase Price for accepted Securities), any surplus Excess Proceeds that were subject to such offer shall cease to be Excess Proceeds, the amount of Excess Proceeds shall be reset to zero and the Company may use any remaining amount for general corporate purposes. (h) Pending the final application of any such Net Available Proceeds, the Company may temporarily reduce Indebtedness under any Credit Facility or otherwise invest such Net Available Proceeds in any manner that is not prohibited under this Indenture. (i) The Company shall comply with any applicable tender offer rules (including, without limitation, any applicable requirements of Rule 14e-1 under the Exchange Act) in the event that an Asset Sale Offer is required under the circumstances described herein. SECTION 4.08. Limitation on Transactions with Affiliates. -38- 45 (a) Subsequent to the Issue Date, the Company will not, and will not permit any Subsidiary to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, but limited to, the purchase, sale or exchange of Property, the making of any Investment, the giving of any guarantee to, or the rendering of any service with, any Affiliate of the Company, other than transactions among the Company and any Guarantor or any Wholly Owned Subsidiaries) unless (i) such transaction or series of related transactions is on terms no less favorable to the Company or such Subsidiary than those that could be obtained in a comparable arm's length transaction with a Person that is not such an Affiliate of the Company and (ii) (A) with respect to a transaction or series of related transactions that has a Fair Market Value in excess of $5,000,000 but less than $10,000,000, the Company delivers an Officers' Certificate to the Trustee certifying that such transaction or series of related transactions complies with clause (i) above; or (B) with respect to a transaction or series of related transactions that has a Fair Market Value equal to or in excess of $10,000,000, the transaction or series of related transactions is approved by a majority of the Board of Directors of the Company (including a majority of the disinterested directors), which approval is set forth in a Board Resolution certifying that such transaction or series of transactions complies with clause (i) above. (b) The foregoing provisions shall not be applicable to (i) reasonable and customary compensation, indemnification and other benefits paid or made available to an officer, director or employee of the Company or a Subsidiary for services rendered in such person's capacity as an officer, director or employee (including reimbursement or advancement of reasonable out-of-pocket expenses and provisions of directors' and officers' liability insurance as well as stock option agreements, restricted stock agreements and consulting or similar agreements), (ii) the making of any Restricted Payment otherwise permitted by this Indenture, (iii) any existing employment agreement, stock option agreement, restricted stock agreement, consulting agreement or similar agreement, (iv) any agreement in effect on the Issue Date or any amendment thereto (so long as such amendment is, taken as a whole, no less favorable to the holders of the Securities than the original agreement as in effect on the Issue Date) and any transactions contemplated thereby, or (v) any transaction described in the section entitled "Certain Relationships and Related Transactions" of the Offering Memorandum. SECTION 4.09. Change of Control. (a) Upon the occurrence of a Change of Control, each Holder will have the right to require the Company to repurchase all of such Holder's Securities in whole or in part (the "Change of Control Offer") at a purchase price (the "Change of Control Purchase Price") in cash equal to 101% of the aggregate principal amount at Stated Maturity thereof, plus accrued and unpaid interest thereon, if any, to the Change of Control Payment Date on the terms described below. (b) Within 30 days following any Change of Control, the Company or the Trustee (at the expense of the Company) will mail a notice to each Holder and to the Trustee stating, (i) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this Section 4.09, and that, although Holders are not required to tender their Securities, all Securities that are timely tendered will be accepted for payment; (ii) the Change of Control Purchase Price and the repurchase date, which will be no earlier than 30 days and no later than 60 days after the date such notice is mailed (the "Change of Control Payment Date"); (iii) that any Security or portion thereof accepted for payment pursuant to the Change of Control Offer (and duly paid for on the Change of Control Payment Date) will cease to accrue interest after the Change of Control Payment Date; (iv) that any Security or portion thereof not properly tendered will continue to accrue interest; (v) that any Holder electing to have any Securities or portions thereof purchased pursuant to a Change of Control Offer will be required to surrender such Securities, with the form entitled "Option of Holder to Elect Purchase" on the reverse of such Securities completed, to the -39- 46 Paying Agent at the address specified in the notice, prior to the close of business on the third Business day preceding the Change of Control Date; (vi) that any Holder shall be entitled to withdraw such election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter, setting forth the name of the Holder, the principal amount of Securities delivered for purchase, and a statement that such Holder is withdrawing such Holder's election to have such Securities or portions thereof purchased pursuant to the Change of Control Offer. (vii) that any Holder electing to have Securities purchased pursuant to the Change of Control Offer must specify the principal amount that is being tendered for purchase, which principal amount must be $1,000 at Stated Maturity or an integral multiple thereof; (viii) if Certificated Securities have been issued pursuant to Section 2.06(a), that any Holder of Certificated Securities whose Certificated Securities are being purchased only in part will be issued new Certificated Securities equal in principal amount at Stated Maturity to the unpurchased portion of the Certificated Security or Securities surrendered, which unpurchased portion will be equal in principal amount at Stated Maturity to $1,000 or an integral multiple thereof; (ix) that the Trustee will return to the Holder of a Global Security that is being purchased in part, such Security with a notation on Schedule A thereof adjusting the principal amount thereof to be equal to the unpurchased portion of such Global Security; (x) the instructions and any other information necessary to enable any Holder to accept a Change of Control Offer or effect withdrawal of such acceptance; and (xi) the instructions and any other information necessary to enable Holders to tender their Securities and have such Securities purchased pursuant to the Change of Control Offer. (c) On or before the Change of Control Payment Date, the Company shall (i) accept for payment any Securities or portions thereof properly tendered pursuant to the Change of Control Offer; (ii) irrevocably deposit with the Paying Agent, by 10:00 a.m., New York City time, on such date, in immediately available funds, an amount equal to the Change of Control Purchase Price in respect of all Securities or portions thereof so accepted, including interest, if applicable; and (iii) deliver, or cause to be delivered, to the Trustee the Securities so accepted together with an Officers' Certificate listing the Securities or portions thereof tendered to the Company and accepted for payment. The Paying Agent shall promptly send by first class mail, postage prepaid, to each Holder of Securities or portions thereof so accepted for payment, payment in an amount equal to the Change of Control Purchase Price for such Securities or portions thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. For purposes of this Section 4.09, the Trustee shall act as the Paying Agent. (d) Upon surrender and cancellation of a Certificated Security that is purchased in part pursuant to the Change of Control Offer, the Company shall promptly issue and the Trustee shall authenticate and deliver to the surrendering Holder of such Certificated Security, a new Certificated Security equal in principal amount at Stated Maturity to the unpurchased portion of such surrendered Certificated Security; provided that each such new Certificated Security shall be in a principal amount of $1,000 at Stated Maturity or an integral multiple thereof. Upon surrender of a Global Security that is purchased in part pursuant to a Change of Control Offer, the Paying Agent shall forward such Global Security to the Trustee who shall make a notation on Schedule A thereof to reduce the principal amount at Stated Maturity of such Global Security to an amount equal to the unpurchased portion of such Global Security, as provided in Section 2.05 hereof. -40- 47 (e) The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Company and repurchases all Securities validly tendered and not withdrawn under such Change of Control Offer. (f) The Company will comply with any applicable tender offer rules (including, without limitation, any applicable requirements of Rule 14e-1 under the Exchange Act) in the event that the Change of Control Offer is triggered under the circumstances described herein. SECTION 4.10. Limitation on Liens. The Company will not, and will not permit any Subsidiary to, directly or indirectly, create, affirm, incur, assume or suffer to exist any Liens of any kind other than Permitted Liens on or with respect to any Property of the Company or such Subsidiary or any interest therein or any income or profits therefrom, whether owned at the Issue Date or thereafter acquired, without effectively providing that the Securities shall be secured equally and ratably with (or prior to) the Indebtedness so secured for so long as such obligations are so secured. SECTION 4.11. Limitation on Guarantees by Guarantors. The Company will not permit any Guarantor to guarantee the payment of any Subordinated Indebtedness of the Company unless such guarantee shall be subordinated to such Guarantor's Guarantee at least to the same extent as such Subordinated Indebtedness is subordinated to the Securities; provided that this covenant will not be applicable to any guarantee of any Guarantor that (i) existed at the time at which such Person became a Subsidiary of the Company and (ii) was not incurred in connection with, or in contemplation of, such Person becoming a Subsidiary of the Company. SECTION 4.12. Unrestricted Subsidiaries. (a) The Company may designate a subsidiary (including a newly formed or newly acquired subsidiary) of the Company or any of its Subsidiaries as an Unrestricted Subsidiary; provided that (i) immediately after giving effect to the transaction, the Company could incur $1.00 of additional Indebtedness pursuant to the first sentence of Section 4.03(a) and (ii) such designation is at the time permitted under Section 4.05. Notwithstanding any provisions of this covenant all subsidiaries of an Unrestricted Subsidiary will be Unrestricted Subsidiaries. (b) The Company will not, and will not permit any of its Subsidiaries to, take any action or enter into any transaction or series of transactions that would result in a Person (other than a subsidiary having no outstanding Indebtedness (other than Indebtedness to the Company or a Subsidiary) at the date of determination) becoming a Subsidiary (whether through an acquisition, the redesignation of an Unrestricted Subsidiary or otherwise) unless, after giving effect to such action, transaction or series of transactions on a pro forma basis, (i) the Company could incur at least $1.00 of additional Indebtedness pursuant to the first sentence of Section 4.03(a) and (ii) no Default or Event of Default would occur. (c) Subject to Sections 4.12(a) and (b), an Unrestricted Subsidiary may be redesignated as a Subsidiary. The designation of a subsidiary as an Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary as a Subsidiary in compliance with this Section 4.12 shall be made by the Board of Directors pursuant to a Board Resolution delivered to the Trustee and shall be effective as of the date specified in such Board Resolution, which shall not be prior to the date such Board Resolution is delivered to the Trustee. Any Unrestricted Subsidiary shall become a Subsidiary if it incurs any Indebtedness other than Non-Recourse Indebtedness. If at any time Indebtedness of an Unrestricted Subsidiary which was Non-Recourse Indebtedness no longer so qualifies, such Indebtedness shall be deemed to have been incurred when such Non-Recourse Indebtedness becomes Indebtedness. SECTION 4.13. Limitation on Sale and Lease-Back Transactions. The Company will not, and will not permit any Subsidiary to, directly or indirectly, enter into, assume, guarantee or otherwise become liable with respect to any Sale and Lease-Back Transaction unless (i) the proceeds from such Sale and Lease-Back Transaction are at least equal to the Fair Market Value of such Property being transferred and (ii) the Company or such Subsidiary would have been permitted to enter into such transaction under the provisions of Sections 4.03, 4.04 and 4.10. -41- 48 SECTION 4.14. Limitation on Line of Business. None of the Company or any of its Subsidiaries will directly or indirectly engage to any substantial extent in any line or lines of business activity other than a Related Business. SECTION 4.15. Maintenance of Office or Agency. The Company shall maintain in the City of New York, an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the designated corporate trust office of the Trustee, and the Company hereby appoints the Trustee its agent to receive all presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of the City of New York) where the Securities may be presented or surrendered for any or all of such purposes, and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the City of New York, for such purposes. The Company shall give prompt written notice to the Trustee of any such designation and any change in the location of any such other office or agency. SECTION 4.16. Money for the Security Payments to be Held in Trust. If the Company, any Subsidiary of the Company or any of their respective Affiliates shall at any time act as Paying Agent with respect to the Securities, such Paying Agent shall, on or before each due date of the principal of (and premium, if any) or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto money sufficient to pay the principal (and premium, if any) or interest so becoming due until such money shall be paid to such Persons or otherwise disposed of as herein provided, and shall promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents with respect to the Securities, it shall, prior to or on each due date of the principal of (and premium, if any) or interest on any of the Securities, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Paying Agent shall promptly notify the Trustee of the Company's action or failure so to act. SECTION 4.17. Corporate Existence. The Company will, and will cause each of its Subsidiaries to, preserve and keep in full force and effect its corporate existence in accordance with applicable law, except as permitted in Sections 5.01 and 5.02; provided, however, that the Company may terminate the corporate existence of any Subsidiary if, in the good faith judgment of the Board of Directors of the Company, such termination is desirable in the conduct of the business of the Company and its Subsidiaries and is not disadvantageous in any material respect to the Holders of the Securities. SECTION 4.18. Maintenance of Property. The Company shall cause all Property used in the conduct of its business or the business of any of its Subsidiaries to be maintained and kept in good condition, repair and working order (reasonable wear and tear excepted) and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as, in the judgment of the Company, may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided that nothing in this Section 4.18 shall prevent the Company from discontinuing the operation or maintenance of any of such Property if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any of its Subsidiaries and not disadvantageous in any material respect to the Holders of the Securities. SECTION 4.19. Payment of Taxes and Other Claims. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed upon the Company or any of its Subsidiaries or upon the income, profits or property of the Company or any of its Subsidiaries and (b) all material lawful claims for labor, materials and supplies which, if unpaid, -42- 49 might by law become a Lien upon the property of the Company or any of its Subsidiaries; provided that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP or other appropriate provision has been made. SECTION 4.20 Compliance Certificate; Notice of Default or Event of Default. (a) The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate (which shall be signed by officers satisfying the requirements of Section 314 of the Trust Indenture Act) stating whether or not, to the best knowledge of such officers, the Company has complied with all conditions and covenants under this Indenture, and, if the Company shall be in Default, specifying all such Defaults and the nature thereof of which such officer may have knowledge. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants or its successor, the year-end financial statements delivered pursuant to Section 4.02 above shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation reasonably satisfactory to the Trustee) that in making the examination necessary for certification of such financial statements nothing has come to their attention which would lead them to believe that the Company or any of its Subsidiaries has violated the provisions of Section 4.01, 4.03, 4.04, 4.05, 4.07, 4.09 or 4.17 hereof or of Article 5 of this Indenture or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any person for any failure to obtain knowledge of any such violation, and it being further understood that such statement may not be provided to the extent contrary to the then current recommendations of the accountants' governing body. (c) The Company will, so long as any of the Securities are outstanding, deliver to the Trustee, within 5 days of any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default, describing its status with particularity, and what action the Company or applicable Subsidiary is taking or proposes to take with respect thereto. SECTION 4.21. Further Instruments and Acts. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 4.22. Prohibition on Company and Guarantors Becoming Investment Companies. None of the Company or the Guarantors shall become an "investment company" as defined in the Investment Company Act of 1940, as amended. SECTION 4.23. Stay, Extension and Usury Laws. The Company and each of the Guarantors covenant (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit of advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company and each of the Guarantors (to the extent that it may lawfully do so) hereby expressly waive all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. ARTICLE 5 Consolidation, Merger, Conveyance, Lease or Transfer SECTION 5.01. Consolidation, Merger, Conveyance, Lease or Transfer. (a) The Company will not, in any transaction or series of transactions, consolidate with or merge into any other Person (other than a merger of a Subsidiary into the Company in which the Company is the continuing Person), -43- 50 or continue in any new jurisdiction, or sell, convey, assign, transfer, lease or otherwise dispose of all or substantially all of the Property and assets of the Company and the Subsidiaries, taken as a whole, to any Person, unless (i) either (A) the Company shall be the continuing Person or (B) the Person (if other than the Company) formed by such consolidation or into which the Company is merged, or the Person which acquires, by sale, assignment, conveyance, transfer, lease or disposition, all or substantially all of the Property and assets of the Company and the Subsidiaries, taken as a whole (such Person, the "Surviving Entity"), shall be a Person organized and validly existing under the laws of the United States of America, any political subdivision thereof or any state thereof or the District of Columbia, and shall expressly assume, by a supplemental indenture, the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the performance of the Company's covenants and obligations under this Indenture; (ii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Event of Default or Default shall have occurred and be continuing or would result therefrom; (iii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), the Company (or the Surviving Entity if the Company is not continuing) shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transactions; and (iv) immediately after giving effect to any such transaction or series of transactions on a pro forma basis as if such transaction or series of transactions had occurred on the first day of the Determination Period, the Company (or the Surviving Entity if the Company is not continuing) would be permitted to incur $1.00 of additional Indebtedness pursuant to the provisions of the first sentence of Section 4.03. (b) The provision of Section 5.01(a)(iv) above shall not apply to any merger or consolidation into or with, or any such transfer of all or substantially all of the Property and assets of the Company and the Subsidiaries taken as a whole into, the Company or a Wholly Owned Subsidiary. SECTION 5.02. Officers' Certificate and Opinion of Counsel. In connection with any consolidation, merger, continuation, transfer of assets or other transactions contemplated by this provision, the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, continuation, sale, assignment, conveyance or transfer and the supplemental indenture in respect thereto comply with the provisions of this Indenture and that all conditions precedent in this Indenture relating to such transactions have been complied with. SECTION 5.03. Substitution of Surviving Entity. Upon any transaction or series of transactions that are of the type described in, and are effected in accordance with, this Article 5, the Surviving Entity shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture and the Securities with the same effect as if such Surviving Entity had been named as the Company in this Indenture; and when a Surviving Person duly assumes all of the obligations and covenants of the Company pursuant to this Indenture and the Securities, except in the case of a lease, the predecessor Person shall be relieved of all such obligations. If such Surviving Entity shall have succeeded to and been substituted for the Company, such Surviving Entity may cause to be signed, and may issue either in its own name or in the name of the Company prior to such succession any or all of the Securities delivered to the Trustee; and, upon the order of such Surviving Entity, instead of the Company, and subject to all the terms, conditions and limitations in this Indenture prescribed, upon Order the Trustee shall authenticate and shall deliver any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Securities which such Surviving Entity thereafter shall cause -44- 51 to be signed and delivered to the Trustee for that purpose (in each instance with endorsements of Guarantees thereon by the Guarantors). All of the Securities so issued and so endorsed shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued and endorsed in accordance with the terms of this Indenture and the Guarantee as though all of such Securities had been issued and endorsed at the date of the execution hereof. In case of any such consolidation, merger, sale, transfer, conveyance or other disposal, such changes in phraseology and form (but not in substance) may be made in the Securities thereafter to be issued or the Guarantees to be endorsed thereon as may be appropriate. For all purposes of this Indenture and the Securities, Subsidiaries of any Surviving Entity will, upon such transaction or series of transactions, become Subsidiaries or Unrestricted Subsidiaries as provided pursuant to this Indenture and all Indebtedness, and all Liens on Property or assets, of the Surviving Entity and its Subsidiaries immediately prior to such transaction or series of transactions shall be deemed to have been incurred upon such transaction or series of transactions. ARTICLE 6 Defaults and Remedies SECTION 6.01. Events of Default. Whenever used herein, an "Event of Default" means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of interest on any Security pursuant to this Indenture when the same becomes due and payable, and the continuance of such Default for a period of 30 days; (b) default in the payment of principal of (or premium, if any, on) any Security when the same becomes due and payable, whether upon Maturity, upon optional redemption, required repurchase (including pursuant to a Change of Control Offer or an Asset Sale Offer) or otherwise or the failure to make an offer to purchase any such Security as required pursuant to the provisions of the Securities and this Indenture; (c) the Company fails to comply with any of its covenants or agreements contained in Sections 4.03, 4.04, 4.05, 4.07, 4.09, 4.13 and 5.01 of this Indenture; (d) the Company defaults in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty addressed in clause (a), (b) or (c) above) and continuance of such Default or breach for a period of 60 days after written notice thereof has been given to the Company by the Trustee or to the Company and the Trustee by holders of at least 25% of the aggregate principal amount at Stated Maturity of the outstanding Securities; (e) Indebtedness of the Company or any Subsidiary (other than Non-Recourse Indebtedness) is not paid when due within the applicable grace period, if any, or is accelerated by the holders thereof and, in either case, the principal amount of such unpaid or accelerated Indebtedness exceeds $10,000,000; (f) the entry by a court of competent jurisdiction of one or more final judgments against the Company or any Subsidiary in an uninsured or unindemnified aggregate amount in excess of $10,000,000 which is not discharged, waived, appealed, stayed, bonded or satisfied for a period of 60 consecutive days; (g) the entry by a court having jurisdiction in the premises of (i) a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state, or foreign bankruptcy, insolvency, or other similar law or -45- 52 (ii) a decree or order adjudging the Company or any Significant Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Significant Subsidiary under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state or foreign bankruptcy, insolvency, or similar law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Significant Subsidiary or of any substantial part of the Property or assets of the Company or any Significant Subsidiary, or ordering the winding up or liquidation of the affairs of the Company or any Significant Subsidiary, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; (h) (i) the commencement by the Company or any Significant Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state or foreign bankruptcy, insolvency or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent by the Company or any Significant Subsidiary to the entry of a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state, or foreign bankruptcy, insolvency or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against the Company or any Significant Subsidiary; or (iii) the filing by the Company or any Significant Subsidiary of a petition or answer or consent seeking reorganization or relief under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state or foreign bankruptcy, insolvency or other similar law; or (iv) the consent by the Company or any Significant Subsidiary to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or of any substantial part of the Property or assets of the Company or any Significant Subsidiary or of any substantial part of the Property or assets of the Company or any Significant Subsidiary, or the making by the Company or any Significant Subsidiary of an assignment for the benefit of creditors; or (v) the admission by the Company or any Significant Subsidiary in writing of its inability to pay its debts generally as they become due; or (vi) the taking of corporate action by the Company or any Significant Subsidiary in furtherance of any such action; or (i) any Guarantee shall for any reason cease to be, or be asserted by the Company or any Guarantor, as applicable, not to be, in full force and effect (except pursuant to the release of any such Guarantee in accordance with the provisions of this Indenture). SECTION 6.02. Acceleration. If an Event of Default (other than an Event of Default described in clause (g) or (h) of Section 6.01) occurs and shall be continuing, then in each and every case the Trustee or the Holders of not less than 25% of the outstanding aggregate principal amount at Stated Maturity of the Securities may declare the principal amount at Stated Maturity of the Securities to be due and payable immediately by a notice in writing to the Company (and to the Trustee if given by Holders of such Securities), and upon any such declaration the principal amount at Stated Maturity of, premium, if any, and any accrued and unpaid interest on, and any other amounts payable in respect of, the Securities then outstanding will become and be immediately due and payable. If any Event of Default specified in clause (g) or (h) of Section 6.01 occurs, the principal amount at Stated Maturity of, premium, if any, and any accrued and unpaid interest on, and any other amount payable in respect of, the Securities then outstanding shall become immediately due and payable without any declaration or other act on the part of the Trustee or any Holder of such Securities. In the event of a declaration of acceleration because an Event of Default set forth in Section 6.01(e) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to Section 6.01(e) shall be remedied, or cured or waived by the holders of the relevant Indebtedness within 30 days after such event of default; provided that no judgment or decree for the payment of the money due on the Securities has been obtained by the Trustee as provided in this Indenture. After any such acceleration, but before a judgment or decree based on acceleration, the Holders of a majority in aggregate principal amount at Stated Maturity of the Securities at the time outstanding may rescind and annul such acceleration if (a) the Company or any Guarantor has paid or deposited with the Trustee a sum sufficient to pay -46- 53 (i) all money paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursement and advances of the Trustee, its agents and counsel; (ii) all overdue installments of interest on any other amounts due in respect of all Securities; (iii) the principal of (and premium, if any, on) any Securities that have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates prescribed therefor in the Securities and this Indenture; and (iv) to the extent that payment of such interest is lawful, interest upon Defaulted Interest at the rate or rates prescribed therefor in the Securities and this Indenture (except nonpayment of principal, interest or Liquidated Damages that has become due solely because of the acceleration). (b) all Events of Default, other than the nonpayment of principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 6.04; (c) the annulment of such acceleration would not conflict with any judgment or decree of a court of competent jurisdiction; and (d) the Company has delivered an Officers' Certificate to the Trustee to the effect of clauses (b) and (c) of this sentence. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal (and premium, if any) of or interest on, and any other amounts then due in respect of, the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04. Waiver of Past Defaults. Subject to Section 6.07, the Holders of a majority in principal amount at Stated Maturity of the Securities then outstanding by notice to the Trustee may waive an existing Default and its consequences except (i) a Default in the payment of the principal of or interest on, or premium, if any, on a Security or (ii) a Default in respect of a provision that under Section 10.02 cannot be amended without the consent of each Holder affected. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. The Company shall deliver to the Trustee an Officers' Certificate stating that the required percentage of Holders have consented to such waiver and attaching copies of such consents. SECTION 6.05. Control by Majority. The Holders of a majority in principal amount at Stated Maturity of the Securities then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Holders, it being understood that the Trustee shall have no duty to ascertain whether or not such actions or forbearances are unduly prejudiced to such Holders, or would involve the Trustee in personal liability; provided that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. -47- 54 SECTION 6.06. Limitation on Suits. No Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or a trustee, or for any other remedy hereunder, unless: (i) such Holder has previously given to the Trustee written notice of a continuing Event of Default with respect to the Securities; (ii) the Holders of at least 25% in aggregate principal amount at Stated Maturity of the Securities then outstanding have made written request, and such Holder or Holders have offered reasonable indemnity, to the Trustee to institute such proceeding as trustee; and (iii) the Trustee has failed to institute such proceeding, and has not received from the Holders of a majority in aggregate principal amount at Stated Maturity of the Securities then outstanding a direction inconsistent with such request, within 60 days after such notice, request and offer. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on the Securities held by such Holder, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default specified in Section 6.01(a) or (b) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount then due and owing (together with interest on any unpaid interest to the extent lawful) and the amounts provided for in Section 7.07. SECTION 6.09. Trustee May File Proofs of Claim. The Trustee shall be entitled and empowered, without regard to whether the Trustee or any Holder shall have made any demand or performed any other act pursuant to the provisions of this Article and without regard to whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise, by intervention in any proceedings relative to the Company or any Obligor upon the Securities, or to the creditors or Property of the Company, any Guarantor or any other Obligor or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be entitled and empowered in such instances: (a) to file and prove a claim or claims for the whole amount of principal (and premium, if any), interest and any other amounts owing and unpaid in respect of the Securities, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including all amounts owing to the Trustee and each predecessor Trustee pursuant to Section 7.07 hereof) and of the Holders allowed in any judicial proceedings relative to the Company or other obligor upon the Securities, or to the creditors or property of the Company, any Guarantor, or any such other Obligor, (b) unless prohibited by applicable law and regulations, to vote on behalf of the Holders of the Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings, and (c) to collect and receive any moneys or other Property or assets payable or deliverable on any such claims, and to distribute all amounts received with respect to the claims of the Holders and of the Trustee on their behalf; and any trustee, receiver, or liquidator, custodian or other similar official is hereby authorized by each of the Holders to make payments to the Trustee, and, in the event that the Trustee shall consent to the making of payments directly to -48- 55 the Holders, to pay to the Trustee such amounts as shall be sufficient to cover all amounts owing to the Trustee and each predecessor Trustee pursuant to Section 7.07. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar person. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the Holders of the Securities, and it shall not be necessary to make any Holders of the Securities parties to any such proceedings. SECTION 6.10. Priorities. If the Trustee collects any money or property pursuant to this Article 6, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 7.07; SECOND: to Holders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal (premium, if any) and interest, respectively; and THIRD: to the Company or the Guarantors or to such other party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section. At least 15 days before such record date, the Company shall mail to each Holder and the Trustee a notice that states the record date, the payment date and amount to be paid. The Trustee may mail such notice in the name and at the expense of the Company. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in principal amount at Stated Maturity of the Securities. SECTION 6.12. Restoration of Rights and Remedies. If the Trustee or any Holder of Securities has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding has been instituted. SECTION 6.13. Rights and Remedies Cumulative. Except as otherwise provided in Section 2.08 hereof, no right or remedy conferred herein, upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 6.14. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this -49- 56 Article 6 or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. ARTICLE 7 Trustee SECTION 7.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. (b) Except during the continuance of an Event of Default: (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (1) this subsection does not limit the effect of subsection (b) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05, and the Trustee shall be entitled from time to time to request and receive such a direction. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to subsections (a), (b) and (c) of this Section. (e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. -50- 57 (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the provisions of the Trust Indenture Act. SECTION 7.02. Rights of Trustee. (a) Subject to the provisions of Section 7.01(a) hereof, the Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee may consult with counsel, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (f) Prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, Officer's Certificate, or other certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture, note, coupon, security, or other paper or document unless requested in writing to do so by the Holders of not less than a majority in aggregate principal amount of the Securities then outstanding; provided, that if the payment within a reasonable time to the Trustee of the reasonable costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such examination shall be paid by the Company or, if advanced by the Trustee, shall be repaid by the Company upon demand. (g) The Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder. (h) The Trustee shall not be bound to ascertain or inquire as to the performance or observance of any covenants, conditions, or agreements on the part of the Company, except as otherwise set forth herein, but the Trustee may require of the Company full information and advice as to the performance of the covenants, conditions and agreements contained herein and shall be entitled in connection herewith to examine the books, records and premises of the Company. (i) The permissive rights of the Trustee to do things enumerated in this Indenture shall not be construed as a duty. (j) Except for (i) a default under Section 6.01(a) or (b), or (ii) any other event of which the Trustee has "actual knowledge" and which event, with the giving of notice or the passage of time or both, would constitute an Event of Default under this Indenture, the Trustee shall not be deemed to have notice of any Default or Event of Default unless specifically notified in writing of such event by the Company or the Holders of not less than 25% in aggregate principal amount at Stated Maturity of the Securities then outstanding; provided that the Trustee shall comply with the "automatic -51- 58 stay" provisions contained in the U.S. bankruptcy laws, if applicable; and as used herein, the term "actual knowledge" means the actual fact or statement of knowing, without any duty to make any investigation with regard thereto. (k) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee satisfactory security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. (l) Subject to Section 9.02 hereof, the Trustee may (but shall not be obligated to), without the consent of the Holders, give any consent, waiver or approval required by the terms hereof. The Trustee shall be entitled to request and conclusively rely on an Opinion of Counsel with respect to whether any consent, waiver, approval, amendment or modification shall have a material adverse effect on the interests or rights of any Holder. SECTION 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue as trustee or resign. Any Paying Agent, Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company in this Indenture or in any document issued in connection with the sale of the Securities or in the Securities other than the Trustee's certificate of authentication. SECTION 7.05. Notice of Defaults. If a Default occurs and is continuing and if it is actually known to the Trustee, the Trustee shall mail to each Holder notice of the Default within 90 days after it occurs but in no event sooner than five days after the Trustee becomes actually aware of the Default. Except in the case of a Default in payment of principal of (or premium, if any) or interest on any Security (including payments pursuant to the mandatory repurchase provisions of such Security, if any), the Trustee may withhold the notice if and so long as the Trustee in good faith determines that withholding the notice is in the interests of Holders. SECTION 7.06. Reports by Trustee to Holders. As promptly as practicable after May 15 beginning with the May 15 following the date of this Indenture, and in any event prior to August 15 in each year, the Trustee shall mail to each Holder a brief report dated as of such date that complies with TIA Section 313(a) if and to the extent required by TIA Section 313(a). The Trustee also shall comply with TIA Sections 313(b) and 313(c). A copy of each report at the time of its mailing to Holders shall be filed with the Commission and each stock exchange (if any) on which the Securities are listed. The Company agrees to notify promptly the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.07. Compensation and Indemnity. The Company shall pay to the Trustee promptly upon request from time to time the compensation for its services as agreed to by the Trustee and the Company. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts and any taxes or other expenses incurred by a trust created pursuant to Article 9 hereof. The Company shall indemnify the Trustee and hold it harmless against any and all loss, liability or reasonable expense (including reasonable attorneys' fees) incurred by it in connection with the acceptance and administration of this trust and the performance of its duties hereunder as Trustee, Registrar, Paying Agent, Securities Custodian and/or otherwise. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee may have -52- 59 separate counsel and the Company shall pay the fees and expenses of such counsel. The Company need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own willful misconduct, negligence or bad faith. The Company need not pay for any settlement made by the Trustee without the Company's consent, such consent not to be unreasonably withheld. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Securities on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest on particular Securities. The Company's payment obligations pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs reasonable expenses after the occurrence of a Default specified in Section 6.01(g) or (h) with respect to the Company, the expenses are intended to constitute expenses of administration under any applicable bankruptcy laws. The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. SECTION 7.08. Replacement of Trustee. The Trustee may resign at any time by so notifying the Company. The Holders of a majority in principal amount at Stated Maturity of the Securities may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. If at any time: (i) the Trustee shall fail to comply with Section 310(b) of the Trust Indenture Act after written request thereof by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, unless the Trustee's duty to resign is stayed in accordance with the provisions of TIA Section 310(b); or (ii) the Trustee shall cease to be eligible under Section 7.10 hereof and shall fail to resign after written request therefor by the Company or by any Holder; or (iii) the Trustee shall become incapable of acting or a decree or order for relief by a court having jurisdiction in the premises shall have been entered in respect of the Trustee in an involuntary case under the United States bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law, or a decree or order by a court having jurisdiction in the premises shall have been entered for the appointment of a receiver, custodian, liquidator, assignee, trustee, sequestrator (or other similar official) of the Trustee or of its Property and assets or affairs, or any public officer shall take charge or control of the Trustee or of its Property and assets or affairs for the purpose of rehabilitation, conservation, winding-up or liquidation; or (iv) the Trustee shall commence a voluntary case under the United States bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law or shall consent to the appointment of or taking possession by a receiver, custodian, liquidator, assignee, trustee, sequestrator (or other similar official) of the Trustee or of its Property and assets or affairs, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or shall take corporate action in furtherance of any such action, then, in any such case, (a) the Company by a Board Resolution may remove the Trustee with respect to the Securities, or (b) subject to Section 6.11 hereof, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of such Holder and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee for the Securities. If the Trustee resigns, is removed by the Company or by the Holders of a majority in principal amount at Stated Maturity of the Securities and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. -53- 60 A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the Lien provided for in Section 7.07. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount at Stated Maturity of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Security who has been a Holder of a Security for at least six months, fails to comply with Section 7.10 hereof, such Holder may, at the expense of the Company, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Any successor trustee shall comply with TIA Section 310(a)(5). Notwithstanding the replacement of the Trustee pursuant to this Section, the Company's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7.10. Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of TIA Section 310(a). The Trustee shall have a combined capital and surplus of at least $100,000,000 (or be a member or subsidiary of a bank holding system with an aggregate combined capital and surplus of at least $100,000,000) as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. The provisions of TIA Section 310 shall apply to the Company as obligor of the Securities. SECTION 7.11. Preferential Collection of Claims Against Company. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 8 Satisfaction and Discharge SECTION 8.01. Satisfaction and Discharge. This Indenture shall upon the request of the Company cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Securities herein expressly provided for, the Company's obligations under Sections 7.07 and 8.04 hereof, and the Company's, the Trustee's and the Paying Agent's obligations under Section 8.03 hereof) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture when -54- 61 (a) either (i) all Securities therefore authenticated and delivered (other than (A) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.08 and (B) Securities for whose payment money has been deposited in trust with the Trust or any Paying Agent and thereafter paid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation; or (ii) all such Securities not theretofore delivered to the Trustee for cancellation (A) have become due and payable; or (B) will become due and payable at their Stated Maturity within one year, or (C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of clause (A), (B) or (C) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose money or U.S. Government Obligations in an amount sufficient (as certified by an independent public accountant designated by the Company) to pay and discharge the entire indebtedness of such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest, if any, to the date of such deposit (in the case of Securities which have become due and payable) or the Stated Maturity or Redemption Date, as the case may be; (b) the Company has paid or caused to be paid all other sums then due and payable hereunder by the Company; (c) no Default or Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit and after giving effect to such deposit; and (d) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the Company's obligations in Sections 2.03, 2.04, 2.06, 2.08, 2.11, 7.07, 7.08, 8.02, 8.03 and 8.04, and the Trustee's and Paying Agent's obligations in Section 8.03 shall survive until the Securities are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.07, 8.03 and 8.04 and the Trustee's and Paying Agent's obligations in Section 8.03 shall survive. In order to have money available on a payment date to pay principal (and premium, if any, on) or interest on the Securities, the U.S. Government Obligations shall be payable as to principal (and premium, if any) or interest at least one Business Day before such payment date in such amounts as will provide the necessary money. U.S. Government Obligations shall not be callable at the issuer's option. SECTION 8.02. Application of Trust. All money deposited with the Trustee pursuant to Section 8.01 shall be held in trust and, at the written direction of the Company, be invested prior to maturity in U.S. Government Obligations, and applied by the Trustee in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for the payment of which money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. SECTION 8.03. Repayment to the Company. -55- 62 The Trustee and the Paying Agent shall promptly pay to the Company upon written request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon written request any money held by them for the payment of principal or interest that remains unclaimed for two years after the date upon which such payment shall have become due; provided that the Company shall have either caused notice of such payment to be mailed to each Securityholder entitled thereto no less than 30 days prior to such repayment or within such period shall have published such notice in a financial newspaper of widespread circulation published in the City of New York, including, without limitation, The Wall Street Journal. After payment to the Company, Holders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. SECTION 8.04. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.01 by reason of any legal proceeding or by reason of any order or judgment of any court of governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's and Guarantors' obligations under this Indenture, the Securities and the Guarantees shall be revived and reinstated as though no deposit has occurred pursuant to Section 8.01 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.02; provided, however, that if the Company or the Guarantors have made any payment of interest on or principal of any Securities because of the reinstatement of their Obligations, the Company or such Guarantors shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. -56- 63 ARTICLE 9 Defeasance SECTION 9.01. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may elect, at its option, at any time, to have Section 9.02 or Section 9.03 hereof applied to the outstanding Securities (in whole and not in part) upon compliance with the conditions set forth below in this Article 9, such election to be evidenced by a Board Resolution delivered to the Trustee. SECTION 9.02. Defeasance and Discharge. Upon the Company's exercise of its option to have this Section 9.02 applied to the outstanding Securities (in whole and not in part), the Company and the Guarantors shall be deemed to have been discharged from their Obligations with respect to such Securities as provided in this Section 9.02 on and after the date on which the conditions set forth in Section 9.04 hereof are satisfied (hereinafter called "Defeasance"). For this purpose, Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such Securities and the Company and the Guarantors shall be deemed to have satisfied all of their other obligations under such Securities, this Indenture and the Guarantees (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), subject to the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of such Securities to receive, solely from the trust fund described in Section 9.04 hereof and as more fully set forth in Section 9.04, payments in respect of the principal of and any premium and interest on such Securities when payments are due, (b) the Company's obligations with respect to such Securities under Sections 2.06, 2.08, 2.10, 4.15 and 4.16 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee under this Indenture, and (d) this Article 9. Subject to compliance with this Article 9, the Company may exercise its option to have this Section 9.02 applied to the outstanding Securities notwithstanding the prior exercise of its option to have Section 9.03 hereof applied to such Securities. SECTION 9.03. Covenant Defeasance. Upon the Company's exercise of its option to have this Section 9.03 applied to the outstanding Securities (in whole and not in part), (i) the Company and the Guarantors shall be released from their respective obligations under Article 5, Sections 4.02 through 4.14, inclusive, Sections 4.18, 4.19 and 4.21 and any covenant added to this Indenture subsequent to the Issue Date pursuant to Section 10.01 hereof, and (ii) the occurrence of any event specified in Section 6.01(c) or 6.01(d) hereof, with respect to any of Section 5.01(c) or (d), Sections 4.03 through 4.14, inclusive, Sections 4.18, 4.19 and 4.21, and any covenant added to this Indenture subsequent to the Issue Date pursuant to Section 10.01 hereof, shall be deemed not to be or result in an Event of Default, in each case with respect to such Securities as provided in this Section 9.03 on and after the date on which the conditions set forth in Section 9.04 hereof are satisfied (hereinafter called "Covenant Defeasance"). For this purpose, Covenant Defeasance means that, with respect to such Securities, the Company and the Guarantors may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such specified Section (to the extent so specified in the case of Section 6.01(c) and 6.01(d) hereof), whether directly or indirectly by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provisions herein or in any other document; but the remainder of this Indenture, the Guarantees and such Securities shall be unaffected thereby. SECTION 9.04. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to the application of Section 9.02 or Section 9.03 hereof to the outstanding Securities: (a) The Company shall irrevocably have deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to -57- 64 the benefits of the Holders of such Securities, (i) money in an amount, or (ii) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day after the due date of any payment, money in an amount, or (iii) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge the principal of (premium, if any on) and any installment of interest on such Securities on the Stated Maturity thereof, in accordance with the terms of this Indenture and such Securities. (b) In the event of an election to have Section 9.02 hereof apply to the outstanding Securities, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this Indenture, there has been a change in the applicable United States federal income tax law, in either case (i) or (ii) to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities will not recognize gain or loss for United States federal income tax purposes as a result of the deposit, Defeasance and discharge to be effected with respect to such Securities and will be subject to United States federal income tax in the same amount, in the same manner and at the same times as would be the case if such deposit, Defeasance and discharge were not to occur. (c) In the event of an election to have Section 9.03 hereof apply to the outstanding Securities, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Securities will not recognize gain or loss for United States federal income tax purposes as a result of the deposit and Covenant Defeasance to be effected with respect to such Securities and will be subject to United States federal income tax in the same amount, in the same manner and at the same times as would be the case if such deposit, Covenant Defeasance and discharge were not to occur. (d) No Default or Event of Default with respect to the outstanding Securities shall have occurred and be continuing at the time of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) after giving effect thereto or and no Default or Event of Default under Section 6.01(g) or 6.01(h) shall have occurred at any time on or prior to the 91st day after the date of such deposit and be continuing on such 91st day (it being understood that this condition shall not be deemed satisfied until after such 91st day). (e) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming for the purpose of this clause (e) that all Securities are in default within the meaning of such Act). (f) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company or the Guarantor is a party or by which it is bound. (g) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act of 1940, as amended, unless such trust shall be registered under such act or exempt from registration thereunder. (h) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with. SECTION 9.05. Deposited Money and U.S. Government Obligations to be Held in Trust; Miscellaneous Provisions. Subject to Section 9.06 hereof, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to Section 9.04 hereof in respect of the outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any such Paying Agent as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal and any premium and interest, but money so held in trust need not be segregated upon other funds except to the extent required by law. The Company shall pay and indemnity the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant -58- 65 to Section 9.04 hereof or the principal and interest received in respect thereof other than such tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 9.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of outstanding Securities. Anything in this Article 9 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Order any money or U.S. Government Obligations held by it as provided in Section 9.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof that would then be required to be deposited to effect the Defeasance or Covenant Defeasance, as the case may be, with respect to the outstanding Securities. SECTION 9.06. Repayment to Company. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest, if any, on any Security and remaining unclaimed for two years after such principal, premium, if any, or interest, if any, have become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Company as trustee thereof, shall thereupon cease; provided that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 9.07. Reinstatement. If the Trustee or Paying Agent is unable to apply any money in accordance with this Article 9 with respect to any Securities by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations under this Indenture, the Guarantees and such Securities from which the Company or the Guarantors have been discharged or released pursuant to Section 9.02 or 9.03 hereof shall be revived and reinstated as though no deposit had occurred pursuant to this Article 9 with respect to such Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to Section 9.05 hereof with respect to such Securities in accordance with this Article 9; provided that if the Company or any Guarantor makes any payment of principal of, premium, if any, or interest on any such Security following such reinstatement of its obligations, the Company or such Guarantor, as the case may be, shall be subrogated to the Holders of such Securities to receive such payment from the money so held in trust. ARTICLE 10 Amendments SECTION 10.01. Without Consent of Holders. (a) The Company, the Guarantors and the Trustee may at any time and from time to time, without notice to or consent of any Holder, enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (i) to evidence the succession of another Person to the Company and the Guarantors and the assumption by such successor of the covenants and Obligations of the Company under this Indenture and contained in the Securities and the Guarantors contained in this Indenture and the Guarantees; (ii) to add to the covenants of the Company, for the benefit of the Holders, or to surrender any right or power conferred upon the Company or the Guarantors by this Indenture; (iii) to add any additional Events of Default; -59- 66 (iv) to provide for uncertificated Securities in addition to or in place of certificated Securities; (v) to evidence and provide for the acceptance of appointment under this Indenture by the successor Trustee; (vi) to secure the Securities and/or the Guarantees; (vii) to cure any ambiguity, to correct or supplement any provision in this Indenture which may be inconsistent with any other provision therein or to add any other provisions with respect to matters or questions arising under the Indenture, provided that such actions will not adversely affect the interests of the Holders in any material respect; or (viii) to add or release any Guarantor pursuant to the terms of this Indenture. SECTION 10.02. With Consent of Holders. With the consent of the Holders of at least a majority of the principal amount at Stated Maturity of the outstanding Securities (including consents obtained in connection with a tender offer or an exchange offer for the Securities), by Act delivered to the Company, the Guarantors and the Trustee, the Company, the Guarantors and the Trustee may enter into one or more indentures supplemental hereto for the purpose of adding any provisions to or changing or eliminating any of the provisions of this Indenture or modifying the rights of the Holders of the Securities, provided that no such supplemental indenture, without the consent of the holder of each outstanding security affected thereby, will: (a) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof (or any premium, if any), or the interest thereon, that would be due and payable upon Maturity thereof, or change the place of payment where, or in the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Maturity thereof; or (b) reduce the percentage in principal amount of the outstanding Securities, the consent of whose Holders is required for any such supplemental indenture or required for any waiver of compliance with the provisions of this Indenture; or (c) modify any of the provisions of Section 6.04 hereof, except to increase the percentage set forth therein or to provide that certain other provisions of this Indenture cannot be amended or waived without the consent of the Holder of each outstanding Security affected thereby; or (d) subordinate in right of payment, or otherwise subordinate, the Securities or the Guarantees to any other Indebtedness; or (e) modify any provision of this Indenture relating to the obligations of the Company to make offers to purchase Securities upon a Change of Control or from the proceeds of an Asset Sale; or (f) modify any of the provisions of this Section 10.02 except to increase any percentage set forth herein or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holders of each outstanding Security affected thereby; or (g) amend, supplement or otherwise modify the provisions of the Indenture relating to the Guarantees. It shall not be necessary for any Act of Holders under this Section 10.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 10.03. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article 10, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall -60- 67 form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. After a Supplemental Indenture becomes effective, the Company shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 10.04. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities shall comply with the Trust Indenture Act as then in effect. SECTION 10.05. Revocation and Effect of Consents and Waivers. (a) A consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. After an amendment or waiver becomes effective, it shall bind every Holder. An amendment or waiver becomes effective upon the execution of a supplemental indenture containing such amendment or waiver by the Trustee. (b) The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding subsection, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date. SECTION 10.06. Notation on or Exchange of Securities. If an amendment changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment. SECTION 10.07. Trustee To Execute Supplemental Indentures. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Securities as aforesaid, and upon receipt by a Responsible Officer of the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture affects the Trustee's own rights, duties, liabilities or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. In executing any supplemental indenture, the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.01 hereof) shall be fully protected in relying upon, an Officers' Certificate (which need only cover the matters set forth in clause (a) below) and an Opinion of Counsel provided by the Company stating that: (a) such supplemental indenture is authorized or permitted by this Indenture and that all conditions precedent to the execution, delivery and performance of such supplemental indenture have been satisfied; (b) the Company and the Guarantors have all necessary corporate power and authority to execute and deliver the supplemental indenture and that the execution, delivery and performance of such supplemental indenture has been duly authorized by all necessary corporate action of the Company and the Guarantors; (c) the execution, delivery and performance of the supplemental indenture do not conflict with, or result in the breach of, or constitute a default under, any of the terms, conditions or provisions of (i) this Indenture, (ii) the -61- 68 charter documents and by-laws of the Company or any Guarantor, or (iii) any material agreement or instrument to which the Company or any Guarantor is subject and of which such counsel is aware; (d) to the knowledge of legal counsel writing such Opinion of Counsel, the execution, delivery and performance of the supplemental indenture do not conflict with, or result in the breach of any of the terms, conditions or provisions of (i) any law or regulation applicable to the Company or any Guarantor, or (ii) any material order, writ, injunction or decree of any court or governmental instrumentality applicable to the Company or any Guarantor; (e) such supplemental indenture has been duly and validly executed and delivered by the Company and the Guarantors, and the Indenture together with such supplemental indenture constitutes a legal, valid and binding obligations of the Company and the Guarantors enforceable against the Company and the Guarantors, as applicable, in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally and general equitable principles; and (f) the Indenture together with such amendment or supplement complies with the Trust Indenture Act. SECTION 10.08. Payment for Consent. Neither the Company nor any Affiliate of the Company shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Securities unless such consideration is offered to be paid to all Holders that so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. ARTICLE 11 Guarantees SECTION 11.01. Guarantees. (a) For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, subject to Section 11.07, each of the Guarantors, together with each Subsidiary of the Company which in accordance with Section 11.08 is required in the future to guarantee the Obligations of the Company and the Guarantors under the Securities, the Guarantees and this Indenture upon execution of a supplemental indenture, hereby jointly and severally and irrevocably and unconditionally guarantees to the Trustee and to each Holder of a Security authenticated and delivered by the Trustee irrespective of the validity or enforceability of this Indenture or the Securities or the Obligations of the Company and the Guarantors under this Indenture, that: (i) the principal of, premium, if any, and any interest, on the Securities (including, without limitation, any interest that accrues after the filing of a proceeding of the type described in Sections 6.01(g) and (h)) and any reasonable fees, expenses and other amounts owing under this Indenture will be duly and punctually paid in full when due, whether at Stated Maturity, by acceleration, call for redemption, upon a Change of Control Offer, Asset Sale Offer, purchase or otherwise, and interest on the overdue principal and (to the extent permitted by law) interest, if any, on the Securities and any other amounts due in respect of the Securities, and all other Obligations of the Company and the Guarantors to the Holders of the Securities under this Indenture and the Securities, whether now or hereafter existing, will be promptly paid in full or performed, all strictly in accordance with the terms hereof, and of the Securities; and (ii) in case of any extension of time of payment or renewal of any Securities or any of such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration, call for redemption, upon Change of Control Offer, Asset Sale Offer, purchase or otherwise. If payment is not made when due of any amount so guaranteed for whatever reason, each Guarantor shall be jointly and severally obligated to pay the same individually whether or not such failure to pay has become an Event of Default which could cause acceleration pursuant to Section 6.02. Each Guarantor agrees that this is a guarantee of payment and not a guarantee of collection. An Event of Default under this Indenture or the Securities shall constitute an Event of Default under this Guarantee, and shall entitle the Holders to accelerate the Obligations of each Guarantor hereunder in the same manner and to the same extent as the Obligations of the Company. This Guarantee is intended to be a senior unsecured obligation of each respective Guarantor and is intended to be superior to or pari passu in right of payment with all indebtedness and liabilities of such Guarantor that are not -62- 69 subordinated by their terms to other Indebtedness of such Guarantor, and senior in right of payment to all Subordinated Indebtedness of such Guarantor. Each Guarantor's Obligations are independent of any Obligation of the Company or any other Guarantor. (b) Each Guarantor waives presentation to, demand of, payment from and protest to the Company of any of the Obligations under this Indenture or the Securities and also waives notice of protest for nonpayment. To the extent permitted by law, each Guarantor waives notice of any default under the Securities or the Obligations. The Obligations of each Guarantor hereunder shall not be affected by (a) the failure of any Holder or the Trustee to assert any claim or demand or to enforce any right or remedy against the Company or any other Person under this Indenture, the Securities or any other agreement or otherwise; (b) any extension or renewal of any thereof; (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Indenture, the Securities or any other agreement; (d) the release of any security held by any Holder or the Trustee for the Obligations or any of them; (e) the failure of any Holder or the Trustee to exercise any right or remedy against any other guarantor of the Obligations; or (f) any change in the ownership of such Guarantor. (c) To the extent permitted by law, the Obligations of each Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, recoupment or termination whatsoever or by reason of the invalidity, illegality or unenforceability of the Obligations of the Company or otherwise. Without limiting the generality of the foregoing, to the extent permitted by law, the Obligations of each Guarantor herein shall not be discharged or impaired or otherwise affected by the failure of any Holder or the Trustee to assert any claim or demand or to enforce any remedy under this Indenture, the Securities or any other agreement, by any waiver or modification of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations of the Company, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of such Guarantor or would otherwise operate as a discharge of such Guarantor as a matter of law or equity. (d) Each Guarantor further agrees that its Guarantee herein shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of, premium, if any, or interest on any Obligation of the Company is rescinded or must otherwise be restored by any Holder or the Trustee upon the bankruptcy or reorganization of the Company or otherwise. (e) In furtherance of the foregoing and not in limitation of any other right which any Holder or the Trustee has at law or in equity against any Guarantor by virtue hereof, upon the failure of the Company to pay the principal of, premium, if any, or interest on any Obligation when and as the same shall become due, whether at maturity, by acceleration, by redemption or otherwise, or to perform or comply with any other Obligation, each Guarantor hereby promises to and will, upon receipt of written demand by the Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal to the sum of (i) the unpaid amount of such Obligations, (ii) accrued and unpaid interest on such Obligations (but only to the extent not prohibited by law) and (iii) all other monetary Obligations of the Company to the Holders and the Trustee. (f) Until such time as the Securities and the other Obligations of the Company guaranteed hereby have been satisfied in full, each Guarantor hereby irrevocably waives the right to exercise any claim or other rights that it may now or hereafter acquire against the Company or any other Guarantor that arise from the existence, payment, performance or enforcement of such Guarantor's Obligations under this Guarantee, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of the Holders or the Trustee against the Company or any other Guarantor or any security, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from the Company or any other Guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right. If any amount shall be paid to such Guarantor in violation of the preceding sentence at any time prior to the later of the payments in full of the Securities and all other amounts payable under this Indenture, this Guarantee and the Stated Maturity of the Securities, such amount shall be held in trust for the benefit of the Holders and the Trustee and shall forthwith be paid to the Trustee to be credited and applied to the Securities and all other amounts payable under this Guarantee, whether -63- 70 matured or unmatured, in accordance with the terms of this Indenture, or to be held as security for any Obligations or other amounts payable under this Guarantee thereafter arising. (g) Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that the waiver set forth in this Section 11.01 is knowingly made in contemplation of such benefits. Each Guarantor further agrees that, as between it, on the one hand, and the Holders and the Trustee, on the other hand, (x) subject to this Article 11, the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any acceleration of such Obligations guaranteed hereby as provided in Article 6, such Obligations (whether or not due and payable) shall further then become due and payable by the Guarantors for the purposes of this Guarantee. (h) A Guarantor that makes a distribution or payment under a Guarantee shall be entitled to contribution from each other Guarantor in a pro rata amount based on the Adjusted Net Assets of each such other Guarantor for all payments, damages and expenses incurred by that Guarantor in discharging the Company's obligations with respect to the Securities and this Indenture or any other Guarantor with respect to its Guarantee, so long as the exercise of such right does not impair the rights of the Holders of the Securities under the Guarantees. (i) Each Guarantor also agrees to pay any and all reasonable costs and expenses (including reasonable attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights under this Section. SECTION 11.02. Limitation on Liability. Any term or provision of this Indenture to the contrary notwithstanding, the maximum aggregate amount of the Obligations guaranteed hereunder by any Guarantor shall not exceed the maximum amount that can be hereby guaranteed without rendering this Indenture, as it relates to such Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. To effectuate the foregoing intention, the Obligations of each Guarantor shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the Obligations of such other Guarantor under its Guarantee or pursuant to its contribution Obligations hereunder, result in the obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal, state or foreign law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in a pro rata amount based on the Adjusted Net Assets of each Guarantor. SECTION 11.03. Execution and Delivery of Guarantees. To further evidence its Guarantee set forth in Section 11.01 hereof, each Guarantor hereby agrees that notation of such Guarantee shall be endorsed on each Security authenticated and delivered by the Trustee and executed by either manual or facsimile signature of an authorized officer of such Guarantor. Each Guarantor hereby agrees that its Guarantee set forth in Section 11.01 hereof shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Guarantee. If an officer of a Guarantor whose signature is on this Indenture or a Security no longer holds that office at the time the Trustee authenticates such Security or at any time thereafter, such Guarantor's Guarantee of such Security shall be valid nevertheless. The delivery of any Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Guarantee set forth in this Indenture on behalf of the Guarantor. SECTION 11.04. When a Guarantor May Merge, etc. No Guarantor shall consolidate with or merge with or into (whether or not such Guarantor is the surviving person) another corporation, Person or entity whether or not affiliated with such Guarantor (but excluding any consolidation, amalgamation or merger if the surviving corporation is no longer a Subsidiary) unless (i) subject to the provisions of Section 11.07 hereof, the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the Obligations of such Guarantor pursuant to a supplemental indenture in form reasonably satisfactory to the Trustee under the Securities and this Indenture and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. In connection with any such consolidation or merger, the Trustee shall be entitled to receive an Officers' Certificate and an Opinion of Counsel stating that such consolidation or merger is permitted by this Section 11.04. -64- 71 SECTION 11.05. No Waiver. Neither a failure nor a delay on the part of either the Trustee or the Holders in exercising any right, power or privilege under this Article 11 shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Trustee and the Holders herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which either may have under this Article 11 at law, in equity, by statute or otherwise. SECTION 11.06. Modification. No modification, amendment or waiver of any provision of this Article 11, nor the consent to any departure by any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Trustee, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 11.07. Release of Guarantor. Upon the sale or other disposition (by merger or otherwise) of a Guarantor (or all or substantially all of its Property and assets) to a Person other than the Company or another Guarantor and pursuant to a transaction that is otherwise in compliance with this Indenture (including, without limitation, Section 4.07 hereof), such Guarantor (unless it otherwise remains a Subsidiary) shall be deemed released from its Guarantee and the related Obligations set forth in the Indenture; provided that any such termination shall occur only to the extent that all Obligations of such Guarantor under all of its guarantees of and under all of its pledges of assets or other security interests which secure, other Indebtedness of the Company shall also terminate or be released upon such sale or other disposition. Each Guarantor that is designated as an Unrestricted Subsidiary in accordance with this Indenture shall be released from its Guarantee and the related Obligations set forth in the Indenture so long as it remains an Unrestricted Subsidiary. The Trustee shall deliver an appropriate instrument or instruments evidencing such release upon receipt of a request of the Company accompanied by an Officers' Certificate and Opinion of Counsel certifying as to the compliance with this Section 11.07 and the other applicable provisions of this Indenture. SECTION 11.08. Execution of Supplemental Indenture for Future Guarantors. Any Wholly Owned Subsidiary that is a domestic Subsidiary or any other Subsidiary that is not a Guarantor that guarantees any Indebtedness of the Company is required to become a Guarantor and the Company shall cause each such Subsidiary to promptly execute and deliver to the Trustee a supplemental indenture in the form of Exhibit C hereto pursuant to which such Subsidiary shall become a Guarantor under this Article 11 and shall guarantee the Obligations of the Company under the Securities and this Indenture. Concurrently with the execution and delivery of such supplemental indenture, the Company shall deliver to the Trustee an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized, executed and delivered by such Subsidiary and that, subject to the application of bankruptcy, insolvency, moratorium, fraudulent conveyance or transfer and other similar laws relating to creditors' rights generally and to the principles of equity, whether considered in a proceeding at law or in equity, the Guarantee of such Guarantor is a legal, valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, and as to any such other matters as the Trustee may reasonably request. ARTICLE 12 Miscellaneous SECTION 12.01. Compliance Certificates and Opinions. Upon any application or request by the Company or the Guarantors to the Trustee to take any action under any provision of this Indenture, the Company and the Guarantors, as applicable, shall furnish to the Trustee, to the extent required by the TIA or this Indenture, (i) an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant, compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and (ii) an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically -65- 72 required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion and to the best knowledge and belief after due investigation of each such individual, such condition or covenant has been complied with. SECTION 12.02. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company or any Guarantor may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, and may state that it is so based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company or such Guarantor stating that the information with respect to such factual matters is in the possession of the Company or such Guarantor, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate of opinion or representations with respect to such matters are erroneous. Any certificate, statement or opinion of an officer of the Company or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Company unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 12.03. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by a specified percentage of Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such specified percentage of Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are received by the Trustee and, where it is hereby expressly required, to the Company and -66- 73 the Guarantors. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Sections 7.01 and 7.02) conclusive in favor of the Trustee, the Company and the Guarantors, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient, including the execution of such instrument or writing without more. (c) The ownership, principal amount and serial numbers of Securities held by any Person, and the date of holding the same, shall be proved by the Security Register. (d) If the Company shall solicit from the Holders of Securities any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (e) Except to the extent otherwise expressly provided in this Indenture, any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. (f) Without limiting the foregoing, a Holder entitled hereunder to give or take any action with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any different part of such principal amount. SECTION 12.04. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by Sections 310 to 318, inclusive, of the Trust Indenture Act, the required provision shall control. If any provision of this Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be. SECTION 12.05. Notices. Any notice or communication shall be in writing and delivered in person, or sent by registered or certified mail, by air courier guaranteeing overnight delivery or by fax (promptly confirmed by telephone) and addressed as follows: -67- 74 if to the Company or any Guarantor: Bayard Drilling Technologies, Inc. 4005 Northwest Expressway Suite 550 E Oklahoma City, Oklahoma 73116 Attn: Chief Financial Officer Phone: (405) 840-9550 Fax: (405) 840-9553 if to the Trustee: U. S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201-2936 Attention: Corporate Trust Department Phone: (214) 754-1254 Fax: (214) 754-1303 with a copy to: Arter & Hadden LLP 1717 Main Street, Suite 4100 Dallas, Texas 75201 Attention: Joseph A. Hoffmann, Esq. The Company, the Guarantors or the Trustee by notice to the others may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Holder shall be sent to the Holder by first class mail, postage prepaid, at the Holder's address as it appears in the Security Register and shall be given if so sent within the time prescribed. Failure to mail a notice or communications to a Holder or any default in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed or faxed to the Company, the Guarantors, the Trustee or a Holder in the manner provided above, it is duly given, whether or not the addressee receives it but shall not be effective unless in the case of the Company, the Guarantors or the Trustee actually received. In case by reason of the suspension of regular mail service or by reason or any other cause it shall be impracticable to give notice by mail to Holders, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 12.06. Communication by Holders with Other Holders. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Guarantors, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 12.07. Rules by Trustee, Paying Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Holders. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 12.08. Payments on Business Days. If a payment hereunder is scheduled to be made on a date that is not a Business Day, payment shall be made on the next succeeding day that is a Business Day, and no interest shall accrue with respect to that payment during the intervening period. If a regular Record Date is not a Business Day, such Record Date shall not be affected. SECTION 12.09. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. -68- 75 SECTION 12.10. No Recourse Against Others. No director, officer, employee, incorporator or stockholder of the Company, the Subsidiaries or the Unrestricted Subsidiaries, as such, shall have any liability for any obligations of the Company under the Securities, the Guarantees or this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Securities by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. SECTION 12.11. Submission to Jurisdiction; Appointment of Agent for Service of Process; Waiver Immunities. (a) The Company and each Guarantor hereby irrevocably, to the fullest extent it may do so under applicable law, submits to the jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, the City of New York and to the courts of its own corporate domicile with respect to all actions brought against it as a defendant in respect of any suit, action or proceeding or arbitral award arising out or relating to this Indenture, the Securities or any transaction contemplated hereby or thereby (a "Proceeding"), and irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts, to the fullest extent it may do so under applicable law. The Company and each Guarantor irrevocably waives, to the fullest extent it may do so under applicable law, trial by jury and any objection which it may now or hereafter have to the laying of the venue of any such Proceeding brought in any such court and any claim that any such Proceeding brought in any such court has been brought in an inconvenient forum. The Company and each Guarantor acknowledges that it has, by separate written instrument, irrevocably appointed CT Corporation System (the "Process Agent"), with an office at 1633 Broadway, New York, New York 10019, as its authorized agent to receive on behalf of the Company and each Guarantor and its property service of copies of the summons and compliant and any other process which may be served in any proceeding, and that the Process Agent has accepted such appointment. If for any reason such Process Agent shall cease to be such agent for service of process, the Company and each Guarantor shall forthwith appoint a new agent of recognized standing for service of process in the State of New York, United States and deliver to the Trustee a copy of the new agent's acceptance of that appointment within 30 days. Nothing herein shall affect the right of the Trustee, any Paying Agent or any Holder to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company or the Guarantors in any other court of competent jurisdiction. (b) Service may be made by delivering by hand a copy of such process to the Company or the Guarantors, as the case may be, in care of the Process Agent at the address specified above. The Company and the Guarantors hereby irrevocably authorize and direct the Process Agent to accept such service on their behalf. Failure of the Process Agent to give notice to the Company or the Guarantors or failure of the Company or the Guarantors to receive notice of such service of process shall not affect in any way the validity of such service on the Process Agent or the Company or the Guarantors. As an alternative method of service, the Company and the Guarantors also irrevocably consent to the service of any and all process in any such proceeding by the delivery by hand of copies of such process to the Company or the Guarantors, as the case may be, at the applicable address specified in Section 11.05 hereof or at the address most recently furnished in writing by the Company or the Guarantors to the Trustee. The Company and the Guarantors covenant and agree that they shall take any and all reasonable action, including the execution and filing of any and all documents, that may be necessary to continue the designation of the Process Agent specified above in full force and effect during the term of the Securities, and to cause the Process Agent to continue to act as such. (c) The Company and the Guarantors irrevocably agree that, in any Proceedings anywhere (whether for an injunction, specific performance or otherwise), no immunity (to the extent that it may at any time exist, whether on the grounds of sovereignty or otherwise) from such Proceedings, from attachment (whether in aid of execution, before judgment or otherwise) of their assets or from execution of judgment shall be claimed by them or on their behalf or with respect to their assets, except to the extent required by applicable law, any such immunity being irrevocably waived, to the fullest extent permitted by applicable law. The Company and the Guarantors irrevocably agree that, where permitted by applicable law, they and their assets are, and shall be, subject to such Proceedings, attachment or execution in respect of their obligations under this Indenture or the Securities. -69- 76 SECTION 12.12. Successors. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 12.13. Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. This Indenture may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 12.14. Table of Contents; Headings. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. SECTION 12.15. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first above written. COMPANY: BAYARD DRILLING TECHNOLOGIES, INC. By: /s/ DAVID E. GROSE ------------------------------------- Name: DAVID E. GROSE ------------------------------ Title: Vice President and Chief Financial Officer ----------------------------- -70- 77 GUARANTORS: BAYARD DRILLING, L.L.C. By: /s/ DAVID E. GROSE ------------------------------------- Name: DAVID E. GROSE ------------------------------ Title: Vice President and Chief Financial Officer ----------------------------- BAYARD DRILLING, L.P. By: BAYARD DRILLING, L.L.C., its general partner By: /s/ DAVID E. GROSE ------------------------------------- Name: DAVID E. GROSE ------------------------------ Title: Vice President and Chief Financial Officer ----------------------------- BONRAY DRILLING CORPORATION By: /s/ DAVID E. GROSE ------------------------------------- Name: DAVID E. GROSE ------------------------------ Title: Vice President and Chief Financial Officer ----------------------------- TREND DRILLING CO. By: /s/ DAVID E. GROSE ------------------------------------- Name: DAVID E. GROSE ------------------------------ Title: Vice President and Chief Financial Officer ----------------------------- TRUSTEE: U. S. TRUST COMPANY OF TEXAS, N.A. By: /s/ JOHN C. STOHLMANN ------------------------------------- Name: John C. Stohlmann ------------------------------ Title: Vice President ----------------------------- -71- 78 EXHIBIT A [FORM OF FACE OF GLOBAL SECURITY] BAYARD DRILLING TECHNOLOGIES, INC. No._____ 11% SENIOR NOTE DUE 2005, Series A CUSIP No. 072 700 AA5 [THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE REFERRED TO ON THE REVERSE THEREOF UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO BAYARD DRILLING TECHNOLOGIES, INC. (THE "COMPANY") OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS GLOBAL SECURITY IS EXCHANGEABLE FOR SECURITIES IN DEFINITIVE, FULLY REGISTERED FORM, WITHOUT INTEREST COUPONS, IF (A) DTC NOTIFIES THE COMPANY THAT IT IS UNWILLING OR UNABLE TO CONTINUE AS DEPOSITARY FOR THIS GLOBAL SECURITY OR IF AT ANY TIME DTC CEASES TO BE A "CLEARING AGENCY" REGISTERED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND A SUCCESSOR DEPOSITARY IS NOT APPOINTED BY THE COMPANY WITHIN 90 DAYS OF SUCH NOTICE, (B) THE COMPANY EXECUTES AND DELIVERS TO THE TRUSTEE A NOTICE THAT THIS GLOBAL SECURITY SHALL BE TRANSFERABLE, REGISTRABLE AND EXCHANGEABLE, AND SUCH TRANSFER SHALL BE REGISTRABLE, OR (C) AN EVENT OF DEFAULT (AS HEREINAFTER DEFINED) HAS OCCURRED AND IS CONTINUING WITH RESPECT TO THE SECURITIES.(1)] [THIS NOTE (OR ITS PREDECESSOR) AND ANY GUARANTEE HEREOF HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER: (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), OR (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, - ------------------ (1) These four paragraphs should be included only if the Security is issued in global form. A-1 79 (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, IF REQUESTED BY THE COMPANY) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING.(2)] - ---------------- (2) This paragraph should be removed upon the exchange of the Series A Notes for Series B Notes in the Exchange Offer or upon the registration of the Series A Notes pursuant to the terms of the Registration Rights Agreement. A-2 80 BAYARD DRILLING TECHNOLOGIES, INC., a Delaware corporation, hereby promises to pay to CEDE & CO., or registered assigns, [the principal sum of One-Hundred Million United States Dollars, or such greater or lesser amount as may from time to time be endorsed on Schedule A hereto],(3) on June 30, 2005. Interest Payment Dates: June 30 and December 31, commencing December 31, 1998. Record Dates: June 15 and December 15. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth in this place. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purposes. - --------------- (3) This phrase should be included only if the Security is issued in global form. A-3 81 IN WITNESS WHEREOF, BAYARD DRILLING TECHNOLOGIES, INC. has caused this instrument to be duly executed under its corporate seal. Dated: June 26, 1998 BAYARD DRILLING TECHNOLOGIES, INC. By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- TRUSTEE'S CERTIFICATE OF AUTHENTICATION U. S. TRUST COMPANY OF TEXAS, N.A. as Trustee, certifies that this is one of the Securities referred to in the Indenture. By: ------------------------------------- Authorized Signatory A-4 82 [FORM OF REVERSE SIDE OF SECURITY] 11% Senior Note Due 2005 1. Interest Bayard Drilling Technologies, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on June 30 and December 31 of each year (an "Interest Payment Date") commencing on December 31, 1998, until the principal amount is paid or made available for payment. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Issue Date. The Company will also pay additional interest under the circumstances and in the amounts as described in the Registration Rights Agreement. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment The Company will pay interest on the Securities (except Defaulted Interest) to the Persons who are registered Holders of Securities at the close of business on the June 15 or December 15 immediately preceding the Interest Payment Date even if Securities are canceled after the Record Date and on or before the Interest Payment Date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Securities represented by a Global Security (including principal, premium, if any, and interest) will be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company, but, at the option of the Company, interest may be paid by check mailed to the registered Holders at their registered addresses. 3. Paying Agent and Registrar Initially, U.S. Trust Company of Texas, N.A., a national banking association (the "Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice. In certain situations, the Company or any of its Subsidiaries may act as Paying Agent, Registrar or co- registrar. 4. Indenture The Company issued the Securities under an Indenture dated as of June 26, 1998 (as such may be amended from time to time, the "Indenture"), among the Company, the corporations acting as guarantors and named therein (the "Guarantors") and the U.S. Trust Company of Texas, N.A., as trustee (the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture reference is hereby made for a statement of the respective rights, duties and immunities thereunder of the Company, the Guarantors, the Trustee and each Holder of the Securities and the terms upon which the Securities are, and are to be, authenticated and delivered. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. The Securities are limited to $100,000,000 aggregate principal amount at any one time outstanding (subject to Section 2.08 of the Indenture). This Security is one of the Securities referred to in the Indenture. The Indenture imposes certain limitations on the incurrence of additional Indebtedness by the Company and its Subsidiaries; the payment of dividends on, and redemption of, Capital Stock of the Company and its Subsidiaries and the redemption of Subordinated Indebtedness of the Company and its Subsidiaries; Investments; sales of assets and Subsidiary Capital Stock; certain A-5 83 transactions with Affiliates of the Company and the right of the Company and its Subsidiaries to engage in unrelated lines of business. 5. Optional Redemption Except as provided in the next paragraph, the Securities are not redeemable prior to June 30, 2003. At any time on or after June 30, 2003, the Securities are redeemable at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' notice, at the following Redemption Prices (expressed as percentages of principal amount at Stated Maturity), if redeemed during the 12 months beginning June 30 of the years indicated below, plus accrued and unpaid interest (if any) thereon to the Redemption Date:
Redemption Year Price ---- ---------- 2003 105.5000% 2004 and thereafter 100.0000%
Notwithstanding the foregoing, at any time during the first 36 months after the Issue Date, the Company may redeem up to 35% of the aggregate principal amount of the Securities originally outstanding at a redemption price of 111% of the principal amount thereof, plus accrued and unpaid interest (if any) thereon to the Redemption Date, with the net proceeds of one or more Qualified Equity Offerings of the Company; provided that at least $65,000,000 aggregate principal amount of the Securities shall remain outstanding immediately after the occurrence of any such redemption; and provided, further, that such redemption shall occur not later than 90 days after the date of the closing of any such Qualified Equity Offering. The redemption shall be made in accordance with procedures set forth in the Indenture. 6. Notice of Redemption Notice of redemption will be mailed by first-class mail, postage prepaid, at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at his address as it appears in the Security Register. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If less than all of the Securities are to be redeemed at any time, the Securities to be redeemed will be chosen by the Trustee in accordance with the Indenture. If any Security is redeemed subsequent to a Record Date with respect to any Interest Payment Date specified above and on or prior to such Interest Payment Date, then any accrued interest will be paid on such Interest Payment Date to the Holder of the Security at the close of business on such Record Date. If money sufficient to pay the Redemption Price of and accrued interest on all Securities (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent on or before the Redemption Date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Securities (or such portions thereof) called for redemption. 7. Change of Control Upon the occurrence of a Change of Control, each Holder of Securities shall have the right to require the Company to purchase such Holder's Securities, in whole or in part in a principal amount at Stated Maturity that is an integral multiple of $1,000, pursuant to a Change of Control Offer, at a purchase price in cash equal to 101% of the principal amount thereof on any Change of Control Payment Date, plus accrued and unpaid interest, if any, to the Change of Control Payment Date. Within 30 calendar days following any Change of Control, the Company shall send, or cause to be sent, by first class mail, postage prepaid, a notice regarding the Change of Control Offer to each Holder of Securities. The Holder of this Security may elect to have this Security or a portion hereof in an authorized denomination purchased by completing the form entitled "Option of Holder to Require Purchase" appearing below and tendering this Security pursuant to the Change of Control Offer. Unless the Company defaults in the payment of the Change of Control Purchase Price with respect thereto, all Securities or portions thereof accepted for payment pursuant to the Change of Control Offer will cease to accrue interest from and after the Change of Control Payment Date. A-6 84 8. Repurchase at the Option of Holders upon Asset Sale. Subject to the limitations set forth in the next following paragraph, if at any time the Company or any Subsidiary engages in any Asset Sale, as a result of which the aggregate amount of Excess Proceeds exceeds $10,000,000, the Company shall, within 30 calendar days thereafter make an offer to purchase from all Holders of Securities and other Indebtedness that ranks by its terms pari passu in right of payment with the Securities and the terms of which contain substantially similar requirements with respect to the application of net proceeds from an Asset Sale Offer, on a pro rata basis, the maximum principal amount of the Securities that is an integral multiple of $1,000 that may be purchased out of the Excess Proceeds and the maximum principal amount of such other pari passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount at Stated Maturity thereof, plus accrued and unpaid interest thereon, if any, to the Asset Sale Offer Purchase Date. Upon completion of an Asset Sale Offer (including payment of the Asset Sale Offer Purchase Price for accepted Securities), any surplus Excess Proceeds that were the subject of such offer shall cease to be Excess proceeds, and the Company may then use such amounts for general corporate purposes. Within 30 calendar years of the date the amount of Excess Proceeds exceeds $10,000,000, the Company shall send, or cause to be sent, by first class mail, postage prepaid, a notice regarding the Asset Sale Offer to each Holder of Securities. The Holder of this Security may elect to have this Security or a portion hereof in an authorized denomination purchased by completing the form entitled "Option of Holder to Require Purchase" appearing below and tendering this Security pursuant to the Asset Sale Offer. Unless the Company defaults in the payment of the Asset Sale Offer Purchase Price with respect thereto, all Securities or portions thereof selected for payment pursuant to the Asset Sale Offer will cease to accrue interest from and after the Asset Sale Offer Purchase Date. 9. The Global Security. So long as this Global Security is registered in the name of the Depositary or its nominee, members of, or participants in, the Depositary ("Agent Members") shall have no rights under the Indenture with respect to this Global Security held on their behalf by the Depositary or the Trustee as its custodian, and the Depositary may be treated by the Company, the Guarantors, the Trustee and any agent of the Company, the Guarantors or the Trustee as the absolute owner of this Global Security for all purposes. Notwithstanding the foregoing, nothing herein shall (i) prevent the Company, the Guarantors, the Trustee or any agent of the Company, the Guarantors or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or (ii) impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of Securities. The Holder of this Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests in this Global Security through Agent Members, to take any action which a Holder of Securities is entitled to take under the Indenture or the Securities. Whenever, as a result of an optional redemption of Securities by the Company, a Change of Control Offer, an Asset Sale Offer or an exchange for Certificated Securities, this Global Security is redeemed, repurchased or exchanged or substituted in part, this Global Security shall be surrendered by the Holder thereof to the Trustee who shall cause an adjustment to be made to Schedule A hereof so that the principal amount of this Global Security will be equal to the portion not redeemed, repurchased or exchanged and shall thereafter return this Global Security to such Holder; provided that this Global Security shall be in a principal amount at Stated Maturity of $1,000 or an integral multiple of $1,000. 10. Transfer and Exchange. The Holder of this Global Security shall, by its acceptance of this Global Security, agree that transfers of beneficial interests in this Global Security may be effected only through a book entry system maintained by such Holder (or its agent), and that ownership of a beneficial interest in the Securities represented thereby shall be required to be reflected in book entry form. A-7 85 Transfers of this Global Security shall be limited to transfers in whole, and not in part, to the Depositary, its successors and their respective nominees. Interests of beneficial owners in this Global Security may be transferred in accordance with the rules and procedures of the Depositary (or its successors). This Global Security will be exchanged by the Company for one or more Certificated Securities if (a) the Depositary (i) has notified the Company that it is unwilling or unable to continue as, or ceases to be, a "Clearing Agency" registered under Section 17A of the Exchange Act and (ii) a successor to the Depositary registered as a "Clearing Agency" under Section 17A of the Exchange Act is not appointed by the Company within 90 calendar days or (b) the Depositary is at any time unwilling or unable to continue as Depositary and a successor to the Depositary is not able to be appointed by the Company within 90 calendar days. If an Event of Default occurs and is continuing, the Company shall, at the request of the Holder hereof, exchange all or a part of this Global Security for one or more Certificated Securities; provided that the principal amount at Stated Maturity of each of such Certificated Securities and this Global Security, after such exchange, shall be $1,000 or an integral multiple thereof. Whenever this Global Security is exchanged as a whole for one or more Certificated Securities, it shall be surrendered by the Holder to the Trustee for cancellation. Whenever this Global Security is exchanged in part for one or more Certificated Securities, it shall be surrendered by the Holder to the Trustee and the Trustee shall make the appropriate notations thereon pursuant to Section 2.05 of the Indenture. Interests in this Global Security may not be exchanged for Certificated Securities other than as provided in this paragraph. 11. Persons Deemed Owners The registered Holder of this Security may be treated as the owner of it for all purposes. 12. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 13. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of its Obligations and the Guarantors' Obligations under the Securities, the Guarantees and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal, premium and interest on the Securities to redemption or maturity, as the case may be. 14. Amendment, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in outstanding principal amount at Stated Maturity of the Securities and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in outstanding principal amount at Stated Maturity outstanding of the Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Company, the Guarantors and the Trustee may amend the Indenture or the Securities (a) to evidence the succession of another Person to the Company and the Guarantors and the assumption by such successor of the covenants and Obligations of the Company under the Indenture and contained in the Securities and of the Guarantors contained in the Indenture and the Guarantees, (b) to add to the covenants of the Company, for the benefit of the Holders, or to surrender any right or power conferred upon the Company or the Guarantors by the Indenture, (c) to add any additional Events of Default, (d) to provide for uncertificated Securities in addition to or in place of Certificated Securities, (e) to evidence and provide for the acceptance of appointment under the Indenture by the successor Trustee, (f) to secure the Securities and/or the Guarantees, (g) to cure any ambiguity, to correct or supplement any provision in the Indenture which may be inconsistent with any other provision therein or to add any other provision with respect to matters or questions arising under the Indenture, provided that such actions will not adversely affect the interests of the Holders in any material respect or (h) to add or release any Guarantor pursuant A-8 86 to the terms of the Indenture. Certain provisions of the Securities and the Indenture may not be amended or waived without the consent of each Holder affected thereby. 15. Defaults and Remedies Under the Indenture, Events of Default include in summary form (i) default in the payment of interest on the Securities when due, continued for 30 days; (ii) default in the payment of principal of (or premium, if any, on) the Securities when due; (iii) failure to comply with certain of the covenants in the Indenture, including the Change of Control covenant, the Asset Sale covenant and the Restrictive Payments covenant; (iv) failure to perform any other covenant of the Company or any Guarantor in the Indenture, continued for 60 days after written notice as provided in the Indenture; (v) Indebtedness (other than Non-Recourse Indebtedness) of the Company or any Subsidiary is not paid when due within the applicable grace period, or is accelerated and, in either case, the principal amount of such unpaid Indebtedness exceeds $10,000,000; (vi) one or more final judgments or orders by a court of competent jurisdiction are entered against the Company or any Subsidiary in an uninsured or unindemnified aggregate amount in excess of $10,000,000 and such judgments or orders are not discharged, waived, appealed, stayed, satisfied or bonded for a period of 60 consecutive days; (vii) certain events of bankruptcy, insolvency or reorganization; or (viii) a Guarantee ceases to be in full force and effect (other than in accordance with the terms of the Indenture and such Guarantee) or a Guarantor denies or disaffirms its obligations under its Guarantee. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount at Stated Maturity of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default (except a Default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. The Holders of a majority in principal amount at Stated Maturity of the outstanding Securities, by written notice to the Company and the Trustee, may rescind any declaration of acceleration and its consequences if the rescission would not conflict with any judgment or decree, and if all Events of Default have been cured or waived except nonpayment of principal and interest that has become due solely because of the acceleration. 16. Trustee Dealings with the Company Subject to certain limitations imposed by the Trust Indenture Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 17. No Recourse Against Others No director, officer, employee, incorporator or stockholder of the Company, the Subsidiaries or the Unrestricted Subsidiaries, as such, shall have any liability for any obligations of the Company under the Securities, the Guarantees or this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Securities by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. 18. Governing Law THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 19. Abbreviations A-9 87 Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge to the Holder a copy of the Indenture and/or the Registration Rights Agreement. A-10 88 SECURITY GUARANTEE Subject to the limitations set forth in the Indenture, the Guarantors (as defined in the Indenture referred to in this Security and each hereinafter referred to as a "Guarantor,"which term includes any successor or additional Guarantor under the Indenture) have jointly and severally, irrevocably and unconditionally guaranteed (a) the due and punctual payment of the principal (and premium, if any) of and interest on the Securities, whether at Stated Maturity, by acceleration, call for redemption, upon a Change of Control Offer, Asset Sale Offer, purchase or otherwise, (b) the due and punctual payment of interest on the overdue principal of and interest on the Securities, if any, to the extent lawful, (c) the due and punctual performance of all other Obligations of the Company and the Guarantors to the Holders under the Indenture and the Securities and (d) in case of any extension of time of payment or renewal of any Securities or any of such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration, call for redemption, upon a Change of Control Offer, Asset Sale Offer, purchase or otherwise. Capitalized terms used herein shall have the same meanings assigned to them in the Indenture unless otherwise indicated. Payment on each Security is guaranteed jointly and severally, by the Guarantors pursuant to Article 11 of the Indenture and reference is made to such Indenture for the precise terms of the Guarantees. The Obligations of each Guarantor are limited to the lesser of (a) an amount equal to such Guarantor's Adjusted Net Assets as of the date of the Guarantee and (b) the maximum amount as well, after giving effect to such maximum amount and all other contingent and fixed liabilities of such Guarantor, and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the Obligations of such other Guarantor under its Guarantee or pursuant to its contribution Obligations under the Indenture, result in the Obligations of such Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent conveyance or fraudulent transfer under federal or state law or not otherwise being void, voidable or unenforceable under any similar other bankruptcy, receivership, insolvency, liquidation or other similar legislation or legal principles under applicable foreign law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Company in a pro rata amount based on the Adjusted Net Assets of each Guarantor. Certain of the Guarantors may be released from their Guarantors upon the terms and subject to the conditions provided in the Indenture. A-11 89 The Guarantee shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof and in the Indenture. BAYARD DRILLING, L.L.C. By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- BAYARD DRILLING, L.P. By: BAYARD DRILLING, L.L.C., its general partner By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- BONRAY DRILLING CORPORATION By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- TREND DRILLING CO. By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- A-12 90 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) - -------------------------------------------------------------------------------- (Insert assignee's social security or tax I.D. No.) and irrevocably appoint _______________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Dated: Your Signature: ---------------- ----------------------------------- Sign exactly as your name appears on the other side of this Security. Signature Guarantee: - -------------------------------------- Signature must be guaranteed Notice: Signature(s) must be guaranteed by an institution which is a participant in the Securities Transfer Agent Medallion Program ("STAMP") or similar program. A-13 91 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.07 or Section 4.09 of the Indenture, check the appropriate box: Section 4.07 [ ] Section 4.09 [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.07 or Section 4.09 of the Indenture, state the amount in principal amount (must be an integral of $1,000): $ ---------------- Dated: Your Signature: ---------------- ----------------------------------- Sign exactly as your name appears on the other side of this Security. Signature Guarantee: - -------------------------------------- Signature must be guaranteed Notice: Signature(s) must be guaranteed by an institution which is a participant in the Securities Transfer Agent Medallion Program ("STAMP") or similar program. A-14 92 SCHEDULE A SCHEDULE OF INCREASES OR DECREASES IN PRINCIPAL AMOUNT (4) The initial principal amount at Maturity of this Global Security shall be $100,000,000. The following increases or decreases in this Global Security have been made:
Date of Global Security Increase/ Amount of Decrease in Amount of Increase in Principal Amount Total Principal Decrease Amount at Maturity Amount at Maturity Decrease/Increase Amount - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- --------------- - --------- --------------------- --------------------- ----------------- ---------------
Signature of authorized signatory of following such Trustee or Securities Custodian. -------------------------------- - --------------------- (4) This should be included only if the Security is issued in global form. A-15 93 EXHIBIT B-1 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM U.S. GLOBAL NOTE TO REG S GLOBAL NOTE (Pursuant to Section 2.06(a)(i) of the Indenture) U.S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201-2936 Attention: Corporate Trust Department Re: 11% Senior Notes due 2005, Series A of Bayard Drilling Technologies, Inc. Reference is hereby made to the Indenture, dated as of June 26, 1998 (the "Indenture"), between Bayard Drilling Technologies, Inc. (the "Company"), the Persons acting as guarantors and named therein (the "Guarantors") and U.S. Trust Company of Texas, N. A., as trustee (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings given them in the Indenture. This letter relates to U.S.$___________ principal amount of Securities which are evidenced by one or more U.S. Global Notes and held with the Depositary in the name of _____________ (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Securities to a Person who will take delivery thereof in the form of an equal principal amount of Securities evidenced by one or more Reg S Global Notes, which amount, immediately after such transfer, is to be held with the Depositary through Euroclear or Cedel or both. In connection with such request and in respect of such Securities, the Transferor hereby certifies that such transfer has been effected in compliance with the transfer restrictions applicable to the Global Securities and pursuant to and in accordance with Rule 903 or Rule 904 of Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act"), and accordingly the Transferor hereby further certifies that: (1) The offer of the Securities was not made to a person in the United States and, if the 40-day Distribution Compliance Period has not yet expired and the Transferor is a dealer (as defined in Section 2(12) of the Securities Act), or a person receiving a selling concession, fee or other remuneration in respect of the Securities being sold (collectively, "Dealers"), (i) neither the Transferor or any person acting on its behalf knows that the transferee is a U.S. person and (ii) if the Transferor or any person acting on its behalf knows that the transferee is a Dealer, the Transferor or person acting on its behalf has sent a confirmation or other notice to the transferee stating that the Securities may be offered or sold during the 40-day Distribution Compliance Period only in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act; (2) either: (a) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed and believes that the transferee was outside the United States; or (b) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was prearranged with a buyer in the United States; (3) no directed selling efforts have been made in contravention of the requirements of Rule 904(b) of Regulation S; B-1-1 94 (4) the transaction is not part of a plan or scheme to evade the registration provisions of the Securities Act; and (5) upon completion of the transaction, the beneficial interest being transferred as described above is to be held with the Depositary through Euroclear or Cedel or both. Upon giving effect to this request to exchange a beneficial interest in a U.S. Global Note for a beneficial interest in a Reg S Global Note, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to Reg S Global Notes pursuant to the Indenture and the Securities Act and, if such transfer occurs prior to the end of the 40-day Distribution Compliance Period associated with the initial offering of Series A Notes, the additional restrictions applicable to transfers of interest in the Reg S Global Note. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., BT Alex. Brown and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated (collectively, the Initial Purchasers"), the Initial Purchasers of such Securities being transferred. We acknowledge that you, the Company and the Initial Purchasers will rely upon our confirmations, acknowledgments and agreements set forth herein, and we agree to notify you promptly in writing if any of our representations or warranties herein ceases to be accurate and complete. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By: -------------------------------- Name: ------------------------------ Title: ----------------------------- Dated: ----------------------------------- cc: Bayard Drilling Technologies, Inc. Initial Purchasers B-1-2 95 EXHIBIT B-2 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM REG S GLOBAL NOTE TO U.S. GLOBAL NOTE (Pursuant to Section 2.06(a)(ii) of the Indenture) U.S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201-2936 Attention: Corporate Trust Department Re: 11% Senior Notes due 2005, Series A of Bayard Drilling Technologies, Inc. Reference is hereby made to the Indenture, dated as of June 26, 1998 (the "Indenture"), between Bayard Drilling Technologies, Inc. (the "Company"), the Persons acting as guarantors and named therein (the "Guarantors") and U.S. Trust Company of Texas, N. A., as trustee (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings given them in the Indenture. This letter relates to $____________ principal amount of Securities which are evidenced by one or more Reg S Global Notes and held with the Depositary through Euroclear or Cedel in the name of _________________ (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Securities to a Person who will take delivery thereof in the form of an equal principal amount of Securities evidenced by one or more U.S. Global Notes, to be held with the Depositary. In connection with such request and in respect of such Securities, the Transferor hereby certifies that: [CHECK ONE] [ ] such transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act") and, accordingly, the Transferor hereby further certifies that the Securities are being transferred to a Person that the Transferor reasonably believes is purchasing the Securities for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A; or such transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or [ ] such transfer is being effected in an offshore transaction pursuant to and in accordance with Rule 904 under the Securities Act; or [ ] such transfer is being effected pursuant to an effective registration statement under the Securities Act; B-2-1 96 or [ ] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than those contemplated above, and the Transferor hereby further certifies that the Securities are being transferred in compliance with the transfer restrictions applicable to the Global Securities and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and such Securities are being transferred in compliance with any applicable blue sky or securities laws of any state of the United States or any other applicable jurisdiction. Upon giving effect to this request to exchange a beneficial interest in Reg S Global Notes for a beneficial interest in U.S. Global Notes, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to U.S. Global Notes pursuant to the Indenture and the Securities Act. B-2-2 97 This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Donaldson, Lufkin & Jenrette Securities Corporations, Lehman Brothers Inc., BT Alex. Brown and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated (collectively, the "Initial Purchasers"), the Initial Purchasers of such Securities being transferred. We acknowledge that you, the Company and the Initial Purchasers will rely upon our confirmations, acknowledgments and agreements set forth herein, and we agree to notify you promptly in writing if any of our representations or warranties herein ceases to be accurate and complete. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By: -------------------------------- Name: ------------------------------ Title: ----------------------------- Dated: ----------------------------------- cc: Bayard Drilling Technologies, Inc. Initial Purchasers B-2-3 98 EXHIBIT B-3 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER OF CERTIFICATED SECURITIES (Pursuant to Section 2.06(b) of the Indenture) U.S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201-2936 Attention: Corporate Trust Department Re: 11% Senior Notes due 2005, Series A of Bayard Drilling Technologies, Inc. Reference is hereby made to the Indenture, dated as of June 26, 1998 (the "Indenture"), between Bayard Drilling Technologies, Inc. (the "Company"), the Persons acting as guarantors and named therein (the "Guarantors") and U.S. Trust Company of Texas, N. A., as trustee (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings given them in the Indenture. This relates to $_________ principal amount of Securities which are evidenced by one or more Certificated Securities in the name of ______________ (the "Transferor"). The Transferor has requested an exchange or transfer of such Certificated Security(ies) in the form of an equal principal amount of Securities evidenced by one or more Certificated Securities, to be delivered to the Transferor or, in the case of a transfer of such Securities, to such Person as the Transferor instructs the Trustee. In connection with such request and in respect of the Securities surrendered to the Trustee herewith for exchange (the "Surrendered Securities"), the Holder of such Surrendered Securities hereby certifies that: [CHECK ONE] [ ] the Surrendered Securities are being acquired for the Transferor's own account, without transfer; or [ ] the Surrendered Securities are being transferred to the Company; or [ ] the Surrendered Securities are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Surrendered Securities are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Securities for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or [ ] the Surrendered Securities are being transferred in a transaction permitted by Rule 144 under the Securities Act; B-3-1 99 or [ ] the Surrendered Securities are being transferred in an offshore transaction pursuant to and in accordance with Rule 904 under the Securities Act; or [ ] the Surrendered Securities are being transferred pursuant to an effective registration statement under the Securities Act; or [ ] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than those contemplated above, and the Transferor hereby further certifies that the Securities are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Securities are being transferred in compliance with any applicable blue sky or securities laws of any state of the United States or any other applicable jurisdiction. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., BT Alex. Brown and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated (collectively, the "Initial Purchasers"), the Initial Purchasers of such Securities being transferred. We acknowledge that you, the Company and the Initial Purchasers will rely upon our confirmations, acknowledgments and agreements set forth herein, and we agree to notify you promptly in writing if any of our representations or warranties herein ceases to be accurate and complete. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By: -------------------------------- Name: ------------------------------ Title: ----------------------------- Dated: ----------------------------------- cc: Bayard Drilling Technologies, Inc. Initial Purchasers B-3-2 100 EXHIBIT B-4 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM U.S. GLOBAL NOTE OR REG S PERMANENT GLOBAL SECURITY TO CERTIFICATED SECURITY (Pursuant to Section 2.06(c) of the Indenture) U.S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201-2936 Attention: Corporate Trust Department Re: 11% Senior Notes due 2005, Series A of Bayard Drilling Technologies, Inc. Reference is hereby made to the Indenture, dated as of June 26, 1998 (the "Indenture"), between Bayard Drilling Technologies, Inc. (the "Company"), the Persons acting as guarantors and named therein (the "Guarantors") and U.S. Trust Company of Texas, N. A., as trustee (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings given them in the Indenture. This letter relates to $_____________ principal amount of Securities which are evidenced by a beneficial interest in one or more U.S. Global Notes or Reg S Global Notes in the name of __________________ (the "Transferor"). The Transferor has requested an exchange or transfer of such beneficial interest in the form of an equal principal amount of Securities evidenced by one or more Certificated Securities, to be delivered to the Transferor or, in the case of a transfer of such Securities, to such Person as the Transferor instructs the Trustee. In connection with such request and in respect of the Securities surrendered to the Trustee herewith for exchange (the "Surrendered Securities"), the Holder of such surrendered Securities hereby certifies that: [CHECK ONE] [ ] the Surrendered Securities are being transferred to the beneficial owner of such Securities; or [ ] the Surrendered Securities are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Surrendered Securities are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Securities for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or [ ] the Surrendered Securities are being transferred in a transaction permitted by Rule 144 under the Securities Act; or B-4-1 101 [ ] such transfer is being effected in an offshore transaction pursuant to and in accordance with Rule 904 under the Securities Act; or [ ] the Surrendered Securities are being transferred pursuant to an effective registration statement under the Securities Act; or [ ] the Surrendered Securities are being transferred pursuant to an exemption from the registration requirements of the Securities Act other than those contemplated above, and the Transferor hereby further certifies that the Securities are being transferred in compliance with the transfer restrictions applicable to the Global Securities and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Securities are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., BT Alex. Brown and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated (collectively, the "Initial Purchasers"), the Initial Purchasers of such Securities being transferred. We acknowledge that you, the Company and the Initial Purchasers will rely upon our confirmations, acknowledgments and agreements set forth herein, and we agree to notify you promptly in writing if any of our representations or warranties herein ceases to be accurate and complete. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By: Name: Title: Dated: ----------------------------------- cc: Bayard Drilling Technologies, Inc. Initial Purchasers B-4-2 102 EXHIBIT B-5 [FORM OF FACE OF CERTIFICATED SECURITY] BAYARD DRILLING TECHNOLOGIES, INC. No._________ 11% SENIOR NOTE DUE 2005 CUSIP No.__________ BAYARD DRILLING TECHNOLOGIES, INC., a Delaware corporation, hereby promises to pay to _________________, or registered assigns, the principal sum of _______________ on June 30, 2005. Interest Payment Dates: June 30 and December 31, commencing December 31, 1998. Record Dates: June 15 and December 15. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth in this place. IN WITNESS WHEREOF, BAYARD DRILLING TECHNOLOGIES, INC. has caused this instrument to be duly executed under its corporate seal. Dated: -------------------- BAYARD DRILLING TECHNOLOGIES, INC. By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- TRUSTEE'S CERTIFICATE OF AUTHENTICATION U. S. TRUST COMPANY OF TEXAS, N.A. as Trustee, certifies that this is one of the Securities referred to in the Indenture. By: ------------------------------------- Authorized Signatory B-5-1 103 [FORM OF REVERSE SIDE OF SECURITY] 11% Senior Note Due 2005 1. Interest Bayard Drilling Technologies, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on June 30 and December 31 of each year (an "Interest Payment Date") commencing on December 31, 1998, until the principal amount is paid or made available for payment. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Issue Date. The Company will also pay additional interest under the circumstances and in the amounts as described in the Registration Rights Agreement. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment The Company will pay interest on the Securities (except Defaulted Interest) to the Persons who are registered Holders of Securities at the close of business on the June 15 or December 15 immediately preceding the Interest Payment Date even if Securities are canceled after the Record Date and on or before the Interest Payment Date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Securities represented by a Global Security (including principal, premium, if any, and interest) will be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company, but, at the option of the Company, interest may be paid by check mailed to the registered Holders at their registered addresses. 3. Paying Agent and Registrar Initially, U.S. Trust Company of Texas, N.A., a national banking association (the "Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice. In certain situations, the Company or any of its Subsidiaries may act as Paying Agent, Registrar or co- registrar. 4. Indenture The Company issued the Securities under an Indenture dated as of June 26, 1998 (as such may be amended from time to time, the "Indenture"), among the Company, the corporations acting as guarantors and named therein (the "Guarantors") and the U.S. Trust Company of Texas, N.A., as trustee (the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture reference is hereby made for a statement of the respective rights, duties and immunities thereunder of the Company, the Guarantors, the Trustee and each Holder of the Securities and the terms upon which the Securities are, and are to be, authenticated and delivered. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. B-5-2 104 The Securities are limited to $100,000,000 aggregate principal amount at any one time outstanding (subject to Section 2.08 of the Indenture). This Security is one of the Securities referred to in the Indenture. The Indenture imposes certain limitations on the incurrence of additional Indebtedness by the Company and its Subsidiaries; the payment of dividends on, and redemption of, Capital Stock of the Company and its Subsidiaries and the redemption of Subordinated Indebtedness of the Company and its Subsidiaries; Investments; sales of assets and Subsidiary Capital Stock; certain transactions with Affiliates of the Company and the right of the Company and its Subsidiaries to engage in unrelated lines of business. 5. Optional Redemption Except as provided in the next paragraph, the Securities are not redeemable prior to June 30, 2003. At any time on or after June 30, 2003, the Securities are redeemable at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' notice, at the following Redemption Prices (expressed as percentages of principal amount at Stated Maturity), if redeemed during the 12 months beginning June 30 of the years indicated below, plus accrued and unpaid interest (if any) thereon to the Redemption Date:
Redemption Year Price ---- ---------- 2003 105.5000% 2004 and thereafter 100.0000%
Notwithstanding the foregoing, at any time during the first 36 months after the Issue Date, the Company may redeem up to 35% of the aggregate principal amount of the Securities originally outstanding at a redemption price of 111% of the principal amount thereof, plus accrued and unpaid interest (if any) thereon to the Redemption Date, with the net proceeds of one or more Qualified Equity Offerings of the Company; provided that at least $65,000,000 aggregate principal amount of the Securities shall remain outstanding immediately after the occurrence of any such redemption; and provided, further, that such redemption shall occur not later than 90 days after the date of the closing of any such Qualified Equity Offering. The redemption shall be made in accordance with procedures set forth in the Indenture. 6. Notice of Redemption Notice of redemption will be mailed by first-class mail, postage prepaid, at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at his address as it appears in the Security Register. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If less than all of the Securities are to be redeemed at any time, the Securities to be redeemed will be chosen by the Trustee in accordance with the Indenture. If any Security is redeemed subsequent to a Record Date with respect to any Interest Payment Date specified above and on or prior to such Interest Payment Date, then any accrued interest will be paid on such Interest Payment Date to the Holder of the Security at the close of business on such Record Date. If money sufficient to pay the Redemption Price of and accrued interest on all Securities (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent on or before the Redemption Date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Securities (or such portions thereof) called for redemption. 7. Change of Control Upon the occurrence of a Change of Control, each Holder of Securities shall have the right to require the Company to purchase such Holder's Securities, in whole or in part in a principal amount at Stated Maturity that is an integral multiple of $1,000, pursuant to a Change of Control Offer, at a purchase price in cash equal B-5-3 105 to 101% of the principal amount thereof on any Change of Control Payment Date, plus accrued and unpaid interest, if any, to the Change of Control Payment Date. Within 30 calendar days following any Change of Control, the Company shall send, or cause to be sent, by first class mail, postage prepaid, a notice regarding the Change of Control Offer to each Holder of Securities. The Holder of this Security may elect to have this Security or a portion hereof in an authorized denomination purchased by completing the form entitled "Option of Holder to Require Purchase" appearing below and tendering this Security pursuant to the Change of Control Offer. Unless the Company defaults in the payment of the Change of Control Purchase Price with respect thereto, all Securities or portions thereof accepted for payment pursuant to the Change of Control Offer will cease to accrue interest from and after the Change of Control Payment Date. 8. Repurchase at the Option of Holders upon Asset Sale. Subject to the limitations set forth in the next following paragraph, if at any time the Company or any Subsidiary engages in any Asset Sale, as a result of which the aggregate amount of Excess Proceeds exceeds $10,000,000, the Company shall, within 30 calendar days thereafter make an offer to purchase from all Holders of Securities and other Indebtedness that ranks by its terms pari passu in right of payment with the Securities and the terms of which contain substantially similar requirements with respect to the application of net proceeds from an Asset Sale Offer, on a pro rata basis, the maximum principal amount of the Securities that is an integral multiple of $1,000 that may be purchased out of the Excess Proceeds and the maximum principal amount of such other pari passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount at Stated Maturity thereof, plus accrued and unpaid interest thereon, if any, to the Asset Sale Offer Purchase Date. Upon completion of an Asset Sale Offer (including payment of the Asset Sale Offer Purchase Price for accepted Securities), any surplus Excess Proceeds that were the subject of such offer shall cease to be Excess proceeds, and the Company may then use such amounts for general corporate purposes. Within 30 calendar years of the date the amount of Excess Proceeds exceeds $10,000,000, the Company shall send, or cause to be sent, by first class mail, postage prepaid, a notice regarding the Asset Sale Offer to each Holder of Securities. The Holder of this Security may elect to have this Security or a portion hereof in an authorized denomination purchased by completing the form entitled "Option of Holder to Require Purchase" appearing below and tendering this Security pursuant to the Asset Sale Offer. Unless the Company defaults in the payment of the Asset Sale Offer Purchase Price with respect thereto, all Securities or portions thereof selected for payment pursuant to the Asset Sale Offer will cease to accrue interest from and after the Asset Sale Offer Purchase Date. 9. The Global Security. So long as this Global Security is registered in the name of the Depositary or its nominee, members of, or participants in, the Depositary ("Agent Members") shall have no rights under the Indenture with respect to this Global Security held on their behalf by the Depositary or the Trustee as its custodian, and the Depositary may be treated by the Company, the Guarantors, the Trustee and any agent of the Company, the Guarantors or the Trustee as the absolute owner of this Global Security for all purposes. Notwithstanding the foregoing, nothing herein shall (i) prevent the Company, the Guarantors, the Trustee or any agent of the Company, the Guarantors or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or (ii) impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of Securities. The Holder of this Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests in this Global Security through Agent Members, to take any action which a Holder of Securities is entitled to take under the Indenture or the Securities. B-5-4 106 Whenever, as a result of an optional redemption of Securities by the Company, a Change of Control Offer, an Asset Sale Offer or an exchange for Certificated Securities, this Global Security is redeemed, repurchased or exchanged or substituted in part, this Global Security shall be surrendered by the Holder thereof to the Trustee who shall cause an adjustment to be made to Schedule A hereof so that the principal amount of this Global Security will be equal to the portion not redeemed, repurchased or exchanged and shall thereafter return this Global Security to such Holder; provided that this Global Security shall be in a principal amount at Stated Maturity of $1,000 or an integral multiple of $1,000. 10. Transfer and Exchange. The Holder of this Global Security shall, by its acceptance of this Global Security, agree that transfers of beneficial interests in this Global Security may be effected only through a book entry system maintained by such Holder (or its agent), and that ownership of a beneficial interest in the Securities represented thereby shall be required to be reflected in book entry form. Transfers of this Global Security shall be limited to transfers in whole, and not in part, to the Depositary, its successors and their respective nominees. Interests of beneficial owners in this Global Security may be transferred in accordance with the rules and procedures of the Depositary (or its successors). This Global Security will be exchanged by the Company for one or more Certificated Securities if (a) the Depositary (i) has notified the Company that it is unwilling or unable to continue as, or ceases to be, a "Clearing Agency" registered under Section 17A of the Exchange Act and (ii) a successor to the Depositary registered as a "Clearing Agency" under Section 17A of the Exchange Act is not appointed by the Company within 90 calendar days or (b) the Depositary is at any time unwilling or unable to continue as Depositary and a successor to the Depositary is not able to be appointed by the Company within 90 calendar days. If an Event of Default occurs and is continuing, the Company shall, at the request of the Holder hereof, exchange all or a part of this Global Security for one or more Certificated Securities; provided that the principal amount at Stated Maturity of each of such Certificated Securities and this Global Security, after such exchange, shall be $1,000 or an integral multiple thereof. Whenever this Global Security is exchanged as a whole for one or more Certificated Securities, it shall be surrendered by the Holder to the Trustee for cancellation. Whenever this Global Security is exchanged in part for one or more Certificated Securities, it shall be surrendered by the Holder to the Trustee and the Trustee shall make the appropriate notations thereon pursuant to Section 2.05 of the Indenture. Interests in this Global Security may not be exchanged for Certificated Securities other than as provided in this paragraph. 11. Persons Deemed Owners The registered Holder of this Security may be treated as the owner of it for all purposes. 12. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 13. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of its Obligations and the Guarantors' Obligations under the Securities, the Guarantees and the Indenture if the Company deposits B-5-5 107 with the Trustee money or U.S. Government Obligations for the payment of principal, premium and interest on the Securities to redemption or maturity, as the case may be. 14. Amendment, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in outstanding principal amount at Stated Maturity of the Securities and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in outstanding principal amount at Stated Maturity outstanding of the Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Company, the Guarantors and the Trustee may amend the Indenture or the Securities (a) to evidence the succession of another Person to the Company and the Guarantors and the assumption by such successor of the covenants and Obligations of the Company under the Indenture and contained in the Securities and of the Guarantors contained in the Indenture and the Guarantees, (b) to add to the covenants of the Company, for the benefit of the Holders, or to surrender any right or power conferred upon the Company or the Guarantors by the Indenture, (c) to add any additional Events of Default, (d) to provide for uncertificated Securities in addition to or in place of Certificated Securities, (e) to evidence and provide for the acceptance of appointment under the Indenture by the successor Trustee, (f) to secure the Securities and/or the Guarantees, (g) to cure any ambiguity, to correct or supplement any provision in the Indenture which may be inconsistent with any other provision therein or to add any other provision with respect to matters or questions arising under the Indenture, provided that such actions will not adversely affect the interests of the Holders in any material respect or (h) to add or release any Guarantor pursuant to the terms of the Indenture. Certain provisions of the Securities and the Indenture may not be amended or waived without the consent of each Holder affected thereby. 15. Defaults and Remedies Under the Indenture, Events of Default include in summary form (i) default in the payment of interest on the Securities when due, continued for 30 days; (ii) default in the payment of principal of (or premium, if any, on) the Securities when due; (iii) failure to comply with certain of the covenants in the Indenture, including the Change of Control covenant, the Asset Sale covenant and the Restrictive Payments covenant; (iv) failure to perform any other covenant of the Company or any Guarantor in the Indenture, continued for 60 days after written notice as provided in the Indenture; (v) Indebtedness (other than Non-Recourse Indebtedness) of the Company or any Subsidiary is not paid when due within the applicable grace period, or is accelerated and, in either case, the principal amount of such unpaid Indebtedness exceeds $10,000,000; (vi) one or more final judgments or orders by a court of competent jurisdiction are entered against the Company or any Subsidiary in an uninsured or unindemnified aggregate amount in excess of $10,000,000 and such judgments or orders are not discharged, waived, appealed, stayed, satisfied or bonded for a period of 60 consecutive days; (vii) certain events of bankruptcy, insolvency or reorganization; or (viii) a Guarantee ceases to be in full force and effect (other than in accordance with the terms of the Indenture and such Guarantee) or a Guarantor denies or disaffirms its obligations under its Guarantee. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount at Stated Maturity of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default (except a Default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. The Holders of a majority in principal amount at Stated Maturity of the outstanding Securities, by written notice to the Company and the Trustee, may rescind any declaration of acceleration and its consequences if the rescission would not conflict with any judgment or decree, and if all Events of Default have been cured or waived except nonpayment of principal and interest that has become due solely because of the acceleration. B-5-6 108 16. Trustee Dealings with the Company Subject to certain limitations imposed by the Trust Indenture Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 17. No Recourse Against Others No director, officer, employee, incorporator or stockholder of the Company, the Subsidiaries or the Unrestricted Subsidiaries, as such, shall have any liability for any obligations of the Company under the Securities, the Guarantees or this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Securities by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. 18. Governing Law THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 19. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge to the Holder a copy of the Indenture and/or the Registration Rights Agreement. B-5-7 109 SECURITY GUARANTEE Subject to the limitations set forth in the Indenture, the Guarantors (as defined in the Indenture referred to in this Security and each hereinafter referred to as a "Guarantor,"which term includes any successor or additional Guarantor under the Indenture) have jointly and severally, irrevocably and unconditionally guaranteed (a) the due and punctual payment of the principal (and premium, if any) of and interest on the Securities, whether at Stated Maturity, by acceleration, call for redemption, upon a Change of Control Offer, Asset Sale Offer, purchase or otherwise, (b) the due and punctual payment of interest on the overdue principal of and interest on the Securities, if any, to the extent lawful, (c) the due and punctual performance of all other Obligations of the Company and the Guarantors to the Holders under the Indenture and the Securities and (d) in case of any extension of time of payment or renewal of any Securities or any of such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration, call for redemption, upon a Change of Control Offer, Asset Sale Offer, purchase or otherwise. Capitalized terms used herein shall have the same meanings assigned to them in the Indenture unless otherwise indicated. Payment on each Security is guaranteed jointly and severally, by the Guarantors pursuant to Article 11 of the Indenture and reference is made to such Indenture for the precise terms of the Guarantees. The obligations of each Guarantor are limited to the lesser of (a) an amount equal to such Guarantor's Adjusted Net Assets as of the date of the Guarantee and (b) the maximum amount as well, after giving effect to such maximum amount and all other contingent and fixed liabilities of such Guarantor, and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the Obligations of such other Guarantor under its Guarantee or pursuant to its contribution Obligations under the Indenture, result in the Obligations of such Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent conveyance or fraudulent transfer under federal or state law or not otherwise being void, voidable or unenforceable under any similar other bankruptcy, receivership, insolvency, liquidation or other similar legislation or legal principles under applicable foreign law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Company in a pro rata amount based on the Adjusted Net Assets of each Guarantor. Certain of the Guarantors may be released from their Guarantors upon the terms and subject to the conditions provided in the Indenture. B-5-8 110 The Guarantee shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof and in the Indenture. BAYARD DRILLING, L.L.C. By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- BAYARD DRILLING, L.P. By: BAYARD DRILLING, L.L.C., its general partner By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- BONRAY DRILLING CORPORATION By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- TREND DRILLING CO. By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- B-5-9 111 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) - -------------------------------------------------------------------------------- (Insert assignee's social security or tax I.D. No.) and irrevocably appoint _______________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Dated: Your Signature: ---------------- ----------------------------------- Sign exactly as your name appears on the other side of this Security. Signature Guarantee: - -------------------------------------- Signature must be guaranteed Notice: Signature(s) must be guaranteed by an institution which is a participant in the Securities Transfer Agent Medallion Program ("STAMP") or similar program. B-5-10 112 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.07 or Section 4.09 of the Indenture, check the appropriate box: Section 4.07 [ ] Section 4.09 [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.07 or Section 4.09 of the Indenture, state the amount in principal amount (must be an integral of $1,000): $_______________ Dated: Your Signature: ---------------- ----------------------------------- Sign exactly as your name appears on the other side of this Security. the other Signature Guarantee: -------------------------------------- (Signature must be guaranteed) Notice: Signature(s) must be guaranteed by an institution which is a participant in the Securities Transfer Agent Medallion Program ("STAMP") or similar program. Notice: Signature(s) must be guaranteed by an institution which is a participant in the Securities Transfer Agent Medallion Program ("STAMP") or similar program. B-5- 113 EXHIBIT C FORM OF SUPPLEMENTAL INDENTURE SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of _______________, among [GUARANTOR] (the "New Guarantor"), a subsidiary of Bayard Drilling Technologies, Inc. (or its successor), a Delaware corporation (the "Company"), BAYARD DRILLING TECHNOLOGIES, INC., the Guarantors (the "Existing Guarantors") under the Indenture referred to below, and U.S. TRUST COMPANY OF TEXAS, N.A., as trustee under the Indenture referred to below (the "Trustee"). W I T N E S S E T H : WHEREAS the Company has heretofore executed and delivered to the Trustee an Indenture (as such may be amended from time to time, the "Indenture"), dated as of June 26, 1998, providing for the issuance of an aggregate principal amount of $100,000,000 of 11% Senior Notes due 2005 (the "Securities"); WHEREAS Section 11.07 of the Indenture provides that the Company is required to cause the New Guarantor to execute and deliver to the Trustee a supplemental indenture pursuant to which the New Guarantor shall jointly and severally and unconditionally and irrevocably guarantee all of the Company's Obligations under the Securities and the Indenture pursuant to a Guarantee contained in the Indenture on the terms and conditions set forth herein; and WHEREAS pursuant to Section 10.01 of the Indenture, the Trustee, the Company and Existing Guarantors are authorized to execute and deliver this Supplemental Indenture; NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Guarantor, the Company, the Existing Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the holders of the Securities as follows: 1. Definitions. (a) Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. (b) For all purposes of this Supplemental Indenture, except as otherwise herein expressly provided or unless the context otherwise requires: (i) the terms and expressions used herein shall have the same meanings as corresponding terms and expressions used in the Indenture; and (ii) the words "herein,""hereof" and "hereby" and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture as a whole and not to any particular section hereof. 2. Agreement to Guarantee. The New Guarantor hereby agrees, jointly and severally and unconditionally and irrevocably, with all other Guarantors, to guarantee the Company's Obligations under the Securities and the Indenture on the terms and subject to the conditions set forth in Article 11 of the Indenture and to be bound by all other applicable provisions of the Indenture. From and after the date hereof, the New Guarantor shall be a Guarantor for all purposes under the Indenture and the Securities. 3. Ratification of Indenture; Supplemental Indentures Part of Indenture. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby. C-1 114 4. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 5. Trustee Makes No Representation. The Trustee makes no representation as to the validity or sufficiency of this Supplemental Indenture. 6. Counterparts. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 7. Effect of Headings. The Section headings herein are for convenience only and shall not effect the construction thereof. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the date first above written. [NEW GUARANTOR] By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- BAYARD DRILLING TECHNOLOGIES, INC. By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- [ALL EXISTING GUARANTORS] By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- U. S. TRUST COMPANY OF TEXAS, N.A. as Trustee By: ------------------------------------- Name: ------------------------------ Title: ----------------------------- C-2 EX-4.3 3 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.3 ================================================================================ A/B EXCHANGE REGISTRATION RIGHTS AGREEMENT Dated as of June 26, 1998 by and among Bayard Drilling Technologies, Inc. Bayard Drilling, L.L.C. Bayard Drilling, L.P. Bonray Drilling Corporation Trend Drilling Co. and Donaldson, Lufkin & Jenrette Securities Corporation BT Alex. Brown Dain Rauscher Wessels Lehman Brothers Inc. ================================================================================ 2 This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of June 26, 1998, by and among Bayard Drilling Technologies, Inc., an Oklahoma corporation (the "COMPANY"), the Guarantors named on the signature page hereto (the "GUARANTORS"), and Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown, Dain Rauscher Wessels and Lehman Brothers Inc. (each an "INITIAL PURCHASER" and, collectively, the "INITIAL PURCHASERS"), each of whom has agreed to purchase the Company's 11% Series A Senior Notes due 2005 (the "SERIES A NOTES") pursuant to the Purchase Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement, dated June 19, 1998, (the "PURCHASE AGREEMENT"), by and among the Company, the Guarantors and the Initial Purchasers. In order to induce the Initial Purchasers to purchase the Series A Notes, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchasers set forth in Section 2 of the Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them the Indenture, dated June 26, 1998, between the Company and U.S. Trust Company of Texas, N.A., as Trustee, relating to the Series A Notes and the Series B Notes (the "INDENTURE"). The parties hereby agree as follows: SECTION 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: ACT: The Securities Act of 1933, as amended. AFFILIATE: As defined in Rule 144 of the Act. BROKER-DEALER: Any broker or dealer registered under the Exchange Act. BUSINESS DAY: Any day except a Saturday, Sunday or other day in the City of New York on which banks are authorized to close. CERTIFICATED SECURITIES: Definitive Notes, as defined in the Indenture. CLOSING DATE: The date hereof. COMMISSION: The Securities and Exchange Commission. CONSUMMATE: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Series B Notes to be issued in the Exchange Offer, (b) the maintenance of such Exchange Offer Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Trustee under the Indenture of Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes that were validly tendered by Holders thereof pursuant to the Exchange Offer. -1- 3 CONSUMMATION DEADLINE: As defined in Section 3(b) hereof. EFFECTIVENESS DEADLINE: As defined in Sections 3(a) and 4(a) hereof, as applicable. EXCHANGE ACT: The Securities Exchange Act of 1934, as amended. EXCHANGE OFFER: The registration by the Company under the Act of the Series B Notes (and by the Guarantors of the related guarantees) pursuant to the Exchange Offer Registration Statement pursuant to which the Company offers the Holders of all outstanding Transfer Restricted Securities the opportunity to exchange all such outstanding Transfer Restricted Securities held by such Holders for Series B Notes in an aggregate principal amount equal to the aggregate principal amount of Transfer Restricted Securities validly tendered in such exchange offer by such Holders. EXCHANGE OFFER REGISTRATION STATEMENT: The Registration Statement relating to the Exchange Offer, including the related Prospectus. EXEMPT RESALES: The transactions in which the Initial Purchasers propose to sell the Series A Notes to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act and to persons permitted to purchase the Series A Notes in offshore transactions pursuant to Regulation S under the Act. FILING DEADLINE: As defined in Sections 3(a) or 4(a) hereof, as applicable. HOLDER RESALE NOTICE: As defined in Section 4 hereof. HOLDERS: As defined in Section 2 hereof. LIQUIDATED DAMAGES: As defined in Section 5 hereof. PERSON: Any individual, corporation, limited liability company, partnership, joint venture, trust, estate, unincorporated organization or government or any agency or political subdivision thereof. PROSPECTUS: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. RECOMMENCEMENT DATE: As defined in Section 6(d) hereof. REGISTRATION DEFAULT: As defined in Section 5 hereof. REGISTRATION STATEMENT: Any registration statement of the Company (and with respect to the Guarantees, the Guarantors) relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, in each case, (i) that is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. -2- 4 REGULATION S: Regulation S promulgated under the Act. RULE 144: Rule 144 promulgated under the Act. SERIES B NOTES: The Company's 11% Series B Senior Notes due 2005 to be issued pursuant to the Indenture: (i) in the Exchange Offer or (ii) as contemplated by Section 4 hereof. SHELF REGISTRATION STATEMENT: As defined in Section 6(b) hereof. SUSPENSION NOTICE: As defined in Section 6(d) hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the Indenture. TRANSFER RESTRICTED SECURITIES: The following securities: (i) each Series A Note, until the earliest to occur of (a) the date on which such Series A Note is exchanged in the Exchange Offer for a Series B Note which is entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Series A Note has been disposed of in accordance with a Shelf Registration Statement (and the purchasers thereof have been issued Series B Notes), (c) the date on which such Series A Note is distributed to the public pursuant to Rule 144 under the Act (and purchasers thereof have been issued Series B Notes), or (d) the date on which such Series A Note is eligible for distribution to the public pursuant to paragraph (k) of Rule 144 under the Act and (ii) each Series B Note issued to a Broker-Dealer in the Exchange Offer until the date on which such Series B Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including the delivery of the Prospectus contained therein). SECTION 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Securities (each, a "HOLDER") whenever such Person owns Transfer Restricted Securities. SECTION 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) below have been complied with) or Commission policy, each of the Company (and, to the extent of the Guarantees, the Guarantors) shall (i) cause the Exchange Offer Registration Statement to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 60 days after the Closing Date (such 60th day being the "FILING DEADLINE"), (ii) use its reasonable best efforts to cause such Exchange Offer Registration Statement to be declared effective by the Commission at the earliest possible time, but in no event later than 180 days after the Closing Date (such 180th day being the "EFFECTIVENESS DEADLINE"), (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause it to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Series B Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange -3- 5 Offer. The Exchange Offer shall be on the appropriate form permitting (i) registration of the Series B Notes to be offered in exchange for the Series A Notes that are Transfer Restricted Securities and (ii) resales of Series B Notes by Broker-Dealers that are validly tendered into the Exchange Offer Series A Notes that such Broker-Dealer acquired for its own account as a result of market making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) as contemplated by Section 3(c) below, if permissible under applicable law or Commission policy. (b) The Company (and, to the extent of the Guarantees, the Guarantors) shall use their respective reasonable best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Company (and, to the extent of the Guarantees, the Guarantors) shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Series B Notes shall be included in the Exchange Offer Registration Statement. The Company (and, to the extent of the Guarantees, the Guarantors) shall use their respective reasonable best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 Business Days thereafter (such 30th day being the "CONSUMMATION DEADLINE"); provided, however, that the Consummation Deadline shall be subject to extension for up to an additional 10 Business Days with the written consent of the Initial Purchasers. (c) The Company shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Broker-Dealer who holds Transfer Restricted Securities that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any Affiliate of the Company), may exchange such Transfer Restricted Securities pursuant to the Exchange Offer. Such "Plan of Distribution" section shall also contain all other information with respect to such sales by such Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Transfer Restricted Securities held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy, rules or regulations after the date of this Agreement. Because such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of any Series B Notes received by such Broker-Dealer in the Exchange Offer, the Company and Guarantors shall permit the use of the Prospectus contained in the Exchange Offer Registration Statement by such Broker-Dealer to satisfy such prospectus delivery requirement. To the extent necessary to ensure that the prospectus contained in the Exchange Offer Registration Statement is available for sales of Series B Notes by Broker-Dealers, the Company and the Guarantors agree to use their respective reasonable best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented, amended and current as required by and subject to the provisions of Sections 6(a) and (c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of 180 calendar days from the Consummation Deadline or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold pursuant thereto. The Company and the Guarantors shall provide sufficient copies of the latest version of such Prospectus to such Broker-Dealers, promptly upon request, at any time during such period in order to facilitate such resales. -4- 6 SECTION 4. SHELF REGISTRATION (a) Shelf Registration. If (i) the Exchange Offer is not permitted by applicable law or Commission policy (after the Company and the Guarantors have complied with the procedures set forth in Section 6(a)(i) below) or (ii) any Holder of Transfer Restricted Securities shall give written notice (a "Holder Resale Notice") to the Company on or prior to the 20th Business Day following the Consummation Deadline that (A) such Holder was prohibited by applicable law or Commission policy from participating in the Exchange Offer, (B) such Holder may not resell the Series B Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder or (C) such Holder is a Broker-Dealer and holds Series A Notes acquired directly from the Company or any of its Affiliates, then the Company (and, to the extent of the Guarantees, the Guarantors) shall: (x) cause to be filed, on or prior to the 45th day after the earlier of (i) the date on which the Company determines that the Exchange Offer Registration Statement cannot be filed as a result of clause (a)(i) above and (ii) the date on which the Company receives the Holder Resale Notice (such 45th day being the "FILING DEADLINE"), a shelf registration statement pursuant to Rule 415 under the Act (which may be an amendment to the Exchange Offer Registration Statement) (in either event, the "SHELF REGISTRATION STATEMENT"), relating to all Transfer Restricted Securities the Holders of which shall have previously provided the information required pursuant to Section 4(b) hereof, and (y) shall use their respective reasonable best efforts to cause such Shelf Registration Statement to be declared effective by the Commission on or prior to the 180th day after the Filing Deadline for the Shelf Registration Statement (such 180th day being the "EFFECTIVENESS DEADLINE"). If, after the Company has filed an Exchange Offer Registration Statement that satisfies the requirements of Section 3(a) above, the Company is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer is not permitted under applicable law or Commission policy (i.e., clause (a)(i) above), then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above; provided that, in such event, the Company shall remain obligated to meet the Effectiveness Deadline set forth in clause (y). To the extent necessary to ensure that the Shelf Registration Statement is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a) and the other securities required to be registered therein pursuant to Section 6(b)(ii) hereof, the Company (and, to the extent of the Guarantees, the Guarantors) shall use their respective reasonable best efforts to keep any Shelf Registration Statement required by this Section 4(a) continuously effective, supplemented, amended and current as required by and subject to the provisions of Sections 6(b) and (c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, until the earliest of: (i) the date that is two years (as extended pursuant to Section 6(d)) following the Closing Date, (ii) the Consummation of the Exchange Offer with respect to all Transfer Restricted Securities and the expiration of 20 Business Days after the Consummation thereof if during such 20 Business Day period no Holder Resale Notice shall have been received by the Company or (iii) the date when all Transfer Restricted Securities covered by such Shelf Registration Statement have been sold pursuant thereto. -5- 7 (b) Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 20 days after receipt of a request therefor, the information specified in Item 507 or 508 of Regulation S-K, as applicable, of the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to Liquidated Damages pursuant to Section 5 hereof unless and until such Holder shall have provided all such information. Each selling Holder agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. (c) Black Out Period. During any consecutive 365 day period, the Company may suspend the effectiveness of the Shelf Registration Statement on up to two occasions for a period of not more than 45 consecutive days (whereafter a Registration Default shall occur) if there is a possible acquisition or business combination or other transaction, business development or event involving the Company that may require disclosure in the Shelf Registration Statement and the Board of Directors of the Company determines in the exercise of its reasonable judgment that such disclosure is not in the best interests of the Company and its stockholders or obtaining any financial statements relating to a possible acquisition or business combination required to be included in the Shelf Registration Statement would be impracticable. In such a case, the Company shall promptly notify the Holders of the suspension of the Shelf Registration Statement's effectiveness, provided that such notice shall not require the Company to disclose the possible acquisition or business combination or other transaction, business development or event if the Board of Directors of the Company determines in good faith that such acquisition or business combination or other transaction, business development or event should remain confidential. Upon the abandonment, consummation, or termination of the possible acquisition or business combination, the suspension of the use of the Shelf Registration Statement pursuant to this Section 4(c) shall cease and the Company shall promptly comply with Section 6(c)(ii) hereof and notify the Holders that disposition of Transfer Restricted Securities may be resumed. The Company shall extend the relevant period set forth in Section 4(a) during which it is required to keep the Shelf Registration Statement effective by the number of days the use of the Shelf Registration Statement is suspended pursuant to this Section 4(c). SECTION 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the applicable Filing Deadline, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the applicable Effectiveness Deadline, (iii) the Exchange Offer has not been Consummated on or prior to the Consummation Deadline or (iv) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded within 5 days by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective within 10 days of filing such post-effective amendment to such Registration Statement (each such event referred to in clauses (i) through (iv), a "REGISTRATION DEFAULT"), then the Company and the Guarantors hereby jointly and severally agree to pay to each Holder of Transfer Restricted Securities affected thereby liquidated damages ("Liquidated Damages") in an amount equal to $.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration Default continues for the first 90-day period immediately following the occurrence of such Registration Default. The amount of the Liquidated Damages shall increase by an additional $.05 per week per $1,000 in principal -6- 8 amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of liquidated damages of $.20 per week per $1,000 in principal amount of Transfer Restricted Securities; provided that the Company and the Guarantors shall in no event be required to pay Liquidated Damages for more than one Registration Default at any given time. Notwithstanding anything to the contrary set forth herein, (1) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (ii) above, (3) upon Consummation of the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable in the case of (iv) above, the Liquidated Damages payable with respect to the Transfer Restricted Securities as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All accrued Liquidated Damages shall be paid to the record Holders entitled thereto, in the manner provided for the payment of interest in the Indenture, on each Interest Payment Date, as more fully set forth in the Indenture and the Notes. Notwithstanding the fact that any securities for which Liquidated Damages are due cease to be Transfer Restricted Securities, all obligations of the Company and the Guarantors to pay Liquidated Damages with respect to securities shall survive until such time as such obligations with respect to such securities shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) Exchange Offer Registration Statement. In connection with the Exchange Offer, the Company (and, to the extent of the Guarantees, the Guarantors) shall (x) comply with all applicable provisions of Section 6(c) below, (y) use their respective reasonable best efforts to effect such exchange and to permit the resale of Series B Notes by Broker- Dealers that tendered in the Exchange Offer Series A Notes that such Broker-Dealer acquired for its own account as a result of its market making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) being sold in accordance with the intended method or methods of distribution thereof, and (z) comply with all of the following provisions: (i) If, following the date hereof there has been announced a change in Commission policy with respect to exchange offers such as the Exchange Offer, that in the reasonable opinion of counsel to the Company raises a question as to whether the Exchange Offer is permitted by applicable federal law, the Company and the Guarantors hereby agree to seek a no-action letter or other favorable decision from the Commission, including oral advice from the staff of the Commission, allowing the Company and the Guarantors to Consummate an Exchange Offer for such Transfer Restricted Securities. The Company and the Guarantors hereby agree to pursue the issuance of such a decision to the Commission staff level but shall not be required to take commercially unreasonable action to effect a change of Commission policy. In connection with the foregoing, the Company and the Guarantors hereby agree to take all such other actions (other than such actions as may be commercially unreasonable) as may be requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon -7- 9 which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff. (ii) As a condition to its participation in the Exchange Offer, each Holder of Transfer Restricted Securities (including, without limitation, any Holder who is a Broker Dealer) shall furnish, upon the request of the Company, prior to the Consummation of the Exchange Offer, a written representation to the Company and the Guarantors (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an Affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary course of business. As a condition to its participation in the Exchange Offer each Holder using the Exchange Offer to participate in a distribution of the Series B Notes shall acknowledge and agree that, if the resales are of Series B Notes obtained by such Holder in exchange for Series A Notes acquired directly from the Company or an Affiliate thereof, it (1) could not, under Commission policy as in effect on the date of this Agreement, rely on the position of the Commission enunciated in Morgan Stanley and Co.,Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantors shall provide a supplemental letter to the Commission (A) stating that the Company and the Guarantors are registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991) as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and, if applicable, any no- action letter obtained pursuant to clause (i) above, (B) including a representation that neither the Company nor any Guarantor has entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Exchange Offer and that, to the best of the Company's and each Guarantor's information and belief, each Holder participating in the Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Exchange Offer and (C) any other undertaking (other than such undertakings as would be commercially unreasonable to perform) or representation required by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above, if applicable. (b) Shelf Registration Statement. In connection with the Shelf Registration Statement, the Company (and, to the extent of the Guarantees, the Guarantors) shall: (i) comply with all the provisions of Section 6(c) below and use their respective reasonable best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company (and, to the -8- 10 extent of the Guarantees, the Guarantors) will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof. (ii) issue, upon the request of any Holder or purchaser of Series A Notes covered by any Shelf Registration Statement contemplated by this Agreement, Series B Notes having an aggregate principal amount equal to the aggregate principal amount of Series A Notes sold pursuant to the Shelf Registration Statement and surrendered to the Company for cancellation; the Company shall register Series B Notes on the Shelf Registration Statement for this purpose and issue the Series B Notes to the purchaser(s) of securities subject to the Shelf Registration Statement in the names as such purchaser(s) shall designate. (c) General Provisions. In connection with any Registration Statement and any related Prospectus required by this Agreement to permit the sale or resale of Transfer Restricted Securities (including, without limitation, any Registration Statement and the related Prospectus required to permit resales by Broker-Dealers), the Company (and, to the extent of the Guarantees, the Guarantors) shall: (i) use their respective reasonable best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading or (B) not to be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Company (and, to the extent of the Guarantees, the Guarantors) shall file promptly an appropriate amendment to such Registration Statement curing such defect, and, if Commission review is required, use their respective reasonable best efforts to cause such amendment to be declared effective as soon as reasonably practicable; (ii) prepare and file with the Commission such amendments and post-effective amendments to the applicable Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, as the case may be, or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been exchanged or sold or until such securities no longer constitute Transfer Restricted Securities or are no longer outstanding; cause, subject to Section 4(c), the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise each Holder promptly and, if requested by such Holder, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any applicable Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order -9- 11 suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, and (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Company (and, to the extent of the Guarantees, the Guarantors) shall use their respective reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest practicable time; (iv) subject to Section 6(c)(i), if any fact or event contemplated by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) furnish to the managing underwriters, if any, or any Holder who is required to deliver a Prospectus in connection with an Exchange Offer or who is otherwise named in a Prospectus in connection with such exchange or sale (the "Specified Holders"), if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review and comment of such Specified Holders in connection with such sale, if any, for a period of at least five Business Days, and the Company will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which such Holders shall reasonably object within five Business Days after the receipt thereof. A Specified Holder shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains an untrue statement of a material fact or omits to state any material fact necessary to make the statements therein not misleading or fails to comply with the applicable requirements of the Act; (vi) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, if requested by any Holders within five Business Days after receipt of notification thereof from the Company, provide copies of such document to each Holder in connection with such exchange or sale, if any, make the Company's and the Guarantors' representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such Holders may reasonably request; -10- 12 (vii) make available, at reasonable times, for inspection by each Holder and any attorney or accountant retained by such Holders, all financial and other records, pertinent corporate documents of the Company and the Guarantors and cause the Company's and the Guarantors' officers, directors and employees to supply all information reasonably requested by any such Holder, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; (viii) if requested by any Holders in connection with such exchange or sale, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such Holders may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment; (ix) furnish to each Holder in connection with such exchange or sale, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (x) deliver to each Holder without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company (and, to the extent of the Guarantees, the Guarantors) hereby consent to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each selling Holder in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto; (xi) upon the request of any Specified Holder or the managing underwriters, if any, enter into such agreements (including underwriting agreements) and make such representations and warranties and take all such other customary or appropriate actions as are reasonably requested in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to the applicable Registration Statement contemplated by this Agreement as may be reasonably requested by any Specified Holder in connection with any sale or resale pursuant to any applicable Registration Statement. In such connection, the Company (and, to the extent of the Guarantees, the Guarantors) shall: (A) upon request of any Specified Holder, furnish (or in the case of paragraphs (2) and (3), use its best reasonable efforts to cause to be furnished) to each Specified Holder, upon Consummation of the Exchange Offer or upon the effectiveness of the Shelf Registration Statement, as the case may be: (1) a certificate, dated such date, signed on behalf of the Company and each Guarantor by (x) the President or any Vice President and (y) a principal financial or accounting officer of the Company and such Guarantor, confirming, as of the date thereof, the matters set forth in Sections 6(y), 9(a) and 9(b) of the Purchase Agreement and such other similar matters as such Specified Holders may reasonably request; -11- 13 (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Company and the Guarantors covering matters similar to those set forth in paragraph (e) of Section 9 of the Purchase Agreement and such other matters as such Specified Holder may reasonably request, and in any event including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Company and the Guarantors, representatives of the independent public accountants for the Company and the Guarantors and have considered the matters required to be stated therein and the statements contained therein, although such counsel has not investigated or independently verified, and does not assume any responsibility for, the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing (relying as to materiality to the extent such counsel deems appropriate upon the statements of officers and other representatives of the Company and the Guarantors and without independent check or verification), no facts came to such counsel's attention that caused such counsel to believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment thereto became effective and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements, notes and schedules and other financial or statistical data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated the date of Consummation of the Exchange Offer, or as of the date of effectiveness of the Shelf Registration Statement, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 9(g) of the Purchase Agreement; and (B) deliver such other documents and certificates as may be reasonably requested by the Specified Holders to evidence compliance with the matters covered in clause (A) above and with any customary conditions contained in any agreement entered into by the Company and the Guarantors pursuant to this clause (xi); -12- 14 (xii) prior to any public offering of Transfer Restricted Securities, cooperate with the selling Holders and their counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as the selling Holders may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; provided, however, that neither the Company nor any Guarantor shall be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xiii) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the Holders to facilitate the timely preparation and delivery of certificates, including global certificates, representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and, in the case of certificated Transfer Restricted Securities, to register such Transfer Restricted Securities in such denominations and such names as the selling Holders may request at least two Business Days prior to such sale of Transfer Restricted Securities; (xiv) use their respective reasonable best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (xii) above and except as may be required solely as a consequence of such Seller's business (in which case the Company and the Guarantors will cooperate in all reasonable respects); (xv) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with The Depository Trust Company; (xvi) otherwise use their respective reasonable best efforts to comply with all applicable rules and regulations of the Commission, and to mail or otherwise make generally available to its security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 under the Act (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xvii) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its reasonable best efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and -13- 15 (xviii) provide promptly to each Holder, upon request, each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) Restrictions on Holders. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of (a) the notice referred to in Section 4(c), (b) the notice referred to in Section 6(c)(iii)(C) or (c) any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof (in each case, a "SUSPENSION NOTICE"), such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until (i) such Holder has received copies of the supplemented or amended Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (in each case, the "RECOMMENCEMENT DATE"). Each Holder receiving a Suspension Notice hereby agrees that it will either (i) destroy any Prospectuses, other than permanent file copies, then in such Holder's possession which have been replaced by the Company with more recently dated Prospectuses or (ii) deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of the Suspension Notice. The time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by a number of days equal to the number of days in the period from and including the date of delivery of the Suspension Notice to the Recommencement Date. SECTION 7. REGISTRATION EXPENSES (a) All expenses incident to the Company's and the Guarantors' performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses; (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing (including printing certificates for the Series B Notes to be issued in the Exchange Offer and printing of Prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company, the Guarantors, in accordance with Section 7(b) below, and the Holders of Transfer Restricted Securities; (v) all application and filing fees in connection with listing the Series B Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company and the Guarantors (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its and the Guarantors' internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company or the Guarantors. (b) In connection with any Registration Statement required by this Agreement (including, without limitation, the Exchange Offer Registration Statement and the Shelf Registration Statement), the Company and the Guarantors will reimburse the Initial Purchasers and the Holders of Transfer Restricted Securities who are tendering Series A Notes in the Exchange Offer and/or selling or reselling Series A Notes or Series B Notes pursuant to the "Plan of Distribution" contained in the Exchange Offer Registration Statement or the Shelf Registration Statement, as applicable, for the reasonable fees and disbursements of not more than one counsel, who shall be Andrews & Kurth L.L.P., unless another firm shall be chosen by -14- 16 the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Registration Statement is being prepared. Such Holders shall be responsible for any of their other expenses incurred in connection with the registration of the sale of their Transfer Restricted Securities. SECTION 8. INDEMNIFICATION (a) The Company and the Guarantors agree, jointly and severally, to indemnify and hold harmless each Holder, its directors, officers and each Person, if any, who controls such Holder (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act), from and against any and all losses, claims, damages, liabilities and judgments (including without limitation, any legal or other expenses reasonably incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto) provided by the Company to any Holder or any prospective purchaser of Series B Notes or registered Series A Notes, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is based upon information relating to any of the Holders furnished in writing to the Company by any of the Holders. (b) Each Holder of Transfer Restricted Securities agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantors, and their respective directors, managers and officers, and each Person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company or any of the Guarantors, to the same extent as the foregoing indemnity from the Company and the Guarantors to such Holder set forth in Section 8(a) above, but only with reference to information relating to such Holder furnished in writing to the Company by such Holder expressly for use in any Registration Statement, preliminary prospectus, Prospectus or any amendment or supplement thereto). In no event shall any Holder, its directors, officers or any Person who controls such Holder be liable or responsible for any amount in excess of the dollar amount of the price at which the Series A Notes purchased by it hereunder and resold to Eligible Purchasers were offered to the Eligible Purchasers. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), a Holder shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Holder). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses -15- 17 available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Holders, in the case of the parties indemnified pursuant to Section 8(a), and by the Company and Guarantors, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action effected with the indemnifying party's written consent, which consent will not be unreasonably withheld. Notwithstanding the immediately preceding sentence, if in any case where the fees and expenses of counsel are at the expense of the indemnifying party and an indemnified party shall have requested the indemnifying party to reimburse the indemnified party for such fees and expenses of counsel actually incurred by it, such indemnifying party agrees that it shall be liable for any settlement of any action effected without its written consent if (i) such settlement is entered into more than 60 days after the receipt by such indemnifying party of the aforesaid request (ii) such indemnifying party shall have received notice of the proposed settlement being entered into at least 20 days prior to such settlement being entered into and (iii) prior to the date of such settlement such indemnifying party shall have failed to reimburse the indemnified party in accordance with such request for reimbursement (or, if within 30 days of the receipt of the aforesaid request, the indemnifying party shall have made a good faith written challenge to the reasonableness of the amount of the reimbursement requested or the sufficiency of the documentation supporting the reimbursement requested (which challenge shall specifically set forth the amount of the requested reimbursement which the indemnifying party in good faith believes to be unreasonable or the basis for the good faith claim as to the insufficiency of any supporting documentation), this sentence shall only apply if such indemnifying party shall not have reimbursed the indemnified party for the amount which is not being so challenged). No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent that the indemnification provided for in this Section 8 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors, on the one hand, and the Holders, on the other hand, from their sale of Transfer Restricted Securities or (ii) if the allocation provided by clause 8(d)(i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantors, on the one hand, and of the Holders, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantors, on the one hand and the Holders, on the other hand, shall be deemed to be in -16- 18 the same proportion as the total net proceeds from the offering of the Series A Notes (after discounts and commissions, but before deducting expenses) received by the Company, and the total proceeds received by the Holders from the sale of Transfer Restricted Securities pursuant to a Registration Statement bear to the total price to investors of the Series A Notes. The relative fault of the Company and the Guarantors, on the one hand, and of the Holders, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Guarantor, on the one hand, or by the Holders, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Guarantors and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8: (i) no Holder (other than the Initial Purchasers), its directors, its officers or any Person, if any, who controls such Holder shall be required to contribute, in the aggregate, any amount in excess of the dollar amount by which the total proceeds received by such Holder from the sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds (A) the amount paid by such Holder for such Transfer Restricted Securities and (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (ii) no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Series A Notes purchased by it hereunder and resold pursuant to the Shelf Registration Statement were offered to the public exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to contribute pursuant to this Section 8(d) are several in proportion to the respective principal amount of Transfer Restricted Securities held by each Holder hereunder and not joint. (e) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. SECTION 9. RULE 144A AND RULE 144 The Company and each Guarantor agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company or such Guarantor (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder, to such Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A, and (ii) is subject to Section 13 or 15 (d) of the Exchange Act, -17- 19 to make all filings required thereby in a timely manner in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144. SECTION 10. MISCELLANEOUS (a) Remedies. The Company and the Guarantors acknowledge and agree that any failure by the Company and the Guarantors to comply with their respective obligations under Sections 3 and 4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Guarantor's obligations under Sections 3 and 4 hereof. The Company and the Guarantors further agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. Neither the Company nor any Guarantor will, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Neither the Company nor any Guarantor has previously entered into any agreement granting any registration rights with respect to its securities to any Person, except as disclosed in the Offering Memorandum dated June 19, 1998 with respect to the offering and sale of the Series A Notes. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's and the Guarantors' securities under any agreement in effect on the date hereof. (c) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless (i) in the case of Section 5 hereof and this Section 10(c)(i), the Company has obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities (excluding Transfer Restricted Securities held by the Company or its Affiliates). Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose Transfer Restricted Securities are being tendered pursuant to the Exchange Offer, and that does not affect directly or indirectly the rights of other Holders whose Transfer Restricted Securities are not being tendered pursuant to such Exchange Offer, may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities being tendered in to such Exchange Offer. (d) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and -18- 20 (ii) if to the Company or the Guarantors: Bayard Drilling Technologies, Inc. 4005 Northwest Expressway, Suite 550E Oklahoma City, Oklahoma 73116 Telephone No.: (405) 840-9550 Telecopier No.: (405) 879-9553 Attention: David Grose With a copy to: Baker & Botts, L.L.P. 2001 Ross Avenue Dallas, Texas 75201 Telephone No.: (214) 953-6500 Telecopier No.: (214) 953-6503 Attention: Geoffrey Newton All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. (f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Securities in any manner, whether by operation of law or otherwise, such Transfer Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such Person shall be entitled to receive the benefits hereof. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. -19- 21 (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. -20- 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. BAYARD DRILLING TECHNOLOGIES, INC. /s/ DAVID E. GROSE, III ------------------------------------ By: Name: David E. Grose, III Title: Vice President BAYARD DRILLING, L.L.C. /s/ DAVID E. GROSE, III ------------------------------------ By: Name: David E. Grose, III Title: Vice President BAYARD DRILLING, L.P. By: Bayard Drilling, L.L.C., its general partner /s/ DAVID E. GROSE, III ------------------------------------ By: Name: David E. Grose, III Title: Vice President BONRAY DRILLING CORPORATION /s/ DAVID E. GROSE, III ------------------------------------ By: Name: David E. Grose, III Title: Vice President TREND DRILLING CO. /s/ DAVID E. GROSE, III ------------------------------------ By: Name: David E. Grose, III Title: Vice President -21- 23 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEX. BROWN DAIN RAUSCHER WESSELS LEHMAN BROTHERS INC. By DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ DWIGHT SCOTT ----------------------- Name: Dwight Scott Title: Senior Vice President -22- EX-5.1 4 OPINION AND CONSENT OF BAKER & BOTTS L.L.P. 1 EXHIBIT 5.1 [BAKER & BOTTS LETTERHEAD] July 21, 1998 Bayard Drilling Technologies, Inc. Bayard Drilling, L.L.C. Bayard Drilling, L.P. Bonray Drilling Corporation Trend Drilling Co. 4005 Northwest Expressway Suite 550E Oklahoma City, Oklahoma 73116 Ladies and Gentlemen: As set forth in the Registration Statement on Form S-4 (the "Registration Statement") to be filed by Bayard Drilling Technologies, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), relating to the offering by the Company of an aggregate of $100,000,000 principal amount of 11% Senior Notes due June 30, 2005, Series B (the "Exchange Notes"), together with the related guarantees (the "Guarantees") of the payment of the principal of, premium, if any, and interest on the Exchange Notes by Bayard Drilling, L.L.C., a Delaware limited liability company ("BDLC"), Bayard Drilling, L.P., a Delaware limited partnership ("BDLP"), Bonray Drilling Corporation, a Delaware corporation ("Bonray"), and Trend Drilling Co., an Oklahoma corporation ("Trend," and together with BDLC, BDLP and Bonray, the "Guarantors"), in exchange for the Company's 11% Senior Notes due June 30, 2005, Series A (the "Old Notes"), together with related guarantees by the Guarantors, issued in a private placement pursuant to Rule 144A under the Securities Act, certain legal matters in connection with the Exchange Notes are being passed upon for the Company by us. At your request, this opinion is being furnished to you for filing as Exhibit 5.1 to the Registration Statement. In our capacity as counsel to the Company and the Guarantors in connection with the registration and proposed exchange by the Company of the Exchange Notes as described in the Registration Statement, we have examined the Certificate of Incorporation, Certificate of 2 Bayard Drilling Technologies, Inc., et al. -2- July 21, 1998 Formation and Certificate of Limited Partnership, as appropriate, of the Company and each of the Guarantors, the Bylaws, Limited Liability Company Agreement and Limited Partnership Agreement, as appropriate, of the Company and each of the Guarantors, each as amended to date, the minutes or records of the corporate, partnership or limited liability company proceedings as furnished to us by the Company and the Guarantors with respect to the issuance of the Exchange Notes and the execution of the Indenture dated as of June 26, 1998 (the "Indenture"), among the Company, the Guarantors and U.S. Trust Company of Texas, N.A., as Trustee, pursuant to which the Exchange Notes are to be issued, the Indenture, the proposed form of Exchange Note, and the Registration Statement. We have also examined the originals, or copies certified or otherwise identified, of corporate, partnership or limited liability company records of the Company and the Guarantors, certificates of public officials and of representatives of the Company and the Guarantors, statutes and other records, instruments and documents as a basis for the opinions hereinafter expressed. In such examination, we have assumed that all signatures on all documents examined by us are genuine, that all documents submitted to us as originals are authentic, that all documents submitted to us as copies are true and correct copies of the originals thereof and that all information submitted to us was accurate and complete. As to various questions of fact material to this opinion, we have relied upon the accuracy of certificates and oral statements of officers and representatives of the Company and the Guarantors and of public officials. Based upon our examination as aforesaid, and subject to the assumptions, qualifications, limitations and exceptions herein set forth, we are of the opinion that: 1. The Company and Bonray are both corporations, duly incorporated and validly existing in good standing under the laws of the State of Delaware. 2. BDLC is a limited liability company, duly formed and validly existing in good standing under the laws of the State of Delaware. 3. BDLP is a limited partnership, duly formed and validly existing in good standing under the laws of the State of Delaware. 4. Trend is a corporation, duly incorporated and validly existing in good standing under the laws of the State of Oklahoma. 5. The Exchange Notes and the Guarantees have been duly authorized by all necessary corporate action on the part of the Company and the Guarantors, respectively. 3 Bayard Drilling Technologies, Inc., et al. -3- July 21, 1998 6. Subject to the Registration Statement becoming effective under the Securities Act, to the Indenture being qualified under the Trust Indenture Act of 1939, as amended, to compliance with any applicable state securities laws, and to the Exchange Notes being executed by the Company and authenticated by the Trustee in accordance with the terms of the Indenture, the Exchange Notes and the Guarantees proposed to be exchanged by the Company and the Guarantors for the Old Notes and the related guarantees pursuant to the terms of the exchange offer described in the Registration Statement have been duly authorized for issuance and, when issued and delivered in exchange for the Old Notes and the related guarantees in accordance with the terms and provisions of the exchange offer as described in the Registration Statement and the Indenture, will be entitled to the benefits of the Indenture and will be valid and legally binding obligations of the Company and the Guarantors, respectively, enforceable against the Company and the Guarantors, respectively, in accordance with their terms, except (a) as enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws relating to or affecting creditors' rights generally and (b) by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Our opinion is subject to the qualification that certain of the waivers and remedies in the Indenture and the Exchange Notes may be unenforceable under, or may be limited by, the laws (including judicial decisions) of the State of New York and the United States. However, the unenforceability or limitation of such covenants, waivers and remedies will not, in our opinion, prevent the realization by the holders thereof of the practical benefits intended to be provided by the Indenture, the Exchange Notes and the Guarantees, except for the economic consequences of any delay that may result from such enforceability or limitation. We express no opinion with respect to any laws other than those of the State of Texas, the State of New York, the Federal laws of the United States and the General Corporation Law of the State of Delaware. In rendering the opinions set forth in paragraphs 1, 2 and 3 above with respect to the existence and good standing of the Company and the Guarantors (other than Trend), this firm has relied solely on the certificate(s) of authorities in the state of the Company's and each such Guarantor's formation. In rendering the opinions set forth in paragraphs 4, 5 and 6 above regarding Trend and the Guarantee proposed to be issued by it, and with respect to all matters relating to or based upon Oklahoma law, this firm has relied, with your permission, solely on the opinion letter of 4 Bayard Drilling Technologies, Inc., et al. -4- July 21, 1998 McAfee & Taft A Professional Corporation, special Oklahoma counsel for Trend, dated July 21, 1998 and attached hereto as Exhibit A. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to us under "Legal Matters" in the Prospectus forming a part of the Registration Statement. In giving such consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act. This opinion is furnished to you in connection with the filing of the Registration Statement, and is not to be used, circulated, quoted or otherwise relied upon for any other purpose. Very truly yours, /s/ Baker & Botts, L.L.P. 5 EXHIBIT A [MCAFEE & TAFT LETTERHEAD] July 21, 1998 Trend Drilling Co. 4005 Northwest Expressway Suite 550E Oklahoma City, OK 73116 Ladies and Gentlemen: You have requested our opinion on certain legal matters in connection with the offering by Bayard Drilling Technologies, Inc. (the "Company") of an aggregate of $100,000,000 principal amount of 11% Senior Notes due June 30, 2005, Series B (the "Exchange Notes"), together with the related guarantee (the "Guarantee") of the payment of the principal of, premium, if any, and interest on the Exchange Notes by Trend Drilling Co., an Oklahoma corporation ("Trend"), in exchange for the Company's 11% Senior Notes due June 30, 2005, Series A (the "Old Notes"), together with related guarantee by Trend. In our capacity as counsel to Trend, we have examined the Certificate of Incorporation and the Bylaws, as amended to date, and minutes of Trend as furnished to us by Trend with respect to the Guarantee. We have also examined the originals, or copies certified or otherwise identified, of certificates of public officials and of representatives of Trend, and we have made such other investigations as we deemed appropriate in order to express the opinions set forth herein. We have assumed that all signatures on all documents examined by us are genuine, that all documents submitted to us as originals are authentic, that all documents submitted to us as copies are true and correct copies of the originals thereof and that all information submitted to us was accurate and complete. As to various questions of fact material to this opinion, we have relied upon the accuracy of certificates and oral statements of officers and representatives of Trend and of public officials. 6 -2- Based upon our examination as aforesaid, and subject to the assumptions, qualifications, limitations and exceptions herein set forth, we are of the opinion that: 1. Trend is a corporation, duly incorporated and validly existing in good standing under the laws of the State of Oklahoma. 2. The Guarantee has been duly authorized by all necessary corporate action on the part of Trend. 3. Subject to the Registration Statement to be filed by the Company in connection with the exchange offer becoming effective under the Securities Act of 1933, to the Indenture being qualified under the Trust Indenture Act of 1939, as amended, to compliance with any applicable state securities laws, and to the Exchange Notes being executed by the Company and authenticated by the Trustee in accordance with the terms of the Indenture, the Guarantee proposed to be exchanged by Trend pursuant to the terms of the exchange offer has been duly authorized for issuance and, when issued and delivered in exchange for the guarantee related to the Old Notes in accordance with the terms and provisions of the exchange offer as described in the Registration Statement and the Indenture, will be a valid and legally binding obligation of Trend enforceable in accordance with its terms, except (a) as enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws relating to or affecting creditors' rights generally and (b) by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). We express no opinion with respect to any laws other than those of the State of Oklahoma and the Federal laws of the United States. In rendering the opinions set forth in paragraphs 1 above with respect to the existence and good standing of Trend, this firm has relied solely on an oral representation from the Secretary of State of the State of Oklahoma. We are expressing no opinion as to the enforceability of provisions that purport to (i) establish any evidentiary standard, (ii) specify any interpretation or standard of interpretation, (iii) specify the scope or effect of any waiver or any omission or delay of enforcement of any remedy, (iv) waive any defense to specific performance, (v) agree to forego any benefits of usuary laws, (vi) dictate severance or reformation of contractual remedies, or (viii) confer or restrict equitable remedies. We hereby consent to the reliance on this opinion by Baker & Botts, L.L.P., for the purpose of rendering that firm's opinion to be filed as Exhibit 5.1 to the Registration Statement and to inclusion of this opinion as an Exhibit thereto. This opinion is not to be used, circulated, quoted or otherwise relied upon for any other purpose. 7 -3- Very truly yours, /s/ McAfee & Taft, P.C. EX-10.13 5 AMENDED & RESTATED LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.13 LOAN AND SECURITY AGREEMENT BY AND BETWEEN FLEET CAPITAL CORPORATION AND BAYARD DRILLING TECHNOLOGY, INC. DATED: JUNE 18, 1998 $10,000,000 2 TABLE OF CONTENTS
Page SECTION 1. CREDIT FACILITY 1 1.1 REVOLVING CREDIT LOANS. 1 1.2 LETTERS OF CREDIT; LC GUARANTIES 2 1.3 ALL LOANS TO CONSTITUTE ONE OBLIGATION 2 1.4 RELEASE OF TREND 2 SECTION 2. INTEREST, FEES AND CHARGES 2 2.1 INTEREST 2 2.2 COMPUTATION OF INTEREST AND FEES 4 2.3 AMENDMENT FEE 4 2.4 LETTER OF CREDIT AND LC GUARANTY FEES 4 2.5 COMMITMENT FEE 4 2.6 SERVICING FEE 4 2.7 AUDIT AND APPRAISAL FEES 4 2.8 REIMBURSEMENT OF EXPENSES 4 2.9 BANK CHARGES 5 2.10 LINE DEBIT FOR CHARGES 5 SECTION 3. LOAN ADMINISTRATION 5 3.1 MANNER OF BORROWING REVOLVING CREDIT LOANS 5 3.2 PAYMENTS 6 3.3 APPLICATION OF PAYMENTS AND COLLECTIONS 7 3.4 LOAN ACCOUNT 7
i 3 3.5 STATEMENTS OF ACCOUNT 7 SECTION 4. TERM AND TERMINATION 8 4.1 TERM OF AGREEMENT 8 4.2 TERMINATION 8 SECTION 5. SECURITY INTERESTS 9 5.1 SECURITY INTEREST IN COLLATERAL 9 5.2 INTENTIONALLY OMITTED 9 5.3 LIEN PERFECTION; FURTHER ASSURANCES 9 5.4 LIEN ON REALTY 10 SECTION 6. COLLATERAL ADMINISTRATION 10 6.1 GENERAL 10 6.2 ADMINISTRATION OF ACCOUNTS 11 6.3 INTENTIONALLY OMITTED 12 6.4 ADMINISTRATION OF DRILLING RIGS 13 6.5 PAYMENT OF CHARGES 13 SECTION 7. REPRESENTATIONS AND WARRANTIES 14 7.1 GENERAL REPRESENTATIONS AND WARRANTIES 14 7.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES 19 SECTION 8. COVENANTS AND CONTINUING AGREEMENTS 19 8.1 AFFIRMATIVE COVENANTS 19 8.2 NEGATIVE COVENANTS 22 8.3 SPECIFIC FINANCIAL COVENANTS 29
ii 4 SECTION 9. CONDITIONS PRECEDENT 29 9.1 DOCUMENTATION 29 9.2 NO DEFAULT 29 9.3 OTHER LOAN DOCUMENTS 29 9.4 CERTIFICATE OF LIMITED PARTNERSHIP 29 9.5 PARTNERSHIP AGREEMENT 29 9.6 ARTICLES OF INCORPORATION; OPERATING AGREEMENT 30 9.7 GOOD STANDING CERTIFICATES 30 9.8 OPINION LETTERS 30 9.9 INSURANCE 30 9.10 DOMINION ACCOUNT 30 9.11 REPRESENTATIONS 30 9.12 NO LITIGATION 30 9.13 EVIDENCE OF PERFECTION AND PRIORITY OF LIENS IN COLLATERAL 30 9.14 CIT INTERCREDITOR AGREEMENT 30 9.15 NO MATERIAL ADVERSE CHANGE 31 SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 31 10.1 EVENTS OF DEFAULT 31 10.2 ACCELERATION OF THE OBLIGATIONS 33 10.3 OTHER REMEDIES 33 10.4 REMEDIES CUMULATIVE; NO WAIVER 35 SECTION 11. MISCELLANEOUS 35 11.1 POWER OF ATTORNEY 35
iii 5 11.2 INDEMNITY 36 11.3 MODIFICATION OF AGREEMENT; SALE OF INTEREST 37 11.4 SEVERABILITY 37 11.5 SUCCESSORS AND ASSIGNS 38 11.6 CUMULATIVE EFFECT; CONFLICT OF TERMS 38 11.7 EXECUTION IN COUNTERPARTS 38 11.8 NOTICE 38 11.9 LENDER'S CONSENT 39 11.10 CREDIT INQUIRIES 39 11.11 TIME OF ESSENCE 39 11.12 ENTIRE AGREEMENT; APPENDIX A AND EXHIBITS AND SCHEDULES 39 11.13 INTERPRETATION 40 11.14 GOVERNING LAW; CONSENT TO FORUM 40 11.15 WAIVERS BY BORROWER 41 11.16 ORAL AGREEMENTS INEFFECTIVE 41 11.17 NONAPPLICABILITY OF CHAPTER 346 OF THE TEXAS FINANCE CODE 41 11.18 CERTAIN MATTERS OF CONSTRUCTION 42 11.19 RELEASE 42 11.20 AMENDMENT AND RESTATEMENT 42 11.21 JOINDER 42
iv 6 Exhibit 10.13 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is made this 18th day of June, 1998, by and between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation with an office at 2711 North Haskell Avenue, Suite 2100, LB 21, Dallas, Texas 75204, and Bayard Drilling Technologies, Inc., a Delaware corporation ("Bayard" or "Borrower"), with its chief executive office and principal place of business at 4005 N.W. Expressway, Oklahoma City, Oklahoma 73116 and joined in by Bayard Drilling, L.P., a Delaware limited partnership ("Drilling LP") for the purposes described in Section 11.21 below (the "Agreement"). Capitalized terms used in this Agreement have the meanings assigned to them in Appendix A, General Definitions. Accounting terms not otherwise specifically defined herein shall be construed in accordance with GAAP consistently applied. SECTION 1. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lender agrees to make a total credit facility of up to $10,000,000 available upon Borrower's request therefor, as follows: 1.1 Revolving Credit Loans. 1.1.1 Loans and Reserves. Lender agrees, during the term of this Agreement and for so long as no Default or Event of Default exists, to make Revolving Credit Loans to Borrower from time to time, as requested by Borrower in the manner set forth in Section 3.1.1 hereof, up to a maximum principal amount at any time outstanding equal to the Borrowing Base. Lender shall have the right to establish reserves in such amounts, and with respect to such matters, as Lender shall deem necessary or appropriate, against the amount of Revolving Credit Loans which Borrower may otherwise request under this Section 1.1.1, including, without limitation, with respect to (i) any sums chargeable against Borrower's Loan Account as Revolving Credit Loans under any section of this Agreement; (ii) amounts owing by Borrower and/or Drilling LP to any Person to the extent secured by a Lien on, or trust over, any Property of Borrower and/or Drilling LP other than the CIT Debt; (iii) all amounts of past due rent or other charges owing at such time by Borrower and/or Drilling LP to any landlord of any premises where any of the Collateral is located; and (iv) such other matters, events, conditions or contingencies as to which Lender, in its reasonable judgment, determines reserves should be established from time to time hereunder. 1.1.2 Use of Proceeds. The Revolving Credit Loans shall be used solely for general corporate purposes and capital needs of the Borrower and its Subsidiaries, in a manner consistent with the provisions of this Agreement and Applicable Law. In no event shall any proceeds of any Revolving Credit Loans be used to purchase or to carry, reduce, retire or refinance any Indebtedness incurred to purchase or carry any margin stock (within the meaning of Regulations G or U of the Federal Reserve Board). 1 7 1.2 Letters of Credit; LC Guaranties. Lender agrees, for so long as no Default or Event of Default exists and if requested by Borrower, to (i) issue its, or cause to be issued by its Affiliates, standby Letters of Credit for the account of Borrower or (ii) execute LC Guaranties by which Lender or its Affiliates shall guaranty the payment or performance by Borrower of its reimbursement obligations with respect to standby Letters of Credit, provided that the LC Amount at any time shall not exceed $2,000,000. No Letter of Credit or LC Guaranty may have an expiration date that is after the last day of the Original Term. Any amounts paid by Lender under any LC Guaranty or in connection with any Letter of Credit shall be treated as Revolving Credit Loans, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolving Credit Loans. 1.3 All Loans to Constitute One Obligation. All Loans shall constitute one general obligation of Borrower, and shall be secured by Lender's security interest in and Lien upon all of the Collateral, and by all other security interests and Liens heretofore, now or at any time or times hereafter granted by Borrower or any Subsidiary to Lender. 1.4 Release of Trend. Trend is hereby released from its obligations under the Original Loan Agreement. Such release shall not affect Trend's obligations as Guarantor or party to a Security Agreement. SECTION 2. INTEREST, FEES AND CHARGES 2.1 Interest. 2.1.1 Rates of Interest. The outstanding principal amount of the Loans shall bear interest at a fluctuating rate per annum equal to the lesser of (a) one and one-half percent (1.5 %) above the Base Rate (the "Applicable Annual Rate") and (b) the Maximum Legal Rate. The rate of interest applicable to all Loans shall increase or decrease by an amount equal to any increase or decrease in the Base Rate, effective as of the opening of business on the day that any such change in the Base Rate occurs. 2.1.2 Default Rate of Interest. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of all Loans shall bear interest at a rate per annum equal to the lesser of (a) two percent (2.00%) above the Applicable Annual Rate and (b) the Maximum Legal Rate. 2.1.3 Maximum Interest. (A) Notwithstanding anything to the contrary in this Agreement or otherwise, (i) if at any time the amount of interest computed on the basis of an Applicable Annual Rate or a Default Rate would exceed the amount of such interest computed upon the basis of the maximum rate of interest permitted by applicable state or federal law in effect from time to time hereafter (the "Maximum Legal Rate"), the interest payable under this Agreement shall be computed upon the basis of the Maximum Legal Rate, but any subsequent reduction in such Applicable Annual Rate or Default Rate, as applicable, shall not reduce such interest thereafter payable hereunder below the amount computed on the basis of the Maximum Legal Rate until the aggregate amount of such interest accrued and payable under this Agreement 2 8 equals the total amount of interest which would have accrued if such interest had been at all times computed solely on the basis of an Applicable Annual Rate or Default Rate, as applicable; and (ii) unless preempted by federal law, an Applicable Annual Rate or Default Rate, as applicable, from time to time in effect hereunder may not exceed the applicable "annual ceiling" as defined in Chapter 303, Optional Interest Rate Ceilings of the Texas Finance Code. If the applicable state or federal law is amended in the future to allow a greater rate of interest to be charged under this Agreement than is presently allowed by applicable state or federal law, then the limitation of interest hereunder shall be increased to the maximum rate of interest allowed by applicable state or federal law as amended, which increase shall be effective hereunder on the effective date of such amendment, and all interest charges owing to Lender by reason thereof shall be payable in accordance with Section 3.2.2 hereof. (B) Excess Interest. No agreements, conditions, provisions or stipulations contained in this Agreement or any other instrument, document or agreement between Borrower and Lender or default of Borrower, or the exercise by Lender of the right to accelerate the payment of the maturity of principal and interest, or to exercise any option whatsoever contained in this Agreement or any other Loan Document, or the arising of any contingency whatsoever, shall entitle Lender to contract for, charge, or receive, in any event, interest exceeding the Maximum Legal Rate. In no event shall Borrower be obligated to pay interest exceeding such Maximum Legal Rate and all agreements, conditions or stipulations, if any, which may in any event or contingency whatsoever operate to bind, obligate or compel Borrower to pay a rate of interest exceeding the Maximum Legal Rate, shall be without binding force or effect, at law or in equity, to the extent only of the excess of interest over such Maximum Legal Rate. In the event any interest is contracted for, charged or received in excess of the Maximum Legal Rate ("Excess Interest"), Borrower acknowledges and stipulates that any such contract, charge, or receipt shall be the result of an accident and bona fide error, and that any Excess received by Lender shall be applied, first, to reduce the principal then unpaid hereunder; second, to reduce the other Obligations; and third, returned to Borrower, it being the intention of the parties hereto not to enter at any time into a usurious or otherwise illegal relationship. Borrower recognizes that, with fluctuations in the Base Rate and the Maximum Legal Rate, such a result could inadvertently occur. By the execution of this Agreement, Borrower covenants that (i) the credit or return of any Excess Interest shall constitute the acceptance by Borrower of such Excess Interest, and (ii) to the extent permitted by law, Borrower shall not seek or pursue any other remedy, legal or equitable, against Lender, based in whole or in part upon contracting for, charging or receiving of any interest in excess of the maximum authorized by applicable law. For the purpose of determining whether or not any Excess Interest has been contracted for, charged or received by Lender, all interest at any time contracted for, charged or received by Lender in connection with this Agreement shall be amortized, prorated, allocated and spread in equal parts during the entire term of this Agreement. (C) Incorporation by this Reference. The provisions of Section 2.1.3(B) shall be deemed to be incorporated into every document or communication relating to the Obligations which sets forth or prescribes any account, right or claim or alleged account, right or claim of Lender with respect to Borrower (or any other obligor in respect of Obligations including, without limitation, Drilling LP), whether or not any provision of Section 2.1.3(B) is 3 9 referred to therein. All such documents and communications and all figures set forth therein shall, for the sole purpose of computing the extent of the Obligations of Borrower (or any other obligor) asserted by Lender thereunder, be automatically re-computed by Borrower or any such obligor, and by any court considering the same, to give effect to the adjustments or credits required by Section 2.1.3(B). 2.2 Computation of Interest and Fees. Interest, Letter of Credit and LC Guaranty fees and commitment fees hereunder shall be calculated daily and shall be computed on the actual number of days elapsed over a year of 360 days. For the purpose of computing interest hereunder, all items of payment received by Lender shall be deemed applied by Lender on account of the Obligations (subject to final payment of such items) one (1) Business Day after receipt by Lender of such items in Lender's account located in Atlanta, Georgia, and Lender shall be deemed to have received such items of payment on the date specified in Section 3.3 hereof. 2.3 Amendment Fee. Borrower shall pay to Lender, on the Amendment Date, an amendment fee in the amount of $20,000. 2.4 Letter of Credit and LC Guaranty Fees. Borrower shall pay to Lender for standby Letters of Credit and LC Guaranties of standby Letters of Credit, two percent (2.00%) per annum of the aggregate face amount of such Letters of Credit and LC Guaranties outstanding from time to time during the term of this Agreement, plus all normal and customary charges associated with the issuance thereof, which fees and charges shall be deemed fully earned upon issuance of each such Letter of Credit or LC Guaranty, shall be due and payable on the first Business Day of each month and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. 2.5 Commitment Fee. Borrower shall pay to Lender a commitment fee equal to one-half of one percent (.5%) per annum of the amount by which the Average Monthly Revolving Credit Loan Balance is less than the Total Credit Facility. The commitment fee shall be payable monthly, in arrears, on the last day of each calendar month hereafter. 2.6 Servicing Fee. Borrower shall pay to Lender an annual servicing fee of $20,000. This servicing fee shall be paid in equal installments of $5,000, payable on the first day of each April, July, October, and January thereafter. 2.7 Audit and Appraisal Fees. Borrower shall reimburse Lender for all actual out-of-pocket costs and expenses incurred by Lender in connection with audits and appraisals of Borrower and/or any Subsidiary's books and records and such other matters as Lender shall deem appropriate. All such out-of-pocket expenses shall be payable on demand. 2.8 Reimbursement of Expenses. If, at any time or times regardless of whether or not an Event of Default then exists, Lender incurs reasonable legal expenses or any accounting expenses or any other costs or out-of-pocket expenses in connection with (i) the negotiation and preparation of this Agreement or any of the other Loan Documents, any amendment of or modification of this Agreement or any of the other Loan Documents, or any sale or attempted 4 10 sale of any interest herein to any other Person; (ii) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; (iii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, Borrower or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents or Borrower's or any Loan Party's affairs; (iv) any attempt to enforce any rights of Lender against Borrower or any other Person which may be obligated to Lender by virtue of this Agreement or any of the other Loan Documents, including the Account Debtors; or (v) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then all such legal and accounting expenses, other costs and out of pocket expenses of Lender shall be charged to Borrower. All amounts chargeable to Borrower under this Section 2.8 shall be Obligations secured by all of the Collateral, shall be payable on demand to Lender and shall bear interest from the date such demand is made until paid in full at the rate applicable to Revolving Credit Loans from time to time. Borrower shall also reimburse Lender for expenses incurred by Lender in its administration of the Collateral to the extent and in the manner provided in Section 6 hereof. 2.9 Bank Charges. Borrower shall pay to Lender, on demand, any and all normal and customary fees, costs or expenses which Lender pays to a bank or other similar institution arising out of or in connection with (i) the forwarding to Borrower or any other Person on behalf of Borrower, by Lender, of proceeds of loans made by Lender to Borrower pursuant to this Agreement and (ii) the depositing for collection, by Lender, of any check or item of payment received or delivered to Lender on account of the Obligations. 2.10 Line Debit for Charges. Lender may, at its option, make a Revolving Credit Loan to reimburse itself for any and all amounts payable by Borrower to Lender hereunder. Alternatively, Lender may invoice Borrower for any such amounts and, in such case and notwithstanding anything contained herein to the contrary, interest shall not begin to accrue on such amounts until five (5) days after the delivery by Lender of such invoice. SECTION 3. LOAN ADMINISTRATION 3.1 Manner of Borrowing Revolving Credit Loans. Borrowings under the credit facility established pursuant to Section 1 hereof shall be as follows: 3.1.1 Loan Requests. A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (i) Borrower shall give Lender notice of its intention to borrow, in which notice Borrower shall specify the amount of the proposed borrowing and the proposed borrowing date, no later than 11:00 a.m. Dallas, Texas time on the proposed borrowing date; provided, however, Lender shall have the right to refuse to accept such a request or make a Revolving Credit Loan if at such time there exists a Default or an Event of Default; and (ii) the becoming due of any amount required to be paid under this Agreement or under any of the other Loan Documents, whether as principal, accrued interest, fees or other charges, shall be deemed irrevocably to be a request by Borrower from Lender for a Revolving Credit Loan on the due date of, and in an aggregate amount required to pay, such principal, accrued interest, fees or other charges, and the proceeds of any such Revolving Credit Loan may 5 11 be disbursed by Lender by way of direct payment of the relevant Obligation (whether or not any Default, Event of Default or Out-of-Formula Condition exists at the time of or would result from such Revolving Credit Loan) and shall bear interest at the rate of interest applicable to Revolving Credit Loans. As an accommodation to Borrower, Lender may permit telephonic requests for loans and electronic transmittal of instructions, authorizations, agreements or reports to Lender by Borrower. Unless Borrower specifically directs Lender in writing not to accept or act upon telephonic or electronic communications from Borrower, Lender shall have no liability to Borrower for any loss or damage suffered by Borrower as a result of Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to Lender telephonically or electronically and purporting to have been sent to Lender by any individual from time to time designated by Borrower as an authorized officer and Lender shall have no duty to verify the origin or authenticity of any such communication. 3.1.2 Disbursement. Borrower hereby irrevocably authorizes Lender to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, pursuant to this Section 3.1.2 as follows: (i) the proceeds of each Revolving Credit Loan requested under Section 3.1.1(i) shall be disbursed by Lender in lawful money of the United States of America in immediately available funds, by wire transfer to such bank account as may be agreed upon by Borrower and Lender from time to time or elsewhere if pursuant to a written direction from Borrower; and (ii) the proceeds of each Revolving Credit Loan requested under Section 3.1.1(ii) shall be disbursed by Lender by way of direct payment of the relevant interest or other Obligation. 3.1.3 Authorization. Borrower hereby irrevocably authorizes Lender, in Lender's sole discretion, to advance to Borrower, and to charge to Borrower's Loan Account hereunder as a Revolving Credit Loan, a sum sufficient to pay all interest accrued on the Obligations during the immediately preceding month and to pay all costs, fees and expenses at any time owed by Borrower to Lender hereunder. 3.2 Payments. All payments with respect to any of the Obligations shall be made to Lender on the date when due, in Dollars and in immediately available funds, without any offset or counterclaim. Except where evidenced by notes or other instruments issued or made by Borrower to Lender specifically containing payment provisions which are in conflict with this Section 3.2 (in which event the conflicting provisions of said notes or other instruments shall govern and control), the Obligations shall be payable as follows: 3.2.1 Principal. Principal payable on account of Revolving Credit Loans shall be payable by Borrower to Lender immediately upon the earliest of (i) the receipt by Lender, Borrower or any other Loan Party of any proceeds of any of the Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 4 hereof; provided, however, that if an Out-of-Formula Condition shall exist at any time, Borrower shall, on demand, repay the Obligations to the extent necessary to eliminate the Out-of-Formula Condition. 6 12 3.2.2 Interest. Interest accrued on the Revolving Credit Loans shall be due on the earliest of (i) the first calendar day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations or (iii) termination of this Agreement pursuant to Section 4 hereof. 3.2.3 Costs, Fees and Charges. Costs, fees and charges payable pursuant to this Agreement shall be payable by Borrower as and when provided in Section 2 hereof, to Lender or to any other Person designated by Lender in writing. 3.2.4 Other Obligations. The balance of the Obligations requiring the payment of money, if any, shall be payable by Borrower to Lender as and when provided in this Agreement, the Other Agreements or the Security Documents, or, if no date of payment is otherwise specified in the Loan Documents, on demand. 3.3 Application of Payments and Collections. All items of payment received by Lender by 12:00 noon, Dallas, Texas time, on any Business Day shall be deemed received on that Business Day. All items of payment received after 12:00 noon, Dallas, Texas time, on any Business Day shall be deemed received on the following Business Day. Borrower irrevocably waives the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of Borrower, and Borrower does hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lender or its agent against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. If as the result of collections of Accounts as authorized by Section 6.2.6 hereof a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrower, but shall be available to Borrower at any time or times for so long as no Default or Event of Default exists. Lender may, at its option, offset such credit balance against any of the Obligations upon and after the occurrence of an Event of Default. 3.4 Loan Account. Lender shall establish an account on its books (the "Loan Account") and shall enter all Loans as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrower on any Obligations and all proceeds of Collateral which are finally paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Borrower. 3.5 Statements of Account. Lender will account to Borrower monthly with a statement of Loans, charges and payments made pursuant to this Agreement supported, if requested by Borrower, by appropriate documentation, and such account rendered by Lender shall be deemed final, binding and conclusive upon Borrower unless Lender is notified by Borrower in writing to the contrary within sixty (60) days after the date each accounting is deemed to have been sent pursuant to Section 11.8 hereof. Such notice shall only be deemed an objection to those items specifically objected to therein. 7 13 SECTION 4. TERM AND TERMINATION 4.1 Term of Agreement. Subject to Section 4.2 hereof and Lender's right to cease making Loans to Borrower upon or after the occurrence of any Default or Event of Default, this Agreement shall terminate on April 30, 2000 (the "Original Term"). 4.2 Termination. 4.2.1 Termination by Lender. After the occurrence and during the continuation of an Event of Default, Lender may terminate this Agreement without notice. 4.2.2 Termination by Borrower. Upon at least sixty (60) days prior written notice to Lender, Borrower may, at its option, terminate this Agreement; provided, however, no such termination shall be effective until Borrower has paid all of the Obligations in immediately available funds and all Letters of Credit and LC Guaranties have expired or have been cash collateralized to Lender's satisfaction. Any notice of termination given by Borrower shall be irrevocable unless Lender otherwise agrees in writing, and Lender shall have no obligation to make any Loans or issue or procure any Letters of Credit or LC Guaranties on or after the termination date stated in such notice. Borrower may elect to terminate this Agreement in its entirety only. No section of this Agreement or type of Loan available hereunder may be terminated singly. 4.2.3 Termination Charges. On the effective date of termination of this Agreement for any reason, Borrower shall pay to Lender (in addition to the then outstanding principal, accrued interest and other charges owing under the terms of this Agreement and any of the other Loan Documents) as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to two percent (2%) of the Total Credit Facility if termination occurs during the second twelve-month period of the Original Term (May 1, 1998, through April 30, 1999); and one percent (1%) of the Total Credit Facility if termination occurs during the third twelve-month period of the Original Term (May 1, 1999, through April 30, 2000). If termination occurs on the last day of the Original Term, no termination charge shall be payable. 4.2.4 Effect of Termination. All of the Obligations shall be immediately due and payable upon the termination date stated in any notice of termination of this Agreement. All undertakings, agreements, covenants, warranties and representations of Borrower contained in the Loan Documents shall survive any such termination and Lender shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such termination until Borrower has paid the Obligations to Lender, in full, in immediately available funds, together with the applicable termination charge, if any. Notwithstanding the payment in full of the Obligations, Lender shall not be required to terminate its security interests in the Collateral unless, with respect to any loss or damage Lender may incur as a result of dishonored checks or other items of payment received by Lender from Borrower, or any other Loan Party or any Account Debtor and applied to the Obligations, Lender shall, at its option (i) have received a written agreement, executed by Borrower, Drilling LP and by any Person whose loans or other 8 14 advances to Borrower are used in whole or in part to satisfy the Obligations, indemnifying Lender from any such loss or damage; or (ii) have retained such monetary reserves and Liens on the Collateral for such period of time as Lender, in its reasonable discretion, may deem necessary to protect Lender from any such loss or damage. SECTION 5. SECURITY INTERESTS 5.1 Security Interest in Collateral. To secure the prompt payment and performance to Lender of all of the Obligations, Borrower hereby grants to Lender a continuing security interest in and Lien upon all of Borrower's right, title and interest in and to the following Property and interests in Property of Borrower, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (i) All accounts (as defined in Section 9.106 of the Code); (ii) All Inventory; (iii) All General Intangibles (excluding, to the extent included, drilling contracts other than the Drilling Contracts); (iv) All investment property (as defined in Section 9.115 of the Code); (v) the El Reno Property; (vi) the Drilling Rigs; (vii) the Drilling Contracts; (viii) All monies and other Property of any kind now or at any time or times hereafter in the possession or under the control of Lender or a bailee or Affiliate of Lender; (ix) All accessions to, substitutions for and all replacements, products and cash and non-cash proceeds of (i) through (viii) above, including, without limitation, proceeds of and unearned premiums with respect to insurance policies insuring any of the Collateral; and (x) All books and records (including, without limitation, customer lists, credit files, computer programs, print-outs, and other computer materials and records) of Borrower pertaining to any of (i) through (ix) above. 5.2 Intentionally Omitted. 5.3 Lien Perfection; Further Assurances. Borrower shall execute such UCC-1 financing statements as are required by the Code and such other instruments, assignments or documents as are necessary to perfect Lender's Lien upon any of the Collateral (other than motor vehicles and investment property) and shall take such other action as may be required to 9 15 perfect or to continue the perfection of Lender's Lien upon such Collateral. Unless prohibited by Applicable Law, Borrower hereby authorizes Lender to execute and file any such financing statement on Borrower's behalf. The parties agree that a carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. At Lender's reasonable request, Borrower shall also promptly execute or cause to be executed and shall deliver to Lender any and all documents, instruments and agreements deemed necessary by Lender to give effect to or carry out the terms or intent of the Loan Documents. 5.4 Lien on Realty. The due and punctual payment and performance of the Obligations shall also be secured by a Lien upon the El Reno Property owned by Drilling LP. SECTION 6. COLLATERAL ADMINISTRATION 6.1 General 6.1.1 Location of Collateral. All tangible items of Collateral, other than Inventory in transit and Drilling Rigs, the locations of which are reported to Lender pursuant to Section 6.4.4 hereof, motor vehicles and investment property held in an account with a securities intermediary, shall at all times be kept by Borrower and its Subsidiaries at one or more of the business locations set forth in Exhibit A hereto and shall not, without the prior written approval of Lender, be moved therefrom except, prior to an Event of Default and Lender's acceleration of the maturity of the Obligations in consequence thereof, for (i) sales and other movement of Inventory in the ordinary course of business, and (ii) removals in connection with dispositions of Drilling Rigs that are authorized by Section 6.4.2 hereof. 6.1.2 Insurance of Collateral. Borrower shall maintain and pay, and cause each Subsidiary to maintain and pay, for insurance upon all Collateral wherever located and with respect to Borrower's and its Subsidiaries' business, covering casualty, hazard, public liability and such other risks in such amounts and with such insurance companies as is carried by prudent owners of similar assets engaged in similar operations (at the time of issue of the policies in question) and approved by Lender. Borrower or such Subsidiary shall deliver the originals or certified copies of such policies to Lender with satisfactory lender's loss payable endorsements, which policies shall name Lender as a loss payee, assignee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than thirty (30) days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever, unless such cancellation is a result of non-payment of premiums in which case 10 days prior written notice shall be given to Lender, and a clause specifying that the interest of Lender shall not be impaired or invalidated regardless of any breach of or violation by Borrower or a Subsidiary of any warranties, declarations or conditions contained in said policy. If Borrower or a Subsidiary fails to provide and pay for such insurance, Lender may, at its option, but shall not be required to, procure the same and charge Borrower therefor. Borrower agrees, and shall cause each Subsidiary as applicable, to deliver to Lender, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. 10 16 6.1.3 Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any Applicable Law on any of the Collateral or in respect of the sale thereof, and all other payments required to be made by Lender to any Person to realize upon any Collateral shall be borne and paid by Borrower. If Borrower fails to promptly pay any portion thereof when due, Lender may, at its option, but shall not be required to, pay the same and charge Borrower therefor. Lender shall not be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto (except for reasonable care in the custody thereof while any Collateral is in Lender's actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other Person whomsoever, but the same shall be at Borrower's sole risk. 6.2 Administration of Accounts. 6.2.1 Records, Schedules and Assignments of Accounts. Drilling LP shall keep accurate and complete records of the Accounts and all payments and collections thereon and shall submit to Lender on such periodic basis as Lender shall request a sales and collections report for the preceding period, in form satisfactory to Lender. On or before the fifteenth day of each month from and after the date hereof, Drilling LP shall deliver to Lender, in form acceptable to Lender, a detailed aged trial balance of all Accounts existing as of the last day of the preceding month, specifying the names, addresses, face value, dates of invoices and due dates for each Account Debtor obligated on an Account so listed ("Schedule of Accounts"), and, upon Lender's request therefor, copies of proof of delivery and the original copy of all documents, including, without limitation, repayment histories and present status reports relating to the Accounts so scheduled and such other matters and information relating to the status of then existing Accounts as Lender shall reasonably request. In addition, if Accounts in an aggregate face amount in excess of $350,000 become ineligible because they fall within one of the specified categories of ineligibility set forth in the definition of Eligible Accounts or otherwise established by Lender, Drilling LP shall notify Lender of such occurrence on the first Business Day following the day such occurrence becomes known to Drilling LP and the Borrowing Base shall thereupon be adjusted to reflect such occurrence. If requested by Lender, Drilling LP shall execute and deliver to Lender agings and formal written assignments of all of the Accounts weekly or daily, which shall include all Accounts that have been created since the date of the last assignment, together with copies of invoices or invoice registers related thereto. 6.2.2 Discounts, Allowances, Disputes. If Drilling LP grants any discounts, allowances or credits that are not shown on the face of the invoice for the Account involved, Drilling LP shall report such discounts, allowances or credits, as the case may be, to Lender as part of the next required Schedule of Accounts. If any amounts due and owing in excess of $350,000 are in dispute between Drilling LP and any Account Debtor, Drilling LP shall provide Lender with written notice thereof at the time of submission of the next Schedule of Accounts, explaining in detail the reason for the dispute, all claims related thereto and the amount in controversy. Upon and after the occurrence of an Event of Default, Lender shall have the right to settle or adjust all disputes and claims directly with the Account Debtor and to compromise the amount or extend the time for payment of the Accounts upon such terms and conditions as 11 17 Lender may deem advisable, and to charge the deficiencies, costs and expenses thereof, including attorney's fees, to Borrower. 6.2.3 Taxes. If an Account includes a charge for any tax payable to any governmental taxing authority, Lender is authorized, in its sole discretion, to pay the amount thereof to the proper taxing authority for the account of Drilling LP and to charge Borrower therefor; provided, however, that Lender shall not be liable for any such taxes to any governmental taxing authority that may be due by Drilling LP or Borrower. 6.2.4 Account Verification. Whether or not a Default or an Event of Default has occurred, any of Lender's officers, employees or agents shall have the right, at any time or times hereafter, in the name of Lender, any designee of Lender, Borrower or Drilling LP, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, facsimile transmission or otherwise. Borrower and Drilling LP shall cooperate fully with Lender in an effort to facilitate and promptly conclude any such verification process. 6.2.5 Maintenance of Dominion Account. Drilling LP shall maintain a Dominion Account pursuant to a lockbox arrangement acceptable to Lender with such banks as may be selected by Drilling LP and be acceptable to Lender. Drilling LP shall issue to any such banks an irrevocable letter of instruction directing such banks to deposit all payments or other remittances received in the lockbox to the Dominion Account for application on account of the Obligations. All funds deposited in the Dominion Account shall immediately become the property of Lender and Drilling LP shall obtain the agreement by such banks in favor of Lender to waive any offset rights against the funds so deposited. 6.2.6 Collection of Accounts, Proceeds of Collateral. To expedite collection, Drilling LP shall endeavor in the first instance to make collection of the Accounts for Lender. All remittances received by Borrower and/or Drilling LP in respect of the Accounts, together with the proceeds of any other Collateral, shall be held as Lender's property by Borrower or Drilling LP, as the case may be, as trustee of an express trust for Lender's benefit and Borrower or Drilling LP, as the case may be, shall immediately deposit, or cause to be deposited, same in kind in the Dominion Account. Lender retains the right at all times after the occurrence of an Event of Default to notify Account Debtors (and account debtors of Borrower with respect to Borrower's accounts) that Accounts, or accounts, the case may be, have been assigned to Lender and to collect Accounts, or accounts, as the case may be, directly in its own name and to charge the collection costs and expenses, including reasonable attorneys' fees to Borrower. 6.3 Intentionally Omitted. 6.4 Administration of Drilling Rigs. 6.4.1 Records and Schedules of Drilling Rigs. Borrower, Drilling LP, and each other Subsidiary shall keep accurate records itemizing and describing the kind, type, quality, quantity and value of the Drilling Rigs and related equipment respectively owned by any of them, and all dispositions made in accordance with Section 6.4.2 hereof, and shall furnish Lender 12 18 with a current schedule containing the foregoing information on at least an annual basis and more often if requested by Lender. Immediately on request therefor by Lender, Borrower, Drilling LP, and each other Subsidiary shall deliver to Lender any and all evidence of ownership, if any, of any of the Drilling Rigs and related equipment respectively owned by any of them. 6.4.2 Dispositions of Drilling Rigs. Borrower will not, and shall cause Drilling LP and each other Subsidiary to not, sell, lease or otherwise dispose of or transfer any of the Drilling Rigs or any part thereof without the prior written consent of Lender; provided, however, that the foregoing restriction shall not apply, for so long as no Default or Event of Default exists, to (i) dispositions of Drilling Rigs and related equipment which, in the aggregate during any fiscal year of Borrower, has a fair market value or book value, whichever is less, of $1,000,000 or less, (ii) replacements of Drilling Rigs and related equipment that are substantially worn, damaged or obsolete with Drilling Rigs and related equipment of like kind, function and value, provided that the replacement equipment or Drilling Rigs shall be acquired prior to or concurrently with any disposition of the Drilling Rigs and related equipment that is to be replaced, the replacement Drilling Rigs and related equipment or Drilling Rigs shall be free and clear of Liens other than Permitted Liens, or (iii) dispositions of Drilling Rigs permitted under Section 8.2.9 hereof. 6.4.3 Condition of Drilling Rigs. Borrower, Drilling LP, each other Subsidiary represent and warrant to Lender that the Drilling Rigs are in good operating condition and repair according to customary oil and gas industry practice, and all necessary replacements of and repairs thereto shall be made so that the value and operating efficiency of the Drilling Rigs shall be maintained and preserved in accordance with such practice, reasonable wear and tear excepted. Borrower, Drilling LP, and each other Subsidiary will not permit any of the and Drilling Rigs to become affixed to any real Property leased to Borrower or any Subsidiary so that an interest arises therein under the real estate laws of the applicable jurisdiction unless the landlord of such real Property has executed a landlord waiver or leasehold mortgage in favor of and in form acceptable to Lender, and Borrower, Drilling LP, and each other Subsidiary will not permit any of the Drilling Rigs to become an accession to any personal Property that is subject to a Lien unless the Lien is a Permitted Lien. 6.4.4 Location of Drilling Rigs. Not later than fifteen (15) days after the end of each month hereafter, Borrower and Drilling LP shall cause to be prepared and furnish to Lender a schedule indicating the precise location of each Drilling Rig as of the end of such month. 6.5 Payment of Charges. All amounts chargeable to Borrower under Section 6 hereof shall be Obligations secured by all of the Collateral, shall be payable on demand and shall bear interest from the date such advance was made until paid in full at the rate applicable to Revolving Credit Loans from time to time. 13 19 SECTION 7. REPRESENTATIONS AND WARRANTIES 7.1 General Representations and Warranties. To induce Lender to enter into this Agreement and to make advances hereunder, Borrower and as the case may be, Drilling LP, warrants and represents to Lender and covenants with Lender that: 7.1.1. Organization and Qualification. Borrower and each of its Subsidiaries is duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation. Borrower and its Subsidiaries are duly qualified and authorized to do business and in good standing in each state or jurisdiction listed on Exhibit B hereto and in all other states and jurisdictions where the character of its Properties or the nature of its activities make such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect. 7.1.2. Corporate Power and Authority. Each of Borrower and its Subsidiaries is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary corporate, membership or partnership action, as the case may be, and do not and will not (i) require any consent or approval of the shareholders of Borrower or its corporate Subsidiaries, partners of Drilling LP or members of Drilling LLC; (ii) contravene Borrower's or its corporate Subsidiaries charter, articles or certificate of incorporation or by-laws, Drilling LP's certificate of limited partnership or its partnership agreement; or Drilling LLC's operating agreement; (iii) violate, or cause Borrower or its Subsidiaries to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to Borrower or its Subsidiaries, as the case may be; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Borrower or its Subsidiaries is a party or by which any one of which or any of their respective Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by Borrower its Subsidiaries. 7.1.3. Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding obligation of Borrower and its Subsidiaries, as the case may be, enforceable against it in accordance with its respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or by principles of equity pertaining to the availability of equitable remedies. 7.1.4. Capital Structure on the Amendment Date. Exhibit C hereto states (i) the correct name of each of the Subsidiaries of Borrower, its jurisdiction of incorporation, formation or organization, as the case may be, and the percentage of its Voting Stock owned by Borrower, and, in the case of Drilling LP, the respective partnership units and percentage interest, including the general or limited nature thereof, held by each of Trend, Bonray and Drilling LLC, (ii) the 14 20 name of each of Borrower's corporate or joint venture Affiliates and the nature of the affiliation, (iii) the number, nature and holder (if such holder owns or controls five percent (5%) or more of the outstanding securities) of all outstanding Securities (including partnership interests) of Borrower and each Subsidiary of Borrower, and (iv) the number of authorized, issued and treasury shares of Borrower and each Subsidiary of Borrower. Borrower has good title to all of the shares it purports to own of the stock of each of its Subsidiaries, free and clear in each case of any Lien. All such shares have been duly issued and are fully paid and non-assessable. Trend, Bonray and Drilling LLC have good title to all partnership interests they purport to own in Drilling LP, free and clear in each case of any Lien. Except as set forth on Exhibit C there are no outstanding options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any Securities or obligations convertible into, or any powers of attorney relating to, shares of the capital stock,. membership interest or partnership interest of any Subsidiary. 7.1.5. Corporate Names. Neither Borrower nor any of its Subsidiaries has been known as or used any corporate, fictitious or trade names except those listed on Exhibit D hereto. Except as set forth on Exhibit D neither Borrower nor any of its Subsidiaries has been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person. 7.1.6. Business Locations; Agent for Process. Borrower's and its Subsidiaries' chief executive office and other places of business are as listed on Exhibit A hereto. During the preceding five-year period, neither Borrower nor any of its Subsidiaries has had an office or place of business other than as listed on Exhibit A. Except as shown on Exhibit A no Inventory of Borrower is stored with a bailee, warehouseman or similar Person, nor is any Inventory consigned to any Person. 7.1.7. Title to Properties; Priority of Liens. To the best of Borrower's and Drilling LP's knowledge, Borrower and its Subsidiaries have good and marketable title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of their real Property, and good title to all of the Collateral and all of their other Property, in each case, free and clear of all Liens except Permitted Liens. Borrower, Drilling LP, and each Subsidiary have paid or discharged all lawful claims (other than accounts payable permitted to be outstanding under Section 8.2.3(iv)) which, if unpaid, might become a Lien against any of such Borrower's, Drilling LP's, or such other Subsidiary's Properties that is not a Permitted Lien. The Liens granted to Lender under Section 5 hereof are first priority Liens, subject only to Permitted Liens. All of the Drilling Rigs are mobile equipment which are not designed to be permanently used for any one location and none of the Drilling Rigs are certificated as motor vehicles under the laws of any jurisdiction. 7.1.8 Accounts. Lender may rely, in determining which Accounts of Drilling LP are Eligible Accounts, on all statements and representations made by Borrower and/or Drilling LP with respect to any Account or Accounts. Unless otherwise indicated in writing to Lender, with respect to each Account: 15 21 (i) It is genuine and in all respects what it purports to be, and it is not evidenced by a judgment; (ii) It arises out of a completed, bona fide sale and delivery of goods or rendition of services by Drilling LP in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts or other documents relating thereto and forming a part of the contract between Drilling LP and the Account Debtor; (iii) It is for a liquidated amount maturing as stated in the duplicate invoice covering such sale or rendition of services, a copy of which has been furnished or is available to Lender; (iv) Such Account, and Lender's security interest therein, is not subject to any offset, Lien, deduction, defense, dispute, counterclaim or any other adverse condition, except for disputes resulting in disputes in service where the amount in controversy is deemed by Lender to be immaterial, and each such Account is absolutely owing to Drilling LP and is not contingent in any respect or for any reason; (v) Drilling LP has made no agreement with any Account Debtor thereunder for any extension, compromise, settlement or modification of any such Account or any deduction therefrom, except discounts or allowances which are granted by Drilling LP in the ordinary course of its business for prompt payment and which are reflected in the calculation of the net amount of each respective invoice related thereto and are reflected in the Schedules of Accounts submitted to Lender pursuant to Section 6.2.1 hereof; (vi) There are no facts, events or occurrences known to Borrower and/or Drilling LP which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered to Lender with respect thereto; (vii) To the best of Drilling LP's knowledge, the Account Debtor thereunder (a) had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (b) such Account Debtor is Solvent; and (viii) To the best of Drilling LP's knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor thereunder which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of such Account. 7.1.9 Financial Statements; Fiscal Year. The Consolidated balance sheet of Borrower as of December 31, 1997, and the related statements of income, changes in stockholder's equity, and cash flow statement for the periods ended on such dates, have been prepared in accordance with GAAP, and present fairly in all material respects the Consolidated financial position of Borrower at such date and the results of Borrower's operations for such periods in accordance with GAAP. Since February 28, 1997, there has been no material adverse 16 22 change in the condition, financial or otherwise, of Borrower or its Subsidiaries and since such date there has been no material and adverse change in the aggregate value of Drilling Rigs and real Property owned by Borrower, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse, and the corporate restructuring of Borrower and its Subsidiaries occurring immediately prior to the Amendment Date. The fiscal year of each Borrower and each of its respective Subsidiaries ends on December 31 of each year. 7.1.10 Full Disclosure. The financial statements referred to in Section 7.1.9 hereof do not, nor does this Agreement or any other written statement of Borrower or any Loan Party to Lender, contain any untrue statement of a material fact or omit a material fact, in either case known to Borrower, necessary to make the statements contained therein or herein not misleading in light of the circumstances under which such statement was made. There is no fact or circumstance known to Borrower which Borrower or its Subsidiaries has failed to disclose to Lender in writing which could reasonably be expected to have a Material Adverse Effect. 7.1.11. Intentionally Omitted. 7.1.12. Intentionally Omitted. 7.1.13. Taxes. Borrower's federal tax identification number is 73-1508021. Drilling LP's federal tax identification number is 73-1532348 Borrower and each of its Subsidiaries has filed all federal, state and local tax returns and other reports it is required by law to file and has paid, or made provision for the payment of, all Taxes upon it, its income and Properties as and when such Taxes are due and payable, except to the extent being Properly Contested. The provision for Taxes on the books of Borrower and its Subsidiaries are adequate for all years not closed by applicable statutes, and for its current fiscal year. 7.1.14. Intentionally Omitted. 7.1.15. Patents, Trademarks, Copyrights and Licenses. Borrower and each of its Subsidiaries own or possess all the material patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of their business without any material conflict with the rights of others and the failure to have such ownership or possession would result in a Material Adverse Effect. All patents, trademarks, service marks, trade names, copyrights, licenses and other similar rights are listed on Exhibit F hereto. 7.1.16. Governmental Consents. Borrower and each of its Subsidiaries have, and are in good standing with respect to, the failure of which, in any either case, would result in a Material Adverse Effect, all material governmental consents, approvals, licenses, authorizations, permits, certificates, inspections and franchises necessary to continue to conduct their business as heretofore or proposed to be conducted by them and to own or lease and operate their Properties as now owned or leased by them. 17 23 7.1.17. Compliance with Laws. Borrower and each of its Subsidiaries have duly complied with, and their Properties, business operations and leaseholds are in compliance in all material respects with, the provisions of all material Applicable Law and there have been no citations, notices or orders of material noncompliance issued to Borrower or any of its Subsidiaries under any such law, rule or regulation the failure to comply with which would result in a Material Adverse Effect. Borrower and each of its Subsidiaries has established and maintains an adequate monitoring system to insure that it remains in compliance with all federal, state and local laws, rules and regulations applicable to it. 7.1.18. Restrictions. Neither Borrower nor any of its Subsidiaries is a party or subject to any contract, agreement, or charter or other corporate restriction, which has or could be reasonably expected to have a Material Adverse Effect. Except as set forth on Exhibit G, neither Borrower nor any of its Subsidiaries is a party or otherwise subject to any contract or agreement which restricts the right or ability of Borrower or such Subsidiaries, as the case may be, to incur Indebtedness upon terms which are more restrictive than the terms of this Agreement. No contracts or agreements to which Borrower or any of its Subsidiaries is a party or by which any of their respective properties are bound prohibits the execution of or compliance with this Agreement or the other Loan Documents by Borrower or any of its Subsidiaries, as applicable. 7.1.19. Litigation. Except as set forth on Exhibit H hereto, there are no actions, suits, proceedings or investigations pending, or to the knowledge of Borrower, threatened, against or affecting Borrower or any of its Subsidiaries, or the business, operations, Properties, prospects, profits or condition of Borrower or any of its Subsidiaries in which the amount in controversy exceeds $1,000,000. Neither Borrower nor any of its Subsidiaries is in default with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal. 7.1.20. No Defaults. No event has occurred and no condition exists which would, upon or after the execution and delivery of this Agreement or any Borrower's or its Subsidiaries' performance hereunder, constitute a Default or an Event of Default that may reasonably be expected to result in costs to Borrower in excess of $1,000,000. Neither Borrower nor any of its Subsidiaries is in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any Indebtedness to any Person for Money Borrowed that may reasonably be expected to result in costs to Borrower in excess of $1,000,000. 7.1.21. Intentionally Omitted. 7.1.22. Pension Plans. Except as disclosed on Exhibit K hereto, neither Borrower nor any of its Subsidiaries has any Plan. Borrower and each of its Subsidiaries is in full compliance with the requirements of ERISA and the regulations promulgated thereunder with respect to each Plan. No fact or situation that could result in a material adverse change in the financial condition of Borrower or any of its Subsidiaries exists in connection with any Plan. Neither Borrower nor any of its Subsidiaries has any withdrawal liability in connection with a Multiemployer Plan. 18 24 7.1.23. Trade Relations. There exists no actual or threatened termination, cancellation or limitation of, or any adverse modification or change in, the business relationship between Borrower or any of its Subsidiaries and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of Borrower or any of its Subsidiaries, or with any material supplier, and there exists no condition or state of facts or circumstances which would materially adversely affect any Borrower and its Subsidiaries taken as a whole or prevent Borrower and its Subsidiaries from conducting such business after the consummation of the transaction contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted. 7.1.24. Labor Relations. Except as described on Exhibit L hereto, neither Borrower nor any of its Subsidiaries is a party to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of Borrower's or any of its Subsidiaries' employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization which could result in a Material Adverse Effect. 7.2. Survival of Representations and Warranties. All representations and warranties of Borrower, Drilling LP, and the other Subsidiaries contained in this Agreement or any of the other Loan Documents shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 8. COVENANTS AND CONTINUING AGREEMENTS 8.1 Affirmative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: 8.1.1. Visits and Inspections. Permit representatives of Lender, from time to time, as often as may be reasonably requested, but only during normal business hours, to (i) visit and inspect its Properties and the Properties of each of its Subsidiaries, and (ii) inspect, audit and make extracts from its and its Subsidiaries books and records (including, without limitation, all maintenance records for Drilling Rigs) and discuss with its officers, employees and independent accountants, its business, assets, liabilities, financial condition, business prospects and results of operations. 8.1.2. Notices. Notify Lender in writing (i) of the occurrence of any event or the existence of any fact which renders any representation or warranty in this Agreement or any of the other Loan Documents inaccurate, incomplete or misleading in any material respect; (ii) promptly after Borrower's learning thereof, of the commencement of any litigation affecting Borrower, any Subsidiary or any of their respective Properties, whether or not the claim is considered by Borrower to be covered by insurance, and of the institution of any administrative proceeding which if determined adversely to Borrower or any Subsidiary, would have a Material Adverse Effect; (iii) at least thirty (30) days prior thereto, of Borrower's or any Subsidiary's 19 25 opening of any new office or place of business or Borrower's or any Subsidiary's closing of their respective principal place of business; (iv) promptly after Borrower's learning thereof, of any material labor dispute to which Borrower or any Subsidiary may become a party, any strikes or walkouts relating to any of their respective plants or other facilities, and the expiration of any material labor contract to which it or any Subsidiary is a party or by which either is bound which, with respect to any of the foregoing, could result in a Material Adverse Effect; (v) promptly after Borrower's learning thereof, of any material default by any Loan Party under any note, indenture, loan agreement, mortgage, lease, deed, guaranty or other similar agreement relating to any Indebtedness of Borrower or any Subsidiary exceeding $1,000,000; (vi) promptly after the occurrence thereof, of any Default or Event of Default; (vii) promptly after the occurrence thereof, of any default by any obligor under any note or other evidence of Indebtedness payable to Borrower or any Subsidiary in an amount exceeding $1,000,000; and (viii) promptly after the rendition thereof, of any judgment rendered against any Loan Party in an amount exceeding $1,000,000. 8.1.3 Financial Statements. Keep, and cause each Subsidiary to keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all its financial transactions; and cause to be prepared and furnished to Lender the following (all to be prepared in accordance with GAAP applied on a consistent basis, unless Borrower's certified public accountants concur in any change therein and such change is disclosed to Lender and is consistent with GAAP): (i) not later than one hundred and twenty (120) days after the close of each fiscal year of Borrower, unqualified audited financial statements of Borrower and its Subsidiaries as of the end of such year, on a Consolidated basis, certified by a firm of independent certified public accountants of recognized standing selected by Borrower but acceptable to Lender (except for a qualification for a change in accounting principles with which the accountant concurs); (ii) not later than forty-five (45) days after the end of any month during which a Form 10-Q must be filed by Borrower with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, and thirty (30) days after the end of all other months, unaudited interim financial statements of Borrower and its Subsidiaries as of the end of such month and of the portion of Borrower's financial year then elapsed, on a Consolidated and, upon the request of Lender, consolidating basis, certified by the principal financial officer of Borrower as prepared in accordance with GAAP and fairly presenting in all material respects the Consolidated financial position and results of operations of Borrower and its Subsidiaries for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (iii) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which Borrower and/or its Subsidiaries has generally made available to its shareholders and copies of any regular, periodic and special reports or registration statements which Borrower and/or its Subsidiaries files with 20 26 the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or any national securities exchange; (iv) promptly after the filing thereof, copies of any annual report to be filed in accordance with ERISA in connection with each Plan; (v) such other data and information (financial and otherwise) as Lender, from time to time, may reasonably request, bearing upon or related to the Collateral or Borrower's and each of its Subsidiaries' financial condition or results of operations; and Concurrently with the delivery of the financial statements described in clause (i) of this Section 8.1.3, Borrower shall forward to Lender a copy of the accountants' letter to Borrower's management that is prepared in connection with such financial statements and also shall cause to be prepared and shall furnish to Lender a certificate of the aforesaid certified public accountants certifying to Lender that, based upon their examination of the financial statements of Borrower and its Subsidiaries performed in connection with their examination of said financial statements, they are not aware of any Default or Event of Default, or, if they are aware of such Default or Event of Default, specifying the nature thereof. Concurrently with the delivery of the financial statements described in clauses (i) and (ii) of this Section 8.1.3, or more frequently if requested by Lender, Borrower shall cause to be prepared and furnished to Lender a Compliance Certificate in the form of Exhibit M hereto executed by the chief financial officer of Borrower. 8.1.4 Landlord and Storage Agreements. Upon the occurrence and during the continuance of an Event of Default, provide Lender with copies of all agreements between Borrower or any of its Subsidiaries and any landlord or warehouseman which owns any premises at which any Inventory and Drilling Rigs may, from time to time, be kept. 8.1.5 Projections. No later than thirty (30) days prior to the end of each fiscal year of Borrower, deliver to Lender projections of Borrower's (consisting of Consolidated (and, if available, consolidating) balance sheets, income statements and cash flow statements, together with appropriate supporting details and underlying assumptions) for the forthcoming fiscal year, month by month. 8.1.6 Taxes. Pay and discharge, and cause each Subsidiary to pay and discharge, all Taxes prior to the date on which such Taxes become delinquent or penalties attach thereto, except and to the extent only that such Taxes are being Properly Contested. 8.1.7 Compliance with Laws. Comply and cause each Subsidiary to comply, with all Applicable Laws, including all laws, statutes, regulations and ordinances regarding the collection, payment and deposit of all Taxes, and all ERISA and Environmental Laws, and obtain and keep in force any and all licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, which violation or failure to obtain could reasonably be expected to have a Material Adverse Effect. 21 27 8.1.8 Insurance. In addition to the insurance required herein with respect to the Collateral, Borrower shall maintain and cause each Subsidiary to maintain, with financially sound and reputable insurers, insurance with respect to its Properties and business against such casualties and contingencies of such type (including product liability, business interruption, larceny, embezzlement, or other criminal misappropriation insurance) as is customary in its business and in such amounts as is acceptable to Lender. 8.2 Negative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless Lender has first consented thereto in writing, it will not: 8.2.1 Mergers; Consolidations; Acquisitions. In any transaction or series of transactions, consolidate with or merge into any other Person (other than a merger of a Subsidiary into the Borrower in which the Borrower is the continuing corporation), or continue in a new jurisdiction or sell, convey, assign, transfer, lease or otherwise dispose of all or substantially all of the Property and assets of the Borrower and the Subsidiaries, taken as a whole, or any Person, unless: (i) either (a) the Borrower shall be the continuing corporation or (b) the corporation (if other than the Borrower) formed by such consolidation or into which the Borrower is merged, or the Person which acquires, by sale, assignment, conveyance, transfer, lease or disposition, all or substantially all of the Property and assets of the Borrower and the Subsidiaries, taken as a whole (such corporation or Person, the "Surviving Entity"), shall be a corporation organized and validly existing under the laws of the United States of America, any political subdivision thereof or any state thereof or the District of Columbia, and shall expressly assume, the due and punctual payment of the principal of (and premium, if any) and interest on all the Obligations and the performance of the Borrower's covenants and obligations under this Agreement and the other Loan Documents. (ii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Event of Default or Default shall have occurred and be continuing or would result therefrom; (iii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), the Borrower (or the Surviving Entity if the Borrower is not continuing) shall have a Tangible Net Worth equal to or greater than the Tangible Net Worth of the Borrower immediately prior to such transactions; (iv) immediately after giving effect to any such transaction or series of transactions on a pro forma basis as if such transaction or series of transactions had occurred on the first day of the Determination Period, the Borrower (or the Surviving Entity if the Borrower 22 28 is not continuing) would be permitted to incur $1.00 of additional Indebtedness pursuant to the test described in Section 8.2.3; (v) the provision of clause (iv) shall not apply to any merger or consolidation into or with, or any such transfer of all or substantially all of the Property and assets of the Borrower and the Subsidiaries taken as a whole into, the Borrower or a Wholly Owned Subsidiary. (vi) in connection with any consolidation, merger, transfer of assets or other transactions contemplated by this provision, the Borrower shall deliver, or cause to be delivered, to the Lender, in form and substance reasonably satisfactory to the Lender, an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, conveyance or transfer and the assumption of obligations in connection therewith in respect thereto comply with the provisions of this Agreement and that all conditions precedent in this Agreement relating to such transactions have been complied with. 8.2.2 Loans. Except as provided in Sections 8.2.12 and 8.2.10 hereof and any intercompany loans between Drilling LP and Borrower, make or permit any of its Subsidiaries to make, any loans or other advances of money to any Person, except for travel advances, advances against commissions and other similar advances in the ordinary course of business and Permitted Investments (as defined in the Indenture). 8.2.3 Total Indebtedness. (a) Create, incur, assume, or suffer to exist, or permit any of its Subsidiaries to create, incur or suffer to exist, any Indebtedness, (including Acquired Indebtedness), unless after giving pro forma effect to the incurrence of such Indebtedness, the Consolidated Interest Coverage Ratio for the Determination Period preceding the Transaction Date is at least 2.5 to 1.0. Notwithstanding the foregoing, the Borrower or any Subsidiary (subject to the following paragraph) may incur Permitted Indebtedness. Any Indebtedness of a Person existing at time at which such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be incurred by such Subsidiary at the time at which it becomes a Subsidiary. (b) Subject to Section 8.2.3(a), the Borrower will not permit any Subsidiary to, directly or indirectly, incur any Indebtedness or issue any Preferred Stock except: (i) Indebtedness or Preferred Stock issued to and held by the Borrower, a Guarantor or a Wholly Owned Subsidiary, so long as any transfer of such Indebtedness or Preferred Stock to a Person other than the Borrower, Guarantor or a Wholly Owned Subsidiary will be deemed to constitute an incurrence of such Indebtedness or Preferred Stock by the issuer thereof as of the date of such transfer; (ii) Acquired Indebtedness or Preferred Stock of a Subsidiary issued and outstanding prior to the date on which such Subsidiary was acquired by the Borrower (other than Indebtedness or Preferred Stock issued in connection with or in anticipation of such acquisition); 23 29 (iii) Indebtedness or Preferred Stock outstanding on the Issue Date and listed in a schedule attached to the Indenture; (iv) Indebtedness described in clauses (b), (c), (d), (e), (f), (g), (h), (k) and (n) under the definition of "Permitted Indebtedness" contained in the Indenture; (v) Permitted Subsidiary Refinancing Indebtedness of such Subsidiary; (vi) Indebtedness or Preferred Stock issued in exchange for, or the proceeds of which are used to refinance, repurchase or redeem, Indebtedness or Preferred Stock described in clause (i) of this paragraph (the "Retired Indebtedness or Stock"), provided that the Indebtedness or the Preferred Stock so issued has (i) a principal amount or liquidation value, as the case may be, not in excess of the principal amount or liquidation value of the Retired Indebtedness or Stock plus related expenses for redemption and issuance, (ii) a final redemption date later than the stated maturity or final redemption date (if any) of the Retired Indebtedness or Stock and (iii) an Average Life at the time of issuance of such Indebtedness or Preferred Stock that is greater than the Average Life of the Retired Indebtedness or Stock; (vii) Indebtedness of a Subsidiary which represents the assumption by such Subsidiary of Indebtedness of another Subsidiary in connection with a merger of such Subsidiaries, provided that no Subsidiary or any successor (by way of merger) thereto existing on the Amendment Date shall assume or otherwise become responsible for any indebtedness of an entity which is not a Subsidiary on the Amendment Date, except to the extent that a Subsidiary would be permitted to incur such Indebtedness under this paragraph; (viii) Non-Recourse Indebtedness incurred by a foreign Subsidiary not constituting a Guarantor; and (ix) Indebtedness incurred to finance all or a part of the purchase price or construction, repair or improvement cost of Property acquired, constructed, repaired or improved after the Amendment Date. 8.2.4 Affiliate Transactions. Enter into or be a party to, or permit any of its Subsidiaries to enter into or be a party to, any transaction or series of related transactions with any Affiliate or stockholder (excluding transactions between Borrower and Drilling LP), unless (i) such transaction or series of related transactions is in the ordinary course of and pursuant to the reasonable requirements of Borrower's or such Subsidiary's business and upon fair and reasonable terms at the time entered into which are fully disclosed to Lender and are no less favorable than would be obtained in a comparable arm's length transaction with a Person not an Affiliate or stockholder of Borrower or such Subsidiary and (ii) (a) with respect to a transaction or series of related transactions that has a Fair Market Value in excess of $5 million but less than $10 million, the Borrower delivers an Officers' Certificate to the Lender certifying that such transaction or series of related transactions complies with clause (i) above; or (b) with respect to a transaction or series of related transactions that has a Fair Market Value equal to or in excess of 24 30 $10 million, the transaction or series of related transactions is approved by a majority of the Board of Directors of the Borrower (including a majority of the disinterested directors), which approval is set forth in a Board Resolution certifying that such transaction or series of transactions complies with clause (i) above. The foregoing provisions shall not be applicable to (i) reasonable and customary compensation, indemnification and other benefits paid or made available to an officer, director or employee of the Borrower or a Subsidiary for services rendered in such person's capacity as an officer, director or employee (including reimbursement or advancement of reasonable out-of-pocket expenses and provisions of directors' and officers' liability insurance as well as stock option agreements, restricted stock agreements and consulting or similar agreements), (ii) the making of any Restricted Payment otherwise permitted by the Indenture, (iii) any existing employment agreement, stock option agreement, restricted stock agreement, consulting agreement or similar agreement, (iv) any agreement in effect on the Issue Date or any amendment thereto (so long a such amendment is, taken as a whole, no less favorable to the Lender than the original agreement as in effect on the Issue Date) and any transactions contemplated thereby, or (v) any transaction described in "Certain Relationships and Related Transactions" in the Indenture. 8.2.5 Limitation on Liens. Create or suffer to exist, or permit any its Subsidiaries to create or suffer to exist, any Lien upon any of the Collateral, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Lender; (ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due or being Properly Contested; (iii) Liens arising in the ordinary course of its business by operation of law or regulation, but only if (a) payment in respect of any such Lien is not at the time required or (b) the Indebtedness secured by such Lien is being Properly Contested and such Lien does not materially detract from the value of the Property or materially impair the use thereof in the operation of its business; (iv) security interests on top drives to the extent that such security interests secure the financing by third parties of at least 80% of the purchase price of top drives; provided, however, that the aggregate purchase price of top drives shall not exceed $6,000,000; and provided, further, that the financing for the purchase of top drives shall be repaid from the proceeds of contracts for the use of the top drives of equal or longer duration to the amortization schedules of such financings; (v) liens securing performance and bid bonds obtained by Borrower in the ordinary course of their business up to an aggregate amount of $1,000,000 at any time; (vi) liens securing the Indebtedness described in Section 8.2.3(ix) above; 25 31 (vii) such other Liens as appear on Exhibit O hereto (including, without limitation, the liens securing the CIT Debt); and (viii) liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety, stay, customs and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money).] 8.2.6 Subordinated Debt. Make, or permit any of its Subsidiaries to make, any payment of all or any part of any Subordinated Debt or take any other action or omit to take any other action in respect of any Subordinated Debt, except in accordance with the subordination agreement relative thereto. 8.2.7 Restricted Payments. Make, nor permit any Subsidiary to make, any Restricted Payment, unless at the time of and after giving effect to the proposed Restricted Payment, (a) no Default shall have occurred and be continuing (or would immediately result therefrom), (b) the Borrower could incur at least $1.00 of additional Indebtedness under the tests described in Section 8.23 above, and (c) the aggregate amount of all Restricted Payments declared or made on or after the Amendment Date by the Borrower or any Subsidiary shall not exceed the sum of (i) 50% (or if such Consolidated Net Income shall be a deficit, minus 100% of such deficit) of the aggregate Consolidated Net Income accrued during the period beginning on the first day of the fiscal quarter in which the Amendment Date falls and ending on the last day of the fiscal quarter for which internal financial statements are available ending immediately prior to the date of such proposed Restricted Payment, minus 100% of the amount of any writedowns, write-offs and other negative extraordinary charges not otherwise reflected in Consolidated Net Income during such period, plus (ii) an amount equal to the aggregate net cash proceeds received by the Borrower, subsequent to the Amendment Date, from the issuance or sale (other than to a Subsidiary) of shares of its Capital Stock (excluding Redeemable Stock, but including Capital Stock issued upon the exercise of options, warrants or rights to purchase Capital Stock (other than Redeemable Stock) of the Borrower) and the liability (expressed as a positive number) as expressed on the face of a balance sheet in accordance with GAAP in respect of any Indebtedness of the Borrower or any of its Subsidiaries, or the carrying value of Redeemable Stock, which has been converted into, exchanged for or satisfied by the issuance of shares of Capital Stock (other than Redeemable Stock) of the Borrower, subsequent to the Amendment Date, plus (iii) 100% of the net reduction in Restricted Investments, subsequent to the Amendment Date, in any Person, resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of Property (but only to the extent such interest, dividends, repayments or other transfers of Property are not included in the calculation of Consolidated Net Income), in each case to the Borrower, or any Subsidiary from any Person (including, without limitation, from Unrestricted Subsidiaries) or from redesignations of Unrestricted Subsidiaries as Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed in the case of any Person the amount of Restricted Investments 26 32 previously made by the Borrower or any Subsidiary in such Person and in each such case which was treated as a Restricted Payment, plus (iv) $10,000,000. The foregoing provisions will not prevent (A) the payment of any dividend on Capital Stock of any class within 60 days after the date of its declaration if at the date of declaration such payment would be permitted by the Indenture; (B) any repurchase or redemption of Capital Stock or Subordinated Indebtedness of the Borrower or a Subsidiary made by exchange for Capital Stock of the Borrower (other than Redeemable Stock), or out of the net cash proceeds from the substantially concurrent issuance or sale (other than to a Subsidiary) of Capital Stock of the Borrower (other than Redeemable Stock), provided that the net cash proceeds from such sale are excluded from computations under clause (c) (ii) above to the extent that such proceeds are applied to purchase or redeem such Capital Stock or Subordinated Indebtedness; (C) so long as no Default shall have occurred and be continuing or should occur as a consequence thereof, any repurchase or redemption of Subordinated Indebtedness of the Borrower or a Subsidiary solely in exchange for, or out of the net cash proceeds from the substantially concurrent sale of, new Subordinated Indebtedness of the Borrower or a Subsidiary, so long as such Subordinated Indebtedness is permitted under the covenant described under "Limitation on Indebtedness" in the Indenture and (x) is subordinated to the Notes at least to the same extent as the Subordinated Indebtedness so exchanged, purchased or redeemed, (y) has a stated maturity later than the stated maturity of the Subordinated Indebtedness so exchanged, purchased or redeemed and (z) has an Average Life at the time incurred that is greater than the remaining Average Life of the Subordinated Indebtedness so exchanged, purchased or redeemed; (D) Investments in any Joint Ventures and foreign Subsidiaries not constituting Guarantors (as defined in the Indenture) in an aggregate amount not to exceed $5 million; (E) the payment of any dividend or distribution by a Subsidiary of the Borrower or any of its Wholly Owned Subsidiaries; (F) so long as no Default or Event of Default shall have occurred and be continuing or should occur as a consequence thereof, the repurchase, redemption or other acquisition or retirement for value of any Capital Stock of the Borrower held by any employee of the Borrower or any of its Subsidiaries, provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock pursuant to the terms of an employee benefit plan or employment or similar agreement shall not exceed $500,000 in any calendar year, and (G) the acquisition of Capital Stock by the Borrower in connection with the exercise of stock options or stock appreciation rights by way of cashless exercise or in connection with the satisfaction of withholding tax obligations. Notwithstanding the foregoing, the amount available for Investments in Joint Ventures and foreign Subsidiaries pursuant to clause (D) of the preceding sentence may be increased by the aggregate amount received by the Borrower and its Subsidiaries from a Joint Venture or a foreign Subsidiary on or before such date resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances or other transfers of Property made to such Joint Venture or foreign Subsidiary (but only to the extent such interest, dividends, repayments or other transfers of Property are not included in the calculation of Consolidated Net Income); Restricted Payments permitted to be made as described in the first sentence of this paragraph will be excluded in calculating the amount of Restricted Payments thereafter, except that any such Restricted Payments permitted to be made pursuant to clauses (A), (D), (E) (but only to the extent paid to someone other than the Borrower or any of its 27 33 Wholly Owned Subsidiaries) and (F) will be included in calculating the amount of Restricted Payments thereafter. For purposes of this covenant, if a particular Restricted Payment involves a non-cash payment, including a distribution of assets, then such Restricted Payment shall be deemed to be an amount equal to the cash portion of such Restricted Payment, if any, plus an amount equal to the Fair Market Value of such non-cash portion of such Restricted Payment. 8.2.8 Intentionally Omitted. 8.2.9 Disposition of Assets. Sell, lease or otherwise dispose of, or permit any of its Subsidiaries to sell, lease or otherwise dispose of the whole or, in the opinion of the Lender, any substantial part of the Borrower's, or any Subsidiary's, business, property or other assets, whether by a single transaction or by a series of transactions (related or not) except (i) dispositions permitted under Section 6.4.2, or (ii) (a) (except for Asset Sales resulting from the requisition of title to, seizure or forfeiture of any Property or assets or any actual or constructive total loss or an agreed or compromised total loss) the Borrower or such Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property; (b) at least 75% of such consideration consists of Cash Proceeds (or the assumption of Indebtedness of the Borrower or such Subsidiary relating to the Capital Stock or Property or asset that was the subject of such Asset Sale and the unconditional release of the Borrower or such Subsidiary from such Indebtedness); and (c) the Borrower delivers to Lender an Officers' Certificate certifying that such Asset Sale complies with clauses (a) and (b) provided, however that any Asset Sale pursuant to a condemnation, appropriation or other similar taking, including by deed in lieu of condemnation, or pursuant to the foreclosure or other enforcement of a Permitted Lien or exercise by the related lienholder of rights with respect thereto, including by deed or assignment in lieu of foreclosure shall not be required to satisfy the conditions set forth in clauses (a) and (b) of this sentence. 8.2.10 Stock and/or Partnership Interests of Subsidiaries. Permit any of its Subsidiaries to issue any additional shares of its capital stock or partnership interests, as the case may be, to any Person other than Borrower or any existing Subsidiary and as permitted by Sections 8.2.7 or 8.2.12. 8.2.11 Business Activity. Without the prior written consent of Lender (which consent shall not be unreasonably withheld) conduct or manage, or permit any Subsidiary to conduct or manage, any business activity other than a Related Business (as defined in the Indenture). 8.2.12 Restricted Payments. Make or have, or permit any of its Subsidiaries to make or have, any Restricted Payment (as defined in the Indenture) other than those permitted hereunder. 8.2.13 Intentionally Omitted. 28 34 8.2.14 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than its Subsidiaries. 8.3 Specific Financial Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: (i) maintain, on a quarterly basis, a Cash Flow Coverage Ratio of at least 1.50:1.0 in 1998 and 1.75:1.0 thereafter; (ii) maintain at all times a Consolidated Interest Coverage Ratio (as defined on Exhibit "R") of at least 1.5 to 1.0. (iii) maintain, on a consolidated basis, a ratio of Total Liabilities to Tangible Net Worth not greater than 1.0:1.0 in 1998 and thereafter (excluding for purposes of this test the Total Liabilities and Tangible Net Worth of any Unrestricted Subsidiary). SECTION 9. CONDITIONS PRECEDENT Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other Sections of this Agreement, Lender shall not be required to make any Loan under this Agreement unless and until each of the following conditions has been and continues to be satisfied: 9.1 Documentation. Lender shall have received, in form and substance satisfactory to Lender and its counsel, a duly executed copy of this Agreement and the other Loan Documents, together with such additional documents, instruments and certificates as Lender and its counsel shall require in connection therewith from time to time, all in form and substance satisfactory to Lender and its counsel. 9.2 No Default. No Default or Event of Default shall exist. 9.3 Other Loan Documents. Each of the conditions precedent set forth in the other Loan Documents shall have been satisfied. 9.4 Certificate of Limited Partnership. Lender shall have received a copy of the Certificate of Limited Partnership of Drilling LP and all amendments thereto, certified by the Secretary of State or other applicable official of the jurisdiction of Drilling LP's incorporation. 9.5 Partnership Agreement. Lender shall have received a copy of the partnership agreement which is in full force and effect as of the date hereof of Drilling LP and all amendments thereto. 9.6 Articles of Incorporation; Operating Agreement. Lender shall have received a copy of the Articles or Certificate of Incorporation or Operating Agreement of Borrower and 29 35 each of its Subsidiaries, and all amendments thereto, certified by the Secretary of State or other appropriate official of the jurisdiction of Borrower's and each Subsidiary's incorporation. 9.7 Good Standing Certificates. Lender shall have received good standing certificates for Borrower and each of its Subsidiaries (including, without limitation, Drilling LP), issued by the Secretary of State or other appropriate official of Borrower's and each Subsidiary's jurisdiction of incorporation and each jurisdiction where the conduct of Borrower's or any of its Subsidiary's business activities or ownership of its Property necessitates qualification. 9.8 Opinion Letters. Lender shall have received a favorable, written opinion of counsel to Borrower, as to the transactions contemplated by this Agreement, to be in form and substance satisfactory to Lender and Lender's counsel, in their sole discretion. 9.9 Insurance. Lender shall have received copies of the casualty insurance policies of Borrower and each of its Subsidiaries, together with loss payable endorsements on Lender's standard form of loss payee endorsement naming Lender as loss payee and copies of Borrowers' and each such Subsidiary's liability insurance policies, together with endorsements naming Lender as a co-insured. 9.10 Dominion Account. Lender shall have received the duly executed agreement establishing the Dominion Account with a financial institution acceptable to Lender for the collection or servicing of the Accounts. 9.11 Representations. Each representation, warranty or other statement made or furnished to Lender by or on behalf of Borrower, any Subsidiary of Borrower or any other Loan Party in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in compliance with or in reference thereto shall be true and correct in all material respects. 9.12 No Litigation. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby. 9.13 Evidence of Perfection and Priority of Liens in Collateral. Lender shall have received copies of all filing receipts or acknowledgments issued by any governmental authority to evidence any filing or recordation necessary to perfect the Liens of Lender in the Collateral and evidence in form satisfactory to Lender that such Liens constitute valid and perfected security interests and Liens, and that there are no other Liens upon any Collateral except for Permitted Liens. 9.14 CIT Intercreditor Agreement. CIT and Lender shall have executed an intercreditor agreement in form and substance satisfactory to Lender. 30 36 9.15 No Material Adverse Change. There shall have been no material adverse change in any of Borrower's financial condition between December 31, 1997, and the Amendment Date other than as an immediate result of the corporate restructuring of Borrower and its Subsidiaries occurring immediately prior to the Amendment Date. SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 10.1 Events of Default. The occurrence of one or more of the following events shall constitute an "Event of Default": 10.1.1 Payment of Obligations. Borrower shall fail to pay any of the Obligations on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). 10.1.2 Misrepresentations. Any representation, warranty or other statement made or furnished to Lender by or on behalf of Borrower, any Subsidiary of Borrower or any other Loan Party in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in compliance with or in reference thereto proves to have been false or misleading in any material respect when made or furnished or when reaffirmed pursuant to Section 9.11 hereof. 10.1.3 Breach of Specific Covenants. Borrower shall fail or neglect to perform, keep or observe any covenant contained in Sections 5.2, 5.3, 6.1.2, 6.2, 8.1.1, 8.1.3, 8.2 or 8.3 hereof on the date that Borrower is required to perform, keep or observe such covenant. 10.1.4 Breach of Other Covenants. Borrower shall fail or neglect to perform, keep or observe any covenant contained in this Agreement (other than a covenant which is dealt with specifically elsewhere in Section 10.1 hereof) and the breach of such other covenant is not cured to Lender's satisfaction within twenty (20) days after the sooner to occur of Borrower's receipt of notice of such breach from Lender or the date on which such failure or neglect first becomes known to any officer of Borrower. 10.1.5 Default Under Security Documents/Other Agreements. Any event of default shall occur under, or any Loan Party shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents or the Other Agreements and such default shall continue beyond any applicable grace period. 10.1.6 Other Defaults. There shall occur any default or event of default on the part of Borrower or any of the Guarantors under any agreement, document or instrument to which Borrower or any such Guarantor is a party or by which Borrower or any of the Guarantors or any of their respective Property is bound, creating or relating to any Indebtedness (other than the Obligations) in excess of $7,500,000, if the payment or maturity of such Indebtedness is or may be accelerated in consequence of such event of default or demand for payment of such Indebtedness is made. 31 37 10.1.7 Uninsured Losses. Any material loss, theft, damage or destruction of any of the tangible Collateral not fully covered (subject to such deductibles as Lender shall have permitted) by insurance. 10.1.8 Adverse Changes. There shall occur any material adverse change in the financial condition or business prospects of Borrower and the Subsidiaries taken as a whole. 10.1.9 Insolvency and Related Proceedings. Any Loan Party shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against a Loan Party under the Bankruptcy Code (and if, with respect to any petition filed against any Loan Party, such proceeding shall continue for more than thirty (30) days), or any Loan Party shall make any offer of settlement, extension or compromise to such Loan Party's unsecured creditors generally. 10.1.10 Business Disruption; Condemnation. There shall occur a cessation of a substantial part of the business of Borrower, any Subsidiary of Borrower for a period which significantly affects Borrower's or such Subsidiary's capacity to continue its business, on a profitable basis; or Borrower or any Subsidiary of Borrower shall suffer the loss or revocation of any license or permit now held or hereafter acquired by such Borrower or such Subsidiary which is necessary to the continued or lawful operation of its business; or Borrower or any Subsidiary of Borrower shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which Borrower or any Subsidiary of Borrower leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term; or any part of the Collateral shall be taken through condemnation or the value of such Property shall be impaired through condemnation. 10.1.11 Change of Control. (i) a "Change of Control," as that term is defined in the Indenture, occurs, (ii) subject to Section 8.2.1, Borrower shall cease to own and control beneficially and of record one hundred percent (100%) of each class of the issued and outstanding capital stock, or membership units, as the case may be, in each of Trend, Drilling LLC, and Bonray, or (iii) subject to Section 8.2.1, Trend, Drilling LLC, and Bonray shall cease to collectively own and control, beneficially and of record, one hundred percent (100%) of the outstanding partnership interests of Drilling LP. 10.1.12 ERISA. A Reportable Event shall occur which Lender, in its sole discretion, shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed, or if Borrower or any Subsidiary of Borrower is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting from Borrower's or such Subsidiary's complete or partial withdrawal from such Plan and, with respect to any of the foregoing, could result in a Material Adverse Effect. 32 38 10.1.13 Challenge to Agreement. Borrower, any Subsidiary of Borrower or any other Loan Party, or any Affiliate of any of them, shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender. 10.1.14 Criminal Forfeiture. Borrower or any Subsidiary of Borrower shall be criminally indicted or convicted under any law that could lead to a forfeiture of any Property of Borrower or any Subsidiary of Borrower. 10.1.15 Judgments. Any (i) money judgment for the payment of money in excess of $7,500,000 is filed against Borrower or any Subsidiary of Borrower or any of its respective Property, and such judgment shall remain unpaid, unsatisfied by insurance, and unstayed for more than thirty (30) days, whether or not consecutive, or (ii) writ of attachment or similar process is filed against Borrower or any Subsidiary of Borrower, or any of its respective Property, and such writ of attachment or similar process is not bonded or secured in an amount and manner reasonably satisfactory to lender. 10.1.16 Dominion Account. Drilling LP shall fail to maintain a Dominion Account or shall notify Lender that it intends to terminate its existing Dominion Account. 10.1.17 Indenture and CIT Loan Agreement. An Event of Default occurs under the Indenture or the CIT Loan Agreement. 10.2 Acceleration of the Obligations. Without in any way limiting the right of Lender to demand payment of any portion of the Obligations payable on demand in accordance with Section 3.2 hereof, upon or at any time after the occurrence of an Event of Default, all or any portion of the Obligations shall, at the option of Lender and without presentment, demand, protest, notice of intent to accelerate, notice of acceleration, or any other further notice by Lender, become at once due and payable and Borrower shall forthwith pay to Lender, the full amount of such Obligations; provided, however, that upon the occurrence of an Event of Default specified in Section 10.1.9 hereof, all of the Obligations shall become automatically due and payable without declaration, notice or demand by Lender. 10.3 Other Remedies. Upon the occurrence and during the continuance of an Event of Default, Lender shall have and may exercise from time to time the following rights and remedies: 10.3.1 All of the rights and remedies of a secured party under the Code or under other Applicable Law, and all other legal and equitable rights to which Lender may be entitled, all of which rights and remedies shall be cumulative and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents, and none of which shall be exclusive. 33 39 10.3.2 The right to take immediate possession of the Collateral, and to (i) require Borrower to assemble the Collateral, at Borrower's expense, and make it available to Lender at a place designated by Lender which is reasonably convenient to both parties, and (ii) enter any premises where any of the Collateral shall be located and to keep and store the Collateral on said premises until sold (and if said premises be the Property of Borrower, Borrower agrees not to charge Lender for storage thereof). 10.3.3 The right to sell or otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as Lender, in its sole discretion, may deem advisable. Borrower agrees that any requirement of notice to Borrower of any proposed public or private sale or other disposition of Collateral by Lender shall be deemed reasonable notice thereof if given at least ten (10) days prior thereto, and any such sale may be held at such locations as Lender may designate in said notice. Lender shall have the right to conduct such sales on Borrower's premises, without charge therefor, and such sales may be adjourned from time to time in accordance with Applicable Law. Lender shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. The proceeds realized from the sale of any Collateral may be applied, after allowing two (2) Business Days for collection, first to the costs, expenses and attorneys' fees incurred by Lender in collecting the Obligations, in enforcing the rights of Lender under the Loan Documents and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any Collateral; second to the interest due upon any of the Obligations; and third, to the principal of the Obligations. If any deficiency shall arise, Borrower shall remain liable to Lender therefor. 10.3.4 The right to exercise all of Lender's rights and remedies under any mortgage/deed of trust with respect to any real Property forming a part of the Collateral. 10.3.5 Lender is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit. 10.3.6 Lender may, at its option, require Borrower to deposit with Lender funds equal to the LC Amount and, if Borrower fails to promptly make such deposit, Lender may advance such amount as a Revolving Credit Loan (whether or not an Out of Formula Condition is created thereby). Any such deposit or advance shall be held by Lender as a reserve to fund future payments on such LC Guaranties and future drawings against such Letters of Credit. At such time as all LC Guaranties have been paid or terminated and all Letters of Credit have been drawn upon or expired, any amounts remaining in such reserve shall be applied against any outstanding Obligations, or, if all Obligations have been indefeasibly paid in full, returned to Borrower. 34 40 10.4 Remedies Cumulative; No Waiver. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Borrower contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule or in any Guaranty Agreement given to Lender or contained in any other agreement between Lender and Borrower, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Borrower herein contained. The failure or delay of Lender to require strict performance by Borrower of any provision of this Agreement or to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such performance, Liens, rights, powers and remedies, but all such requirements, Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all other Obligations owing or to become owing from Borrower to Lender shall have been fully satisfied. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or any of the other Loan Documents and no Event of Default by Borrower under this Agreement or any other Loan Documents shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Lender and directed to Borrower. SECTION 11. MISCELLANEOUS 11.1 Power of Attorney. Borrower hereby irrevocably designates, makes, constitutes and appoints Lender (and all Persons designated by Lender) as Borrower's true and lawful attorney (and agent-in-fact) and Lender, or Lender's agent, may, without notice to Borrower and in either Borrower's or Lender's name, but at the cost and expense of Borrower: 11.1.1 At such time or times as Lender or said agent, in its sole discretion, may determine, endorse Borrower's name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Lender or under Lender's control. 11.1.2 At such time or times upon the occurrence and during the continuance of an Event of Default as Lender or its agent in its sole discretion may determine: (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Drilling LP's rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Lender deems advisable; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail 35 41 addressed to Borrower and to notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (vii) endorse the name of Borrower upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Lender on account of the Obligations; (viii) endorse the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use Borrower's stationery and sign the name of Borrower to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory and any other Collateral; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement. 11.2 Indemnity. BORROWER HEREBY INDEMNIFIES, HOLDS HARMLESS, AND SHALL DEFEND LENDER AND ITS DIRECTORS, OFFICERS, AGENTS, COUNSEL AND EMPLOYEES ("INDEMNIFIED PERSONS") FROM AND AGAINST ANY AND ALL LOSSES, LIABILITIES, DAMAGES, COSTS, EXPENSES, SUITS, ACTIONS AND PROCEEDINGS ("LOSSES") EVER SUFFERED OR INCURRED BY ANY INDEMNIFIED PERSON ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION CONTEMPLATED HEREBY, INCLUDING, WITHOUT LIMITATION, ANY LOSSES CAUSED BY THE NEGLIGENCE OF ANY SUCH INDEMNIFIED PERSON, BUT NOT INCLUDING ANY LOSSES CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY SUCH INDEMNIFIED PERSON, AND BORROWER SHALL REIMBURSE LENDER AND EACH OTHER INDEMNIFIED PERSON FOR ANY EXPENSES (INCLUDING IN CONNECTION WITH THE INVESTIGATION OF, PREPARATION FOR OR DEFENSE OF ANY ACTUAL OR THREATENED CLAIM, ACTION OR PROCEEDING ARISING THEREFROM, INCLUDING ANY SUCH COSTS OF RESPONDING TO DISCOVERY REQUESTS OR SUBPOENAS, REGARDLESS OF WHETHER LENDER OR SUCH OTHER INDEMNIFIED PERSON IS A PARTY THERETO). WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THIS INDEMNITY SHALL EXTEND TO ANY CLAIMS ASSERTED AGAINST LENDER OR ANY OTHER INDEMNIFIED PERSON BY ANY PERSON UNDER ANY ENVIRONMENTAL LAWS OR SIMILAR LAWS BY REASON OF BORROWER'S OR ANY OTHER PERSON'S FAILURE TO COMPLY WITH LAWS APPLICABLE TO SOLID OR HAZARDOUS WASTE MATERIALS OR OTHER TOXIC SUBSTANCES. BORROWER MAY SELECT COUNSEL WITH RESPECT TO ANY LOSSES; PROVIDED, HOWEVER, EACH INDEMNIFIED PERSON SHALL HAVE THE RIGHT TO MONITOR THE PROGRESS OF ANY CLAIMS, SUITS AND ADMINISTRATIVE PROCEEDINGS DEFENDED BY BORROWER HEREUNDER WITH COUNSEL OF SUCH INDEMNIFIED PERSON'S CHOICE, OR CONDUCT ITS DEFENSE THROUGH COUNSEL OF SUCH INDEMNIFIED PERSON'S CHOICE, IN THE EVENT THAT (I) SUCH INDEMNIFIED PERSON DETERMINES IN GOOD FAITH THAT THE CONDUCT OF ITS DEFENSE BY BORROWER COULD BE MATERIALLY PREJUDICIAL TO SUCH INDEMNIFIED PERSON'S INTERESTS OR THAT OTHER REASONABLE GROUNDS EXIST WHICH DEMONSTRATE A LACK OF EFFECTIVENESS OR HIGH LEVEL OF QUALITY IN THE 36 42 CONDUCT OF SUCH DEFENSE BY BORROWER, AND (II) PRIOR TO RETAINING SUCH COUNSEL FOR SUCH PURPOSE, SUCH INDEMNIFIED PERSON SHALL CONSULT WITH BORROWER AND SHALL ATTEMPT IN GOOD FAITH TO AGREE UPON COUNSEL TO CONDUCT THE DEFENSE ON BEHALF OF BORROWER AND SUCH INDEMNIFIED PERSON, AND IN EACH CASE THE FEES AND DISBURSEMENTS OF SUCH COUNSEL SHALL BE PAID BY BORROWER; PROVIDED, HOWEVER, THAT IF SUCH MUTUAL AGREEMENT IS NOT REACHED WITHIN A REASONABLE TIME ON SELECTING COUNSEL, THEN SUCH INDEMNIFIED PERSON MAY RETAIN ITS OWN COUNSEL AT BORROWER'S EXPENSE. NOTWITHSTANDING ANY CONTRARY PROVISION OF THIS AGREEMENT, THE OBLIGATION OF BORROWER UNDER THIS SECTION 11.2 SHALL SURVIVE THE PAYMENT IN FULL OF THE OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT. 11.3 Modification of Agreement; Sale of Interest. This Agreement may not be modified, altered or amended, except by an agreement in writing signed by Borrower and Lender. Borrower may not sell, assign or transfer any interest in this Agreement, any of the other Loan Documents, or any of the Obligations, or any portion thereof, including Borrower's rights, title, interests, remedies, powers, and duties hereunder or thereunder. Borrower hereby consents to Lender's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including Lender's rights, title, interests, remedies, powers, and duties hereunder or thereunder to any Affiliate of Lender or any Person that purchases all or substantially all of the assets of Lender. Any other participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents shall be subject to Borrower's prior consent, such consent not to be unreasonably withheld. If Lender requests such consent in writing and Borrower does not respond in writing within five (5) Business Days from the date of delivery of such request, the consent of Borrower shall be deemed to have been given. In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were "Lender" hereunder and Lender shall be relieved of all obligations hereunder upon any such assignment. Borrower agrees that it will use its best efforts to assist and cooperate with Lender in any manner reasonably requested by Lender to effect the sale of participations in or assignments of any of the Loan Documents or any portion thereof or interest therein, including assisting in the preparation of appropriate disclosure documents. Borrower further agrees that Lender may disclose credit information regarding Borrower and its Subsidiaries to any potential Participant or assignee. 11.4 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under Applicable Law, but if any provision of this Agreement shall be prohibited by or invalid under Applicable Law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.5 Successors and Assigns. This Agreement, the Other Agreements and the Security Documents shall be binding upon and inure to the benefit of the successors and assigns of Borrower and Lender permitted under Section 11.3 hereof. 37 43 11.6 Cumulative Effect; Conflict of Terms. The provisions of the Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in Section 3.2 hereof and except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 11.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 11.8 Notice. All notices, requests and demands to or upon a party hereto shall be in writing and shall be sent by certified or registered mail, return receipt requested, by personal delivery against receipt, by overnight courier or by facsimile transmissions and shall be deemed to have been validly served, given or delivered immediately when delivered against receipt or three (3) Business Days after deposit in the mail, postage prepaid, or with an overnight courier or, in the case of facsimile transmission, when sent, answerback received, in each case addressed as follows: If to Lender: Fleet Capital Corporation 2711 North Haskell Avenue Suite 2100, LB 21 Dallas, Texas 75204 Attention: Loan Administration Manager Facsimile No.: (214) 828-6530 With a copy to: Patton Boggs, LLP 2200 Ross Avenue, Suite 900 Dallas, Texas 75201 Attention: Larry A. Makel, Esq. Facsimile No.: (214) 871-2688 If to Borrower: Bayard Drilling, L.P. 4005 N.W. Expressway Oklahoma City, OK 73126 Attention: Mr. David E. Grose, III Facsimile No.: (405) 879-3847 With a copy to: Baker & Botts, L.L.P. One Shell Plaza 910 Louisiana Houston, Texas 77002-4995 Attention: Mr. Stephen Krebs Facsimile No.: (713) 229-1522 38 44 If to Drilling LP: 4005 N.W. Expressway Oklahoma City, OK 73126 Attention: Mr. David E. Grose, III Facsimile No.: (405) 879-3847 With a copy to: Baker & Botts, L.L.P. One Shell Plaza 910 Louisiana Houston, Texas 77002-4995 Attention: Mr. Stephen Krebs Facsimile No.: (713) 229-1522 or to such other address as each party may designate for itself by notice given in accordance with this Section 11.8; provided, however, that any notice, request or demand to or upon Lender pursuant to Section 3.1.1 or 4.2.2 hereof shall not be effective until received by Lender. Any written notice or demand that is not sent in conformity with the provisions hereof shall nevertheless be effective on the date that such notice is actually received by the noticed party. 11.9 Lender's Consent. Unless otherwise provided herein, whenever Lender's consent is required to be obtained under this Agreement, any of the Other Agreements or any of the Security Documents as a condition to any action, inaction, condition or event, Lender shall be authorized to give or withhold such consent in its sole and absolute discretion. 11.10 Credit Inquiries. Borrower hereby authorizes and permits Lender (but Lender shall have no obligation) to respond to usual and customary credit inquiries from third parties concerning Borrower or any of its Subsidiaries. 11.11 Time of Essence. Time is of the essence of this Agreement, the Other Agreements and the Security Documents. 11.12 Entire Agreement; Appendix A and Exhibits and Schedules. This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. Appendix A and each of the Exhibits and Schedules attached hereto are incorporated into this Agreement and by this reference made a part hereof. 11.13 Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by 39 45 any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 11.14 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN DALLAS, DALLAS COUNTY, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS: PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN TEXAS, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF TEXAS. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWER OR LENDER, BORROWER HEREBY CONSENTS AND AGREES THAT THE DISTRICT COURT OF DALLAS COUNTY, TEXAS, OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, SHALL HAVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. 40 46 11.15 WAIVERS BY BORROWER. BORROWER WAIVES (I) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL; (II) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON- PAYMENT, INTENT TO ACCELERATE, ACCELERATION, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (III) TO THE EXTENT PERMITTED BY LAW, NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (IV) TO THE EXTENT PERMITTED BY LAW, THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (V) NOTICE OF ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11.16 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND THE SAME MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 11.17 Nonapplicability of Chapter 346 of the Texas Finance Code. Borrower and Lender hereby agree that, except for Section 15.10(b) thereof, the provisions of Chapter 346 (other than Section 346.004 thereof) of the Texas Finance Code (as amended from time to time, the "Texas Finance Code") (regulating certain revolving credit loans and revolving tri-party accounts) shall not apply to this Agreement or any of the other Loan Documents. 11.18 Certain Matters of Construction. (A) References to Other Documents. All references to statutes and related regulations in this Agreement, the Other Agreements and the Security Agreements shall include 41 47 any amendments of same and any successor statutes and regulations. All references in this Agreement, the Other Agreements and the Security Agreements to any of the Loan Documents shall include any and all amendments and modifications thereto and any and all extensions or renewals thereof. (B) Reference to Agreement; Obligations. Each of the Loan Documents, including this Agreement and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of this Agreement as amended hereby, are hereby amended so that any reference in such Loan Documents to this Agreement shall mean a reference to the Agreement as amended and restated hereby. Borrower acknowledges and agrees that its obligations hereunder shall constitute "Obligations" as defined in the Agreement and as used in the Loan Documents. 11.19 Release. EACH OF BORROWER AND DRILLING LP ACKNOWLEDGES AND AGREES THAT (A) IT HAS NO CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO THE ORIGINAL LOAN DOCUMENTS AND THE PERFORMANCE OF ITS OBLIGATIONS THEREUNDER, OR (B) IF IT HAS ANY SUCH CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO THE ORIGINAL LOAN DOCUMENTS AND/OR ANY TRANSACTION RELATED TO THE ORIGINAL LOAN DOCUMENTS, SAME ARE HEREBY WAIVED, RELINQUISHED AND RELEASED IN CONSIDERATION OF LENDER'S EXECUTION AND DELIVERY OF THIS AGREEMENT. 11.20 Amendment and Restatement. This Agreement is given in amendment, restatement, renewal and extension (and not in extinguishment or satisfaction) of the Original Loan Agreement and, to the extent applicable, the Original Loan Documents. With respect to matters relating to the period prior to the date hereof, all the provisions of the Original Loan Agreement and, to the extent applicable, the Original Loan Documents are hereby ratified and confirmed and shall remain in full force and effect. 11.21 Joinder. Drilling LP hereby agrees to join in this Agreement for the limited purposes of making the representations and warranties, and complying with the covenants, contained in Sections 6 and 7 hereof and agrees to be bound by the terms and provisions thereof. Nothing contained herein shall in anyway limit or impair the obligations of Drilling LP with respect to any Loan Document to which it is a party. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 42 48 IN WITNESS WHEREOF, this Agreement has been duly executed in Dallas, Texas, on the day and year specified at the beginning of this Agreement. BORROWER: BAYARD DRILLING TECHNOLOGIES, INC. By: /s/ David E. Grose, III -------------------------------- Name: David E. Grose, III Title: Chief Financial Officer Accepted in Dallas, Dallas County, Texas: LENDER: FLEET CAPITAL CORPORATION By: /s/ Bruce Clark -------------------------------- Name: Bruce Clark Title: Vice President Joined in for the purposes stated in Section 11.21. BAYARD DRILLING, L.P. By: Bayard Drilling, L.L.C., its general partner By: /s/ David E. Grose, III -------------------------------- Name: David E. Grose, III Title: Chief Financial Officer Amended and Restated L&S 49 APPENDIX A GENERAL DEFINITIONS When used in the Amended and Restated Loan and Security Agreement dated as of June 18, 1998, by and between Fleet Capital Corporation, Bayard Drilling Technologies, Inc., and joined in by Bayard Drilling, L.P., the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): Account Debtor - any Person who is or may become obligated under or on account of an Account. Accounts - all accounts, contract rights, chattel paper, instruments and documents, whether now owned or hereafter created or acquired by Drilling LP or in which Drilling LP now has or hereafter acquires any interest. Affiliate - a Person (other than a Subsidiary): (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, a Person; (ii) which beneficially owns or holds 10% or more of any class of the Voting Stock of a Person; or (iii) 10% or more of the Voting Stock (or in the case of a Person which is not a corporation, 10% or more of the equity interest) of which is beneficially owned or held by a Person or a Subsidiary of a Person. Agreement - the Loan and Security Agreement referred to in the first sentence of this Appendix A, all Exhibits and Schedules thereto and this Appendix A, as amended, renewed, extended and restated from time to time. Allowed Affiliate Accounts - each Account receivable from Ward or AnSon Company which arises in the ordinary course of Drilling LP's business from the sale of goods or rendition of services to such Persons and which is payable in Dollars. Without limiting the generality of the foregoing, no Account shall be an Allowed Affiliate Account if: (i) it is due or unpaid more than 90 days after the original invoice date; (ii) 20% or more of the Accounts from the Account Debtor are due and unpaid more than 60 days from invoice date or otherwise are not deemed Allowed Affiliate Accounts hereunder (subject, however, to redeterminations by Lender if Drilling LP's provides written evidence to Lender reflecting that sufficient payments have been made on such Accounts between the date of determination of eligibility and the date the Schedule of Accounts was delivered to Lender to merit their inclusion in a Borrowing Base determination); (iii) any covenant, representation or warranty contained in the Agreement with respect to such Account has been breached; (iv) the Account Debtor has disputed liability with respect to such Account, or the Account Debtor has made any claim with respect to any other Account due from such Account Debtor to Drilling LP, or the Account otherwise is or may become subject to any right of setoff, counterclaim, reserve or chargeback, provided that, in any event, the Accounts of such Account Debtor shall be ineligible only to the extent of the amount owing by Drilling LP to such creditor or A-1-1 50 supplier or to the extent of such offset, counterclaim, disputed amount, reserve or chargeback; (v) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the proceedings in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Debtor, or if the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; (vi) it arises from a sale to an Account Debtor with its principal office, assets or place of business outside the United States, unless the sale is backed by an irrevocable letter of credit issued or confirmed by Bank and is in form and substance acceptable to Lender, payable in the full amount of the Account in freely convertible Dollars at a place of payment within the United States; (vii) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; (viii) the Account Debtor has relocated to New Jersey, Minnesota, Indiana, West Virginia or any other state imposing similar conditions on the right of a creditor to collect accounts receivable unless Drilling LP has either qualified to transact business in such state as a foreign corporation or filed a Notice of Business Activities Report or other required report with the appropriate officials in those states for the then current year; (ix) the Account is subject to a Lien other than a Permitted Lien; (x) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by Drilling LP and accepted by the Account Debtor or the Account otherwise does not represent a final sale; (xi) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; (xii) Drilling LP has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or (xiii) Drilling LP has made an agreement with the Account Debtor to extend the time of payment thereof. Amendment Date - the date first written hereinabove. AnSon Company - AnSon Company, an Oklahoma general partnership. Applicable Annual Rate - as defined in Section 2.1.1 of the Agreement. Applicable Law - all laws, rules and regulations applicable to the Person, conduct, transaction, covenant or Loan Documents in question, including all applicable common law and equitable principles; all provisions of all applicable state and federal constitutions, statutes, rules, regulations and orders of governmental bodies; and orders, judgments and decrees of all courts and arbitrators. A-1-2 51 Availability - the amount of money which Borrower is entitled to borrow from time to time as Revolving Credit Loans, such amount being the difference derived when the sum of the principal amount of Revolving Credit Loans then outstanding (including any amounts which Lender may have paid for the account of Borrower pursuant to any of the Loan Documents and which have not been reimbursed by Borrower) and the LC Amount is subtracted from the Borrowing Base. If the amount outstanding is equal to or greater than the Borrowing Base, Availability is 0. Average Monthly Revolving Credit Balance - the amount obtained by adding the aggregate unpaid principal amount of Revolving Credit Loans plus the LC Amount at the end of each day during the month in question and by dividing such sum by the number of days in such month. Bank - Fleet National Bank, and its successors or assigns. Base Rate - the rate of interest announced or quoted by Bank from time to time as its prime rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and, if such prime rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate. Bonray - Bonray Drilling Corporation, a Delaware Corporation. Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (a) Total Credit Facility; or (b) an amount equal to: (i) 80% of the net amount of Eligible Accounts outstanding at such date; PLUS (ii) 50% of the net amount of Turnkey Accounts; PLUS (iii) the lesser of (x) 80% of the net amount of Allowed Affiliate Accounts and (y) $5,000,000; or (c) the Maximum Guaranteed Amount as such term is defined in the Guaranty Agreement of Drilling LP A-1-3 52 MINUS (subtract from the amount of clauses (a), (b) or (c) above) the sum of (i) the LC Amount, plus (ii) the amount of any reserves established by Lender pursuant to Section 1.1.1 at such date. For purposes of clauses (b)(i), (b)(ii) and (b)(iii) hereof, the net amount of Eligible Accounts, Turnkey Accounts, and Allowed Affiliate Accounts, as the case may be, at any time shall be the face amount of such Accounts less any and all returns, rebates, discounts (which may, at Lender's option, be calculated on shortest terms), credits, allowances or sales, excise or withholding taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time. Business Day - any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the state of Texas or is a day on which banking institutions located in such state are closed. Capitalized Lease Obligation - any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. Cash Flow - means, for any period, the sum of Borrower's and all Subsidiaries consolidated net income plus depreciation, depletion and amortization less dividends paid and extraordinary items of income or loss (as determined in accordance with GAAP) in the prior four quarters. Cash Flow shall exclude the Cash Flow attributable to any Unrestricted Subsidiary. Cash Flow will be calculated as as of June 30, 1998 and for all subsequent periods as the sum of the actual Cash Flow for the then preceding twelve months. Cash Flow Coverage Ratio - means the ratio of Cash Flow to Projected Debt Service. CIT - The CIT Group/Equipment Financing, Inc., a New York corporation. CIT Debt - means any and all indebtedness, claims, debts, liabilities, or obligations of Borrower owing to CIT, individually and as agent for CIT and Lender, and Lender, of whatever nature, character, or description, arising solely as a result of the loans made pursuant to the CIT Loan Agreement, as amended, but in no event shall such CIT Debt exceed $19,000,000 plus accrued interest in the aggregate. CIT Loan Agreement - means that certain Loan Agreement, dated as of December 10, 1996, by and between CIT and Borrower, as amended and restated as of May 1, 1997 and as of June 18, 1998, by and between CIT, Lender, CIT as agent for CIT and Lender, and Borrower, and any and all other agreements, documents and instruments currently or hereafter entered into by and between Borrower, CIT, Lender, and CIT as agent for CIT A-1-4 53 and Lender, or executed by Borrower in favor of, or to the order of, CIT, Lender, and CIT as agent for CIT and Lender, in connection with such Loan Agreement. Closing Date - the date on which all of the conditions precedent in Section 9 of the Agreement are satisfied and the initial Loan is made or the initial Letter of Credit or LC Guaranty is issued under the Agreement. Code - the Uniform Commercial Code as adopted and in force in the state of Texas, as from time to time in effect. Collateral - all of the Property and interests in Property described in Section 5 of the Agreement, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations, including, without limitation, the "Collateral" as defined in the Security Agreements. Consolidated - the consolidation in accordance with GAAP of the accounts or other items as to which such term applies. Current Assets - at any date means the amount at which all of the current assets of a Person would be properly classified as current assets shown on a balance sheet at such date in accordance with GAAP. Default - an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. Default Rate - as defined in Section 2.1.2 of the Agreement. Dollars and the sign "$" - lawful money of the United States of America. Dominion Account - a special account of Lender established by Drilling LP pursuant to the Agreement at a bank selected by Borrower and Drilling LP, but acceptable to Lender in its reasonable discretion, and over which Lender shall have sole and exclusive access and control for withdrawal purposes. Drilling Contracts - any and all drilling contracts and any and all rights thereunder, including but not limited to the right to receive payments due or to become due, as associated with or to the Drilling Rigs. Drilling LLC - Bayard Drilling, L.L.C. a Delaware limited liability company. Drilling LP - Bayard Drilling, L.P., a Delaware limited partnership. Drilling Rigs - the land drilling rigs and drilling equipment identified on Exhibit P to the Agreement, the ownership of which has been assigned from Borrower to Drilling LP, and all metal products, machinery, equipment, materials or other goods of any A-1-5 54 description whatsoever, used or acquired for use by Borrower and all pumps, drilling equipment, drill pipe, machinery, equipment, supplies, parts and other goods of any description whatsoever installed in or affixed to or to be used in connection with any Drilling Rig or acquired for installation on, affixation to, or use in connection with any Drilling Rig. Eligible Account - an Account (other than a Turnkey Account) arising in the ordinary course of Drilling LP's business from the sale of goods or rendition of services which is payable in Dollars and which Lender, in its sole credit judgment, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if: (i) it arises out of a sale made by Drilling LP to a Subsidiary or an Affiliate of Drilling LP or to a Person controlled by an Affiliate of Drilling LP, including, without limitation, any Allowed Affiliate Account; (ii) it is due or unpaid more than 90 days after the original invoice date; (iii) 20% or more of the Accounts from the Account Debtor are due and unpaid more than 60 days from invoice date or otherwise are not deemed Eligible Accounts hereunder; (iv) the total unpaid Accounts of the Account Debtor exceed 20% of the net amount of all Eligible Accounts (excluding Accounts receivable from Chesapeake, Union Pacific Resource Corporation and Sonat Exploration Company, to the extent of such excess; (v) any covenant, representation or warranty contained in the Agreement with respect to such Account has been breached; (vi) the Account Debtor, other than Chesapeake, is also Drilling LP's creditor or supplier, or the Account Debtor has disputed liability with respect to such Account, or the Account Debtor has made any claim with respect to any other Account due from such Account Debtor to Drilling LP, or the Account otherwise is or may become subject to any right of setoff, counterclaim, reserve or chargeback, provided that, in any event, the Accounts of such Account Debtor shall be ineligible only to the extent of the amount owing by Drilling LP to such creditor or supplier or to the extent of such offset, counterclaim, disputed amount, reserve or chargeback; (vii) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the proceedings in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Debtor, or if the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; (viii) it arises from a sale to an Account Debtor with its principal office, assets or place of business outside the United States, unless the sale is backed by an irrevocable letter of credit issued or confirmed by Bank and is in form and substance acceptable to Lender, payable in the full amount of the Account in freely convertible Dollars at a place of payment within the United States; (ix) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; (x) (a) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Drilling LP assigns its right to payment of such Account to Lender, in a manner satisfactory to Lender, so as to comply with the Assignment of Claims Act of 1940 (31 A-1-6 55 U.S.C. Section 203 et seq.) or (b) the Account Debtor is a state, county or municipality, or a political subdivision or agency thereof, which is subject to any Applicable Law that would disallow an assignment of Accounts on which it is the Account Debtor; (xi) the Account Debtor is located in New Jersey, Minnesota, Indiana, West Virginia or any other state imposing similar conditions on the right of a creditor to collect accounts receivable unless Drilling LP has either qualified to transact business in such state as a foreign corporation or filed a Notice of Business Activities Report or other required report with the appropriate officials in those states for the then current year; (xii) the Account is subject to a Lien other than a Permitted Lien; (xiii) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by Drilling LP and accepted by the Account Debtor or the Account otherwise does not represent a final sale; (xiv) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; (xv) Drilling LP has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or (xvi) Drilling LP has made an agreement with the Account Debtor to extend the time of payment thereof. El Reno Property - That certain parcel of real property located in El Reno, Canadian County, Oklahoma and upon which Trend granted to Lender a mortgage in connection with the Original Loan Agreement. Environmental Laws - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to health, safety or environmental matters. ERISA - the Employee Retirement Income Security Act of 1974, as amended, and all rules and regulations from time to time promulgated thereunder. Event of Default - as defined in Section 10.1 of the Agreement. Excess Interest - as defined in Section 2.1.3(B) of the Agreement. GAAP - generally accepted account principles in the United States of America in effect from time to time. General Intangibles - all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including all choices in action, causes of action, corporate or other business records, deposit accounts, inventions, blueprints, designs, patents, patent applications, trademarks, trademark applications, trade names, trade secrets, service marks, goodwill, brand names, copyrights, registrations, licenses, franchises, customer lists, tax refund claims, computer programs, operational manuals, all claims under guaranties, security interests or other security held by or granted to A-1-7 56 Borrower to secure payment of any of the Accounts by an Account Debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Accounts), and excluding drilling contracts other than the Drilling Contracts. Guarantors - collectively, Drilling LP, Drilling LLC, Trend and Bonray and any other or future guarantor of the Obligations. Guaranty Agreements - collectively, the Continuing Guaranty Agreements executed by each of Drilling LP, Drilling LLC, Trend and Bonray. Indebtedness - shall have the meaning ascribed thereto in the Indenture; and in the case of Borrower (without duplication), shall include the Obligations. Indemnified Persons - as defined in Section 11.2 of the Agreement. Inventory - all of Borrower's inventory, whether now owned or hereafter acquired, including, but not limited to, all goods intended for sale or lease by Borrower, or for display or demonstration; all work in process; all raw materials and other materials and supplies of every nature and description used or consumed in Borrower's business; and all documents evidencing and General Intangibles relating to any of the foregoing, whether now owned or hereafter acquired by Borrower, excluding, however, all Inventory associated with any drilling rig other than the Drilling Rigs. LC Amount - at any time, the aggregate undrawn face amount of all Letters of Credit and LC Guaranties then outstanding. LC Guaranty - any guaranty pursuant to which Lender or any Affiliate of Lender shall guaranty the payment or performance by Borrower of its reimbursement obligation under any letter of credit. Letter of Credit - any letter of credit issued by Lender or any of Lender's Affiliates for the account of Borrower. Lien - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of the Agreement, Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. Loan Account - the loan account established on the books of Lender pursuant to Section 3.4 of the Agreement. A-1-8 57 Loan Documents - the Agreement, the Other Agreements and the Security Documents. Loan Party - Borrower and each other Person (other than Lender) who is at any time a party to any Loan Document. Loans - all loans and advances of any kind made by Lender pursuant to the Agreement. Losses - as defined in Section 11.2 of the Agreement. Material Adverse Effect - the effect of any event or condition which, alone or when taken together with other events or conditions occurring or existing concurrently therewith, (a) has a material adverse effect upon the business, operations, Properties, condition (financial or otherwise) or business prospects of Borrower and its Subsidiaries, including without limitation, Drilling LP, taken as a whole; (b) has any material adverse effect whatsoever upon the validity or enforceability of any material provisions of the Agreement or any of the other Loan Documents; (c) has or may be reasonably expected to have any material adverse effect upon the value of the whole or any material part of the Collateral, the Liens of Lender with respect to the Collateral or any material part thereof or the priority of such Liens; (d) materially impairs the ability of Borrower and the other Loan Parties, taken as a whole, to perform their material obligations under this Agreement or any of the other Loan Documents, including repayment of the Obligations when due; or (e) materially impairs the ability of Lender to enforce or collect the Obligations or realize upon any of the Collateral in accordance with the Loan Documents and Applicable Law. Maximum Legal Rate - as defined in Section 2.1.3(A) of the Agreement. Money Borrowed - means (i) Indebtedness arising from the lending of money by any Person to Borrower or any Subsidiary; (ii) Indebtedness, whether or not in any such case arising from the lending by any Person of money to Borrower or any Subsidiary, (A) which is represented by notes payable or drafts accepted that evidence extensions of credit, (B) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property, other than accounts payable; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit and (v) Indebtedness of Borrower or any Subsidiary under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (i) through (iii) hereof, if owed directly by Borrower. Mortgage - the mortgage or deed of trust to be executed by Borrower in favor of Lender by which Borrower shall grant and convey to Lender, as security for the A-1-9 58 Obligations, a Lien upon the real Property owned in fee by Borrower, located at El Reno, Oklahoma. Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of ERISA. Obligations - all Loans, and all other advances, debts, liabilities, obligations, covenants and duties, together with all interest, fees and other charges thereon, owing, arising, due or payable from Borrower to Lender of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under the Agreement or any of the other Loan Documents or otherwise, and whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. Original Term - as defined in Section 4.1 of the Agreement. Original Loan Agreement - that certain Loan and Security Agreement dated as of May 1, 1997 between Trend, Borrower and Lender. Original Loan Documents - the Loan Documents as defined in the Original Loan Agreement. Other Agreements - any and all agreements, instruments and documents (other than the Agreement and the Security Documents), heretofore, now or hereafter executed by Borrower, any Subsidiary of Borrower or any other third party and delivered to Lender in respect of the transactions contemplated by the Agreement. Out-of-Formula Condition - at any date of determination thereof, a condition such that the outstanding principal amount of Revolving Credit Loans plus the LC Amount on such date exceeds the Borrowing Base on such date. Participant - each Person who shall be granted the right by Lender to participate in any of the Loans described in the Agreement and who shall have entered into a participation agreement in form and substance satisfactory to Lender. Permitted Indebtedness - shall have the meaning ascribed thereto in the Indenture. Permitted Lien - a Lien of a kind specified in Section 8.2.5 of the Agreement. Person - an individual, partnership, corporation, limited liability company, joint stock company, land trust, business trust, or unincorporated organization, or a government or agency or political subdivision thereof. Plan - an employee benefit plan now or hereafter maintained for employees of Borrower that is covered by Title IV of ERISA. A-1-10 59 Projected Debt Service - means the sum of the current portion of Borrower's and each Subsidiaries' long term debt and capitalized lease obligations coming due in the following four quarters, including any maturities of the Loans associated with this Agreement. Projected Debt Service shall exclude the Projected Debt Service attributable to any Unrestricted Subsidiary. Properly Contested - in the case of any Indebtedness of a Loan Party (including any Taxes) that is not paid as and when due or payable by reason of such Loan Party's bona fide dispute concerning its liability to pay same or concerning the amount thereof, that (i) such Indebtedness and any Liens securing same are being properly contested in good faith by appropriate proceedings promptly instituted and diligently conducted, (ii) such Loan Party has established appropriate reserves as shall be required in conformity with GAAP, (iii) the non-payment of such Indebtedness will not have a Material Adverse Effect and will not result in a forfeiture of any assets of such Loan Party; (iv) no Lien is imposed upon any of such Loan Party's assets with respect to such Indebtedness unless such Lien is at all times junior and subordinate in priority to the Liens in favor of Lender (except only with respect to property taxes that have priority as a matter of applicable state law); (v) if the Indebtedness results from the entry, rendition or issuance against a Loan Party or any of its assets of a judgment, writ, order or decree, such judgment, writ, order or decree is stayed or bonded pending a timely appeal or other judicial review; and (vi) if such contest is abandoned, settled or determined adversely to such Loan Party, such Loan Party forthwith pays such Indebtedness and all penalties and interest in connection therewith. Property - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Rentals - as defined in Section 8.2.13 of the Agreement. Reportable Event - any of the events set forth in Section 4043(b) of ERISA. Revolving Credit Loan - a Loan made by Lender as provided in Section 1.1 of the Agreement. Schedule of Accounts - as defined in Section 6.2.1 of the Agreement. Security - shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. Security Agreements - collectively, the Security Agreements executed by each of Drilling LLP, Drilling LLC, Trend and Bonray. A-1-11 60 Security Documents - the Guaranty Agreements, Security Agreements, and all other instruments and agreements now or at any time hereafter securing the whole or any part of the Obligations. Senior Debt - means all Money Borrowed, excluding Subordinated Debt. Solvent - as to any Person, such Person (i) owns Property whose fair salable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Subordinated Debt - Indebtedness of Borrower or any Subsidiary that is subordinated to the Obligations in a manner satisfactory to Lender. Subsidiary - any corporation of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Voting Stock at the time of determination or any association or other business entity of which more than fifty percent (50%) of the total voting power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof, or to vote in matters relating to the partnership if a partnership, is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other subsidiaries of that Person or a combination thereof. Notwithstanding the foregoing, the term Subsidiary shall include all Guarantors whether or not included within the foregoing and shall exclude any Unrestricted Subsidiary. Tangible Net Worth - means, at a particular date, the sum of the Borrowers' capital stock (excluding treasury stock), warrants, surplus (including earned surplus, capital surplus and the balance of the current profit and loss account not transferred to surplus) and debt that is specifically subordinated to the Obligations on the terms acceptable to the Lender accounted on a consolidated basis appearing on a consolidated balance sheet prepared in accordance with GAAP as of the date of determination, and after deducting therefrom the net book value of all assets (after deducting any reserves applicable thereto) which would be treated as intangibles under GAAP (including, without limitation, such items as goodwill, trademarks, trade names, patents and licenses, franchises and operating rights) and excluding the amount of the Borrowers' equity investment in any Unrestricted Subsidiary. Taxes - any present or future taxes, levies, imposts, duties, fees, assessments, deductions, withholdings or other charges of whatever nature, including, without limitation, income, receipts, excise, property, sales, transfer, license, payroll, withholding, social security and franchise taxes now or hereafter imposed or levied by the United States, or any state, local or foreign government or by any department, agency or other A-1-12 61 political subdivision or taxing authority thereof or therein and all interest, penalties, additions to tax and similar liabilities with respect thereto. Total Credit Facility - $10,000,000. Total Liabilities - means indebtedness of the Borrower and its Subsidiaries on a consolidated basis which would in accordance with GAAP be classified as current and long term liabilities of a corporation conducting a business the same as or similar to the Borrower and its Subsidiaries, but excluding debt that is specifically subordinated to the Obligations on terms acceptable to the Lender and total liabilities of any Unrestricted Subsidiary. Trend - Trend Drilling Co., and Oklahoma corporation. Turnkey Accounts - Accounts arising from oil or gas drilling contracts between Drilling LP and owners or operators of oil or gas wells pursuant to which Drilling LP assumes primary control over drilling activity, and is responsible for subcontracting related services. Unrestricted Subsidiary - Any Subsidiary of the Borrower that the Borrower has clarified as an Unrestricted Subsidiary under the Indenture and that has not been reclassified as a Subsidiary pursuant to the terms of the Indenture. Voting Stock - Securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). Ward - Ward Drilling Company. TERMS DEFINED IN INDENTURE. Capitalized terms used in this Agreement but not otherwise defined herein, or specifically referenced to the Indenture for their meaning, shall have the meaning given them in that certain Offering Memorandum dated June 19, 1998, pursuant to which Borrower is offering senior notes in an aggregate principal amount not to exceed $100,000,000, without giving any effect to any amendments or modifications thereto after the date thereof ("Indenture"), a copy of which is attached hereto as Exhibit Q. OTHER TERMS. All other terms contained in the Agreement shall have, when the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein. CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. In the computation of periods of time from a specified date to a later specified date, the word "from" A-1-13 62 means "from and including" and the words "to" and "until" each means "to but excluding." The section titles, table of contents and list of Exhibits appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof. Wherever the phrase "including" shall appear in the Agreement, such word shall be understood to mean "including, without limitation." [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] A-1-14 EX-10.14 6 2ND AMENDED & RESTATED LOAN AGREEMENT-JUNE 18,1998 1 EXHIBIT 10.14 SECOND AMENDED AND RESTATED LOAN AGREEMENT AMONG THE CIT GROUP/EQUIPMENT FINANCING, INC. AND FLEET CAPITAL CORPORATION AS LENDERS, AND BAYARD DRILLING TECHNOLOGIES, INC., AS BORROWER. DATED AS OF JUNE 18, 1998 2 TABLE OF CONTENTS ARTICLE I. - THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 1.1 Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 1.2 Pro-Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 1.3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 1.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 1.5 Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (a) Mandatory Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (i) Total Loss or Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (ii) "Total Loss" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (iii) Collateral Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (iv) Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (b) Voluntary Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 1.6 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 1.7 Amendment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 1.8 Agency Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 1.9 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 1.10 Release of Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE II. - CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.1 Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.2 Waiver of Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE III. - REPRESENTATIONS, WARRANTIES AND COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.1 Representations of the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3.2 Covenants of the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE IV. - EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE V. - THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 5.1 Appointment and Duties of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 5.2 Discretion and Liability of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 5.3 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 5.4 Consultation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 5.5 Communications to and from Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 5.6 Limitations of Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.7 No Representations or Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.8 Lender Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.9 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.10 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.11 Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 5.12 Limitation of Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3 Section 5.13 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE VI. - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 6.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 6.2 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 6.3 Applicable Law and Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 6.4 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.5 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.6 Assignment and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.7 Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.9 Section Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.10 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Exhibit A-1 - CIT Note Exhibit A-2 - Fleet Note 4 SECOND AMENDED AND RESTATED LOAN AGREEMENT THIS SECOND AMENDED AND RESTATED LOAN AGREEMENT dated as of June 18, 1998, among BAYARD DRILLING TECHNOLOGIES, INC., a Delaware corporation (the "Borrower"), THE CIT GROUP/EQUIPMENT FINANCING, INC., a New York corporation ("CIT"), and FLEET CAPITAL CORPORATION, a Rhode Island corporation ("Fleet"; collectively with CIT, the "Lenders") and CIT as Agent for the Lenders (the "Agent"). Capitalized terms used herein and not otherwise defined herein are used with the meanings ascribed thereto in the Definitions Section of this Agreement. R E C I T A L S: 1. The Borrower and its subsidiaries are in the business of owning and operating land drilling rigs. 2. Pursuant to the Amended and Restated Loan Agreement dated as of May 1, 1997 among the Lenders, the Agent, the Borrower and Trend Drilling Co. ("Trend") (the "Restated Loan Agreement"), the Lenders agreed to make a loan to the Borrower and Trend in the principal amount of USD 30,577,131.15 (the "Restated Loan") in order to (i) facilitate the purchase of additional drilling rigs by the Borrower and Trend, (ii) upgrade existing and new drilling rigs, and (iii) provide working capital for the Borrower and Trend. 3. The Restated Loan was evidenced by the secured promissory notes made by the Borrower and Trend to CIT and Fleet. 4. The principal amount outstanding as of the date hereof under the Restated Loan is USD 18,219,458.32 (the "Loan"). 5. The Borrower and the Lenders wish to restate the Restated Loan Agreement in order to release Trend as a Borrower, add newly created subsidiaries of the Borrower as guarantors and amend certain other terms and covenants of the Restated Loan Agreement. NOW, THEREFORE, in consideration of the above recitals, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend and restate the Restated Loan Agreement as follows: DEFINITIONS: The following terms shall have the following meanings for all purposes of this Agreement and shall be equally applicable to both the singular and the plural forms of the terms herein defined. 5 "Agreement", "this Agreement", "herein", "hereunder"' or other like words mean this Loan Agreement as originally executed or as modified, amended or supplemented from time to time pursuant to the provisions hereof. "Amendment Date" means the date on which the conditions precedent contained in Section 2.1 of this Agreement are fulfilled or waived and the modifications to the Restated Loan Agreement contemplated by this Agreement become effective. "Borrower" means Bayard Drilling Technologies, Inc. and its successors and permitted assigns. "Business Day" means a day other than a Saturday or a Sunday or a day on which commercial banks are authorized to be closed in the State of New York or the State of Texas. "Cash Flow" means, for any period, the sum of the Borrower's consolidated net income plus depreciation, depletion and amortization, less dividends paid and extraordinary items of income or loss (as determined in accordance with generally accepted United States accounting principles) in the prior four quarters. "Cash Flow Coverage Ratio" means the ratio of Cash Flow to Projected Debt Service. "Collateral Value" has the meaning set forth in Section 1.5(a)(iii) hereof. "Dollars" or "USD" means lawful currency of the United States of America. "Event of Default" has the meaning set forth in Article IV hereof. "Excluded Income Taxes" has the meaning set forth in Section 1.5(a) hereof. "Fair Market Value" has the meaning set forth in Section 1.5(a)(iv) hereof. "Governmental Agencies" means any government or any state, department or other political subdivision thereof or governmental body, agency, authority, department or commission having jurisdiction over either Borrower or their properties (including without limitation any court or tribunal) exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any corporation, partnership or other entity directly or indirectly owned by the foregoing. "Guaranties" means the guaranties of the Guarantors in favor of the Agent, in form and substance reasonably acceptable to the Lenders. 2 6 "Guarantors" means Bayard Drilling, L.P. a Delaware limited partnership, Bayard Drilling, LLC, a Delaware limited liability company, Bonray Drilling Corporation, a Delaware corporation, and Trend. "Hazardous Substances" means petroleum and used oil, or any other pollutant or contaminant, hazardous, dangerous or toxic waste, substance or material as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (hereinafter called "CERCLA"); the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901, et seq. (hereinafter called "RCRA"); the Toxic Substances Control Act, as amended, 15 U.S.C. Section 2601, et seq. (hereinafter called "TSCA"); the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Section 1801, et seq. (hereinafter called "HMTA"); the Oil Pollution Act of 1990, Pub.L. No. 101-380, 104 Stat. 484 (1990) (hereinafter called "OPA"); or any other statute, law, ordinance, code or regulation of any Governmental Agency relating to or imposing liability or standards of conduct concerning the use, production, generation, treatment, storage, recycling, handling, transportation, release, threatened release or disposal of any hazardous, dangerous or toxic waste, substance or material, currently in effect or at any time hereafter adopted. "Intercreditor Agreement" means the Amended and Restated Intercreditor Agreement dated as of June 18, 1998 among the Lenders and the Agent in form and substance satisfactory to the Lenders, as amended, from time to time. "Interest Period" has the meaning set forth in Section 1.3(d) hereof. "Interest Rate" has the meaning set forth in Section 1.3(b) hereof. "LIBOR Rate" means the one-month rate of interest per annum at which deposits in Dollars are offered to major banks in the London interbank market at approximately 11:00 a.m. (London time), as reported and published in the Wall Street Journal for the 15th day of each month, or, if the 15th day of the month is not a day for which the Wall Street Journal reports LIBOR, then on the first preceding day on which the Wall Street Journal reports the LIBOR and shall become effective as of the first day of the succeeding calendar month and shall continue in effect to, and including, the last day of such Month. "Loan" means the current principal amount and unpaid interest outstanding under the Restated Loan Agreement as amended and restated by this Agreement. "Loan Documents" means the Notes, this Agreement, the Security Agreement and the Amendment No. 1 to Intercreditor Agreement. "Material adverse effect" means having a material adverse effect on the business, properties or condition (financial or otherwise) of the Borrower and its subsidiaries taken as a whole. "Maturity Date" means March 31, 2002. 3 7 "Notes" means the amended and restated promissory notes of the Borrower in favor of the Lenders, substantially in the form of Exhibits A-1 and A-2 attached hereto and made a part hereof. "Orderly Liquidation Value" has the meaning set forth in Section 1.5(a)(iv) hereof. "Payment Date" has the meaning set forth in Section 1.3(a) hereof. "Prepayment Premium" means the prepayment premiums required by Section 1.5 hereof. "Prime Rate" means with respect to any Interest Period, the rate publicly announced in New York, New York from time to time as the prime rate of The Chase Manhattan Bank (or any successor thereof) ("Chase"). The Prime Rate shall be determined by the Lender at the close of business two (2) Business Days before a Payment Date, and shall be effective to but not including the next applicable Payment Date. The Prime Rate is not intended to be the lowest rate of interest charged by Chase or the Lenders in connection with extensions of credit to debtors. "Projected Debt Service" means the sum of the current portion of the Borrower's long term debt and capitalized lease obligations coming due in the following four quarters, including any maturities associated with the Fleet Credit Facility. Both Cash Flow and Projected Debt Service shall exclude the Cash Flow and Projected Debt Service attributable to any Unrestricted Subsidiary. "Responsible Officer" means the Borrower's chief executive officer, the Borrower's chief financial officer or any other officer having principal responsibility for the financial affairs of the Borrower. "Rigs" means the twelve (12) land drilling rigs owned by Bayard Drilling, L.P. and described on Schedule 1 attached hereto, and all metal products, machinery, equipment, materials or other goods of any description whatsoever, used or acquired for use by Bayard Drilling, L.P. and all pumps, drilling equipment, drill pipe, machinery, equipment, supplies, parts and other goods of any description whatsoever installed in or affixed to or to be used in connection with any Rig, or acquired for installation on, affixation to, or use in connection with any Rig, other than the top drives referred to in Section 3.2(k)(i) below. "Security Agreement" means the amended and restated security agreement between CIT and Bayard Drilling, L.P. dated as of the date hereof in form and substance satisfactory to the Agent. "Tangible Net Worth" means, at a particular date, the sum of the Borrower's capital stock (excluding treasury stock), warrants, surplus (including earned surplus, capital surplus and the balance of the current profit and loss account not transferred to surplus), and debt that is specifically subordinated to the Loan on the terms reasonably acceptable to the Lenders accounted on a consolidated basis appearing on a consolidated balance sheet prepared in accordance with generally accepted United States accounting principles as of the date of determination after deducting therefrom the net book value of all assets (after deducting any reserves applicable thereto) which 4 8 would be treated as intangibles under generally accepted United States accounting principles (including, without limitation, such items as goodwill, trademarks, trade names, patents and licenses, franchises and operating rights) and excluding the amount of the Borrower's equity investment in any Unrestricted Subsidiary. "Taxes" has the meaning set forth in Section 1.4(a) of this Agreement. "Term Loan" has the meaning set forth in Section 1.1 of this Agreement. "Total Liabilities" means indebtedness of the Borrower on a consolidated basis which would in accordance with generally accepted United States accounting principles be classified as current and long term liabilities of a corporation conducting a business the same as or similar to the Borrower, but excluding other debt that is specifically subordinated to the Loan on terms reasonably acceptable to the Agent and total liabilities of any Unrestricted Subsidiary. "Total Loss" has the meaning set forth in Section 1.5(a) of this Agreement. "Unrestricted Subsidiary" means any subsidiary of the Borrower that the Borrower has classified as an Unrestricted Subsidiary under the Indenture and that has not been reclassified as a Subsidiary pursuant to the terms of the Indenture. Capitalized terms used in this Agreement but not otherwise defined herein shall have the meaning given them in the Indenture, among the Borrower, the Guarantors and U.S. Trust Company of Texas, N.A., as Trustee (the "Indenture"). ARTICLE I. THE LOAN Section 1.1 Repayment. Pursuant to the Restated Loan Agreement, the Lenders have made the Loan available to the Borrower and Trend. Pursuant to Section 1.10, below, Trend is released from all obligations as a Borrower under the Restated Loan Agreement to repay the Loan. The Borrower shall repay the principal amount of the Loan in 46 equal consecutive monthly installments, each such installment to be paid by the Borrower to the Lenders on a Payment Date with the first Payment Date being June 30, 1998 and ending on the Maturity Date. The amount of principal to be repaid on each Payment Date shall be USD 341,311.20 to CIT and USD 55,980.95 to Fleet; provided, however, that the final installment shall be in an amount sufficient to discharge all outstanding amounts due hereunder. No amount of the Loan, once repaid or prepaid, may be reborrowed hereunder. Section 1.2 Pro-Rata Treatment. Except to the extent otherwise provided herein: (a) each payment of fees other than those referred to in Sections 1.7 and 1.8 below shall be made and applied for the account of the Lenders pro rata, according to each Lender's portion of the Loan as of the date of payment; and (b) each payment or prepayment by the Borrower of principal of or interest on the 5 9 Loan shall be made for the account of the Lenders pro rata in accordance with such Lender's portion of the Commitment as of the date of such payment or prepayment. Section 1.3 Interest. (a) The Borrower shall pay interest, in arrears, on the unpaid principal amount of the Loan from the Amendment Date until the principal amount of the Loan is paid in full on the last day of each calendar month, commencing June 30, 1998 up to and including the Maturity Date (each such date a "Payment Date") at a rate of interest per annum (computed on the basis of a 365-day year and actual days elapsed) equal to the applicable Interest Rate; provided, however, that all interest accrued on the Loan and unpaid on the Maturity Date shall be paid on the Maturity Date. (b) The term "Interest Rate" shall mean, for an Interest Period (as hereinafter defined), an interest rate per annum at either the rate certified by the Lender to be (i) the LIBOR Rate, plus four and one quarter percent (4.25%) or (ii) the Prime Rate plus two percent (2%) per annum, at the Borrower's option. (c) (i) The Borrower may elect to pay interest on that portion of the Loan made by CIT hereunder at either the LIBOR Rate or the Prime Rate on the following terms: A. If no election is received by Agent, the Borrower shall pay interest on that portion of the Loan made by CIT at the LIBOR Rate. B. Any interest rate election of the Borrower must be made by written notice three (3) Business days in advance of a Payment Date and may be made once in any twelve (12) month period. C. Each interest rate election made by the Borrower shall be effective as to all amounts outstanding under this Agreement for a twelve (12) month period. (ii) The Borrower may elect to pay interest on that portion of the Loan made by Fleet hereunder at either the LIBOR Rate or the Prime Rate in accordance with the terms of the promissory note of the Borrower issued in favor of Fleet, the form of which is attached to this Agreement as Exhibit A-2. (d) If at any time that the Borrower has elected the LIBOR Rate, the Agent shall determine that by reason of circumstances affecting the London interbank market adequate and reasonable means do not exist for ascertaining the Interest Rate based on the LIBOR Rate for the succeeding Interest Period or the making or continuance of the Loan at an Interest Rate based on the LIBOR Rate has become impracticable as a result of a contingency 6 10 occurring after the date of this Agreement which materially and adversely affects the London interbank market, the Agent shall notify the Borrower that the Interest Rate shall be the Prime Rate, plus two percent (2%) per annum. As used in this Agreement, "Interest Period" shall mean each respective and successive calendar month commencing on the last day of the month in which the Amendment Date occurs; provided, however, that no Interest Period shall commence or extend past the Maturity Date. (e) Any amount of principal or any other amount due hereunder which is not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest from the date when due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to two percent (2%) per annum above the Interest Rate. (f) In no event shall any interest rate provided for in this Agreement or the Notes exceed the maximum rate permitted by the then applicable law. It is the intention of the parties hereto to strictly comply with applicable usury laws; accordingly, it is agreed that, notwithstanding any provision to the contrary in this Agreement, in the Notes, or in the other Loan Documents, in no event shall this Agreement, the Notes, or the other Loan Documents be construed to charge, contract for or require the payment or permit the collection of interest in excess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under this Agreement, the Notes or the other Loan Documents, or in the event that all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received on the principal balance shall exceed the maximum amount of interest permitted by applicable law, then in such event (i) the provisions of this Section 1.3(f) shall govern and control, (ii) neither the Borrower nor any other person or entity now or hereafter liable for the payment thereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by applicable law, (iii) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to the Borrower, at the option of the Lenders, and (iv) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under this Agreement, the Notes and the other Loan Documents which are made for the purpose of determining whether such rate exceeds the maximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from the Borrower or otherwise by the Lenders in connection with such indebtedness; provided, however, that if any applicable state law is amended or the law of the United States of America preempts any applicable state law, so that it becomes lawful for the Lenders to receive a greater simple interest per annum rate than is presently allowed, the Borrower agrees that, on the effective date of such amendment or preemption as the case may be, the lawful maximum hereunder shall be increased to the maximum simple interest 7 11 per annum rate allowed by the higher of the amended state law or the law of the United States of America. Section 1.4 Payments. (a) The payment obligations of the Borrower under the Notes and all other amounts payable under this Agreement shall be paid to the Lenders in proportion to their percentage of the Loan at the time of such payment at such address as the Lenders may designate (not less than one (1) Business Day prior to the due date therefor), not later than the close of business on the due date thereof, in lawful money of the United States. All payments shall be made (i) without set-off, counterclaim or condition and (ii) free and clear of, and without deduction for or on account of, any present or future taxes, levies, duties, imposts, charges, fees, deductions or withholdings of any nature ("Taxes"), unless the Borrower is required by law or regulation to make payment subject to any Taxes. In the event that the Borrower is required by law or regulation to make any deduction or withholding on account of any Taxes from any payment due under this Agreement, then: (a) the Borrower shall notify the Lenders promptly as soon as it becomes aware of such requirement and shall remit promptly the amount of such Taxes to the appropriate taxation authority, and in any event prior to the date on which penalties attach thereto; and (b) such payment shall be increased by such amount as may be necessary to ensure that the Lenders receive a net amount, free and clear of all Taxes, equal to the full amount which the Lenders would have received had such payment not been subject to such Taxes (other than Excluded Income Taxes as such term is defined below). Notwithstanding the foregoing, the Borrower shall not be liable for, or required to pay, any Taxes which are overall income or franchise taxes imposed at any time on either Lender in the United States of America or any Governmental Agency ("Excluded Income Taxes"). Each such payment or reimbursement by the Borrower shall be net of any credit or the value of any deduction received by the Lenders thereon to the extent that the same can be determined by the Lenders (as certified by the Agent to the Borrower, such certificate to be conclusive absent manifest error). The Borrower shall indemnify the Lenders against any liability of the Lenders in respect of such Taxes (other than Excluded Income Taxes) and shall supply copies of applicable tax receipts. (b) If any payment to be made by the Borrower shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day. (c) Each payment to be made on a Payment Date and all prepayments, Prepayment Premiums, and other payments (other than the fees referred to in Sections 1.7 and 1.8 below) shall be allocated to the Lenders in proportion to their percentage of the Loan at the time of payment and shall be applied first to the payment of accrued and unpaid interest on the Loan, then to the payment of all other amounts due under this Agreement and the other Loan Documents, and the balance shall be applied to the payment of principal due under the Notes. 8 12 (d) The Borrower shall indemnify the Lenders and the Agent on demand against all costs, expenses, liabilities and losses (including funding losses) actually incurred by the Lenders and the Agent sustained or incurred by the Lenders and the Agent as a result of or in connection with: (a) the occurrence and/or continuance of any Event of Default (or event which, with the giving of notice and/or lapse of time or other applicable condition might constitute an Event of Default); and/or (b) any judgment or order which relates to any sum due hereunder being expressed in a currency other than the currency expressed to be due hereunder and as a result of a variation in rates of exchange between the rate at which such amount is converted into such other currency for the purposes of such judgment or order and the rate prevailing on the date of actual payment of such amount pursuant thereto; and/or (c) any postponement of the Amendment Date occurring because of one or more of the conditions precedent set forth in Article II shall not have been satisfied or waived; and/or (d) any payment of principal of or interest on the Notes made on a date which is not a Payment Date. The above indemnities are separate and independent obligations of the Borrower and apply irrespective of any indulgence granted by the Lenders or the Agent. Section 1.5 Prepayment. (a) Mandatory Prepayment. (i) Total Loss or Sale. If there shall have occurred a Total Loss as herein defined or the sale of a Rig, the value of which is included in the calculation of Collateral Value set forth in Section 1.5(a)(iii), on the earlier of (x) the date insurance or sale proceeds are received or (y) seventy five (75) days after the date of occurrence of the Total Loss or sale, the Borrower shall either insure that Bayard Drilling, L.P. provides as collateral a replacement rig, or other drilling equipment acceptable to the Agent which is, as determined by the appraiser referred to in Section 1.5(a)(iii) below, of comparable or greater value to the lost or sold Rig, which replacement rig will be added to the lien of the Security Agreement or, if after giving effect to the release of such lost or sold Rig from the lien of the Security Agreement, as applicable, the amount outstanding under the Loan is greater than the Collateral Value, (A) prepay the outstanding principal balance under the Notes in an amount equal to the amount by which the outstanding principal amount of the Loan on the date of prepayment exceeds the Collateral Value on such date, and (B) pay accrued interest thereon to the date of such prepayment together with any other amount due hereunder or under any Loan Document. The Lenders shall apply payments received pursuant to this Section 1.5(a)(i) in accordance with Section 1.4(c) hereof, provided, however, that the principal repayments shall be applied so that the remaining installments of principal of the Loan are reduced on a pro rata basis, such reduction to be confirmed by the Agent in a certificate delivered to the Borrower which certificate shall be conclusive absent manifest error. Mandatory Prepayments made by the Borrower pursuant to this Section 1.5(a) shall include a Prepayment Premium as follows: 9 13 (1) If made on or before December 31, 1998 - two percent (2%) of the aggregate principal amount prepaid; (2) If made between January 1, 1999 and December 31, 1999 - one percent (1%) of the aggregate principal amount prepaid; or (3) If made after December 31, 1999 - no Prepayment Premium. (ii) "Total Loss" means in respect of a Rig (i) the actual or constructive or compromised or arranged total loss of such Rig; or (ii) the requisition for title or other compulsory acquisition of such Rig otherwise than by requisition for rental; or (iii) the seizure, attachment, detention or confiscation of such Rig by any government or by persons acting or purporting to act on behalf of any government unless such Rig is released from such seizure, attachment, detention or confiscation within thirty (30) days of the occurrence thereof. A Total Loss shall be deemed to have occurred (a) in the event of an actual total loss of a Rig, on the date of such loss, (b) in the event of damage to a Rig which results in a constructive or compromised or arranged total loss of such Rig, on the date of the occurrence of the event giving rise to such damage, or (c) in the case of any event referred to in clauses (ii) or (iii) above, on the date of the occurrence of such event. In the event of any Total Loss of a Rig, the Borrower shall give written or telegraphic notice to the Agent not later than ten (10) days after a Responsible Officer of the Borrower has actual knowledge of such occurrence. (iii) Collateral Value. On dates as may be requested by either Lender, but not more than once in any twelve (12) month period, the Agent shall arrange to have the Fair Market Value and the Orderly Liquidation Value of each of the Rigs determined at the Borrower's expense by an independent appraisal firm chosen by the Agent and reasonably acceptable to the Borrower. Each such valuation shall be based on the Fair Market Value of each Rig and the oil field tubular or drill pipe attributable to such Rig. The most recent determination of the lesser of (A) 50% of the aggregate Fair Market Values of all of the Rigs that are working or available for work (a "Working Rig") or (B)75% of the aggregate Orderly Liquidation Values of all of the Working Rigs is hereinafter referred to as the "Collateral Value". If the outstanding principal amount of the Loan shall exceed the Collateral Value, then the Borrower shall either prepay within five days of the Agent's demand the amount of the Loan necessary to restore the ratio referred to herein together with payment of accrued interest thereon or provide additional security for the Loan which shall be acceptable in the sole opinion of the Lenders for these purposes. The Lenders shall apply payments received under this Section 1.5(a)(iii) in accordance with Section 1.4(c) hereof, provided, however, that the principal repayments shall be applied so that the remaining installments of principal of the Loan shall be reduced on a pro rata basis, such reduction to be confirmed by the Agent in a certificate delivered to the 10 14 Borrower which certificate shall be conclusive absent manifest error. No Prepayment Premium shall bepayable with respect to any prepayment required by this Section 1.5(a)(iii). (iv) Fair Market Value. The "Fair Market Value" of any Rig shall be the value determined by an independent appraisal firm chosen by the Agent in accordance with clause (ii) above on the basis of an arms-length purchase by a willing buyer from a willing seller and without consideration of any selling expenses, drilling contract, or other rig employment contract. The "Orderly Liquidation Value" of any Rig shall have the meaning customarily attributed to it in the equipment appraisal industry at the time of the valuation, less the estimated marshalling, stacking, reconditioning and sale expenses designed to maximize the resale value of such Rig (as determined by the appraisal firm referred to above). The appraisal firm's valuation shall be made with or without physical inspection at the Agent's discretion; provided however, that no more than one physical inspection shall be permitted in any one twelve (12) month period. (b) Voluntary Prepayment. (i) Subject to Section 3.2(z) below, after December 31, 1999, the Borrower may prepay from the proceeds of a loan, made without the participation of CIT, in full or in part in amounts of not less than USD 500,000.00, its indebtedness under the Notes on the next Payment Date after giving at least thirty (30) Business Days prior notice of such prepayment. Prepayments made between January 1, 2000 and December 31, 2000 shall include a premium (the "Prepayment Premium") in an amount equal to three percent (3%) of the aggregate principal amount prepaid. Prepayments made between January 1, 2001 and the Maturity Date shall include a Prepayment Premium in an amount equal to two percent (2%) of the aggregate principal amount prepaid. If following a prepayment under this Section 1.5(b)(i), the amount outstanding under the Loan is less than Collateral Value, the Agent agrees to release from the lien of the Restated Security Agreement, as applicable, such Rig or Rigs as will result in Collateral Value equalling the amount outstanding under the Loan. (ii) Subject to 3.2(m) below, at any time during the term of this Agreement if all or substantially all of the stock or assets of the Borrower are sold to another entity or the Borrower merges with another entity and is not the surviving entity, the Borrower may prepay in full or in part in amounts of not less than USD 500,000.00, its indebtedness under the Notes on the next Payment Date after giving at least thirty (30) days prior notice of such prepayment. Prepayments made under this Section 1.5(b)(ii) shall include a Prepayment Premium as follows: 11 15 A. If made on or before December 31, 1998 - four percent (4%) of the aggregate principal amount prepaid; B. If made between January 1, 1999 and December 31, 1999 - three percent (3%) of the aggregate principal amount prepaid; C. If made between January 1, 2000 and December 31, 2000 - two percent (2%) of the aggregate principal amount prepaid; or D. If made after January 1, 2001 - one percent (1%) of the aggregate principal amount prepaid. (iii) The Lenders shall apply payments received pursuant to this Section 1.5(b) in accordance with Section 1.4(c) hereof, provided, however, that the principal repayments shall be applied so that the remaining installments of principal of the Loan shall be reduced on a pro rata basis, such reduction to be confirmed by the Agent in a certificate delivered to the Borrower which certificate shall be conclusive absent manifest error. Section 1.6 Security. All amounts due hereunder and under the Notes shall be secured by the Guaranties and the Security Agreement. As further security for the repayment of all amounts due under this Agreement and the Notes, the Lenders and the Agent will execute and deliver the Intercreditor Agreement and the Borrower will consent to its terms. Section 1.7 Amendment Fee. The Borrower shall pay to CIT an amendment fee in an amount of USD 30,000.00 to be paid on the Amendment Date. Section 1.8 Agency Fee. The Borrower agrees to pay the Agent an annual agency fee of USD 25,000.00 for each of the two (2) years commencing January 1, 1999, payable in advance on the first Business Day in each such year. Section 1.9 Sharing of Payments, Etc. The Borrower agrees that, in addition to (and without limitation of) any right of set-off, bankers' lien or counterclaim a Lender may otherwise have, each Lender shall be entitled, at its option after an Event of Default has occurred and is continuing to offset balances held by it for the account of Borrower at any of its offices against any principal of or interest on any portion of Loan attributable to such Lender hereunder or any other obligation of the Borrower hereunder which is not paid (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower and the Agent thereof, provided that such Lender's failure to give such notice shall not affect the validity thereof. If a Lender shall obtain payment of any principal of or interest on any portion of the Loan attributable to it under this Agreement or other obligation then due to such Lender hereunder, through the exercise of any right of set-off or lien granted under Section 5.13 below), bankers' lien, counterclaim or similar right, or otherwise, it shall promptly purchase from the other Lenders participations in the 12 16 Loan attributable to it, or the other obligations of the Borrower hereunder of, the other Lenders in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Lenders shall share the benefit of such payment (net of any expenses which may be incurred by such Lender in obtaining or preserving such benefit) pro-rata in accordance with their respective portions of the Loan. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any Lender so purchasing a participation in the Loan may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of the Loan or other obligations in the amount of such participation. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligations of the Borrower to such Lender. Section 1.10 Release of Trend. Trend is hereby released from its obligations as a Borrower under the Restated Loan Agreement and the Notes. Such release shall not affect Trend's obligations as a Guarantor. ARTICLE II. CONDITIONS PRECEDENT Section 2.1 Conditions Precedent. The effectiveness of the modifications to the Restated Loan Agreement contemplated by this Agreement are subject to the following conditions having been satisfied in the reasonable opinion of the Lenders on or prior to the Amendment Date: (a) Each of this Agreement and the other Loan Documents shall have been duly authorized and executed with original counterparts thereof delivered to the Lenders. (b) The Borrower and the Guarantors shall have delivered to the Lenders evidence of good standing, certificates of incumbency and duly certified resolutions of their Boards of Directors and all such other corporate documentation authorizing them to enter into the transactions contemplated by this Agreement and the other Loan Documents. (c) The Lenders shall have received opinions from Baker & Botts, L.L.P., counsel to the Borrower and the Guarantors and an opinion of CIT's counsel, Gardere Wynne Sewell & Riggs, L.L.P., each in form and substance satisfactory to the Lenders. (d) The representations and warranties contained in Article III of this Agreement and in each other Loan Document shall be true on the Amendment Date with the same effect as though such representations and warranties had been made on and as of such date, and no Event of Default specified in Article IV hereof and no event which, with the lapse of time or the notice and lapse of time specified in Article IV hereof, would become such an Event of Default, shall have occurred and be continuing or shall have occurred at the completion 13 17 of the making of the Loan, and the Lenders shall have received satisfactory certificates signed by Responsible Officers of the Borrower and the Guarantors, as to all questions of fact involved in this condition. (e) There shall have been no material adverse change in the business, financial condition or operations of the Borrower and of its subsidiaries taken as a whole since March 31, 1998. (f) The Lenders shall have received evidence that the person specified to act as agent for service of process for the Borrower, pursuant to Section 6.3 has agreed to so act. (g) The Lenders shall have received certificates of the Borrower and the Guarantors signed by an officer in charge of environmental affairs and safety as to compliance by the Borrower and Guarantors with all environmental, safety and public health laws and regulations applicable to the Borrower and Guarantors, without limitation of the foregoing, all other laws and regulations affecting or relating to the Rigs, in each case the non-compliance with which would have a material adverse effect. (h) The Borrower shall have provided evidence of insurance maintained by the Borrower or Bayard Drilling, L.P. and approved by Agent on the Rigs as required by Article 5 of the Security Agreement. (i) The Security Agreement shall have been duly executed and delivered and shall create a valid and perfected lien on the collateral described therein. (j) Financing statements or other documents necessary to continue the perfection of the Security Agreement or to perfect the Agent's security interests shall have been filed. (k) The Rigs shall not have been the subject of a Total Loss and shall not have sustained any material damage to their condition since the date of the appraisal reports therefor delivered to CIT pursuant to Section 2.1(m) of the Restated Loan Agreement, or materially decreased in value from the value attributed thereto as set forth in the appraisal report therefor delivered to CIT pursuant to Section 2.1(m) of the Restated Loan Agreement. (l) The Agent shall have received evidence of the amendment to the Fleet Credit Facility. (m) The Lenders shall have received such other documents and instruments it may reasonably request necessary to consummate the transactions described in this Agreement, in each case in form and substance reasonably satisfactory to it. 14 18 Section 2.2 Waiver of Conditions Precedent. All of the conditions precedent contained in this Article II are for the sole benefit of the Lenders and the Lenders may waive any or all of them in their absolute discretion. ARTICLE III. REPRESENTATIONS, WARRANTIES AND COVENANTS Section 3.1 Representations of the Borrower. The Borrower represents and warrants that: (a) The Borrower and each Guarantor is a corporation, limited partnership or a limited liability company, as the case may be, duly organized and validly existing, in good standing under the laws of the state of its incorporation and has the requisite power and authority (i) to carry on its business as presently conducted, (ii) to enter into and perform its obligations under each Loan Document to which it is a party, and (iii) to borrow moneys and guarantee the debts of others. (b) The execution, delivery and performance by the Borrower and each Guarantor of each Loan Document to which it is a party, and any other instrument or agreement provided for by this Agreement, have been duly authorized by all necessary corporate or partnership action, do not require stockholder, partner or member approval other than such as has been duly obtained or given, do not or will not contravene any of the terms of its articles of incorporation or by-laws, partnership agreement, certificate of formation, operating agreement or similar such document, and will not violate any provision of law or of any order of any court or governmental agency if such violation would result in a material adverse effect, or constitute (with or without notice or lapse of time or both) a default under, or result (except as contemplated by this Agreement) in the creation of any security interest, lien, charge or encumbrance upon any of its properties or assets pursuant to, any agreement, indenture or other instrument to which it is a party or by which it may be bound; this Agreement and each Loan Document to which it is a party has been duly executed and delivered by the Borrower and each Guarantor and constitutes its legal, valid and binding agreement or instrument, enforceable in accordance with the respective terms thereof. (c) Other than class action suits previously disclosed to the Lenders, there are no suits or proceedings pending or to its knowledge threatened against or affecting the Borrower or any Guarantor which if adversely determined would have a material adverse effect. (d) The principal place of business of the Borrower and the Guarantors and the place where all records relating to the transactions contemplated hereby, including records relating to the operations of the Rigs are kept is 4005 Northwest Expressway, Suite 400E, Oklahoma City, Oklahoma 73116. (e) Other than such as have been obtained, no license, consent, approval of or filing or registration with any Governmental Agency or other regulatory authority is required 15 19 for the execution, delivery and performance of this Agreement or any Loan Document or any instrument contemplated herein or therein. The Borrower and each Guarantor is the holder of all certificates and authorizations of governmental authorities required by law to enable it to engage in the business transacted by it. (f) No part of the proceeds of the Loan will be used for any purpose that violates the provisions of any of Regulation T, U or X of the Board of Governors of the Federal Reserve System or any other regulation of such Board of Governors. The Borrower is not engaged in the business of extending credit to others for the purpose of purchasing or carrying margin stock within the meaning of Regulations T, U and X of the Board of Governors of the Federal Reserve System. If requested by the Agent, the Borrower will furnish to the Lenders in connection with the Loan hereunder a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in said Regulation U. The Borrower is not an "investment company" or a company "controlled" by an "investment company" (as each of such terms is defined or used in the Investment Company Act of 1940, as amended). No proceeds of the Loan will be used to acquire any security in any transaction which is subject to Sections 13 and 14 of the Securities Exchange Act of 1934, as amended. (g) The Rigs are and will be on the Amendment Date owned by Bayard Drilling, L.P., free and clear of all liens, charges and rights of others except as provided in the Security Agreement or as permitted by Section 3.2(k) below. All of the Rigs are mobile equipment which are not designed to be permanently used in any one location and none of the Rigs are certificated as motor vehicles under the laws of any jurisdiction. (h) Each of the Borrower and the Guarantors has filed or caused to be filed all tax returns required by the United States of America, the state of its principal place of business and the states where its business or operations require such filings which are required to be filed and has paid or caused to be paid all taxes as shown on such returns or on any assessment received by it to the extent that such taxes have become due and except as to such taxes being contested in good faith by appropriate proceedings for which adequate reserves are being maintained. Each of the Borrower and the Guarantors has established reserves to the extent believed by it to be adequate for the payment of additional taxes for years which have not been audited by the respective tax authorities. (i) The Borrower is the sole shareholder, is the sole general partner, or is a member of each of the Guarantors, as the case may be. (j) (i) Each of the Borrower and the Guarantors has duly complied with, and the Rigs and its other properties and operations are in compliance with, the provisions of all applicable environmental, health and safety laws, codes and ordinances and all rules and regulations promulgated thereunder of all Governmental Agencies, the non-compliance with which would have a material adverse effect, 16 20 unless such compliance would violate the laws or regulations of the jurisdiction in which the Rigs are operating. (ii) As of the date of this Agreement, neither the Borrower nor any Guarantor has received notice from any Governmental Agency, and has no knowledge, of any fact(s) which constitute a violation of any applicable environmental, health or safety laws, codes or ordinances, and any rules or regulations promulgated thereunder of all Governmental Agencies, which relate to the use or ownership of the Rigs or properties owned or operated by the Borrower or any Guarantor. (iii) Each of the Borrower and the Guarantors has been issued all required permits, licenses, certificates and approvals of all Governmental Agencies the failure to have issued which would result in a material adverse effect relating to (a) air emissions, (b) discharges to surface water or ground water, (c) noise emissions, (d) solid or liquid waste disposal, (e) the use, generation, storage, transportation, treatment, recycling or disposal of Hazardous Substances or (f) other environmental, health or safety matters which are material and necessary for the ownership or operation of the Rigs or other properties owned or operated by the Borrower or any Guarantor and such permits, licenses, certificates and approvals are in full force and effect on the date of this Agreement. (iv) Except as disclosed to the Agent in writing, to the best of the Borrower's knowledge, except in accordance with a valid governmental permit, license, certificate or approval, there has been no spill or unauthorized discharge or release of any Hazardous Substance to the environment at, from, or as a result of any operations on the Rigs or other properties and operations owned or operated by the Borrower or any Guarantor required to be reported to any Governmental Agency by the Borrower or any Guarantor. (v) Except as disclosed to the Agent in writing, there has been no material complaint, compliance order, compliance schedule, notice letter, notice of citation or other similar notice from any applicable environmental agency delivered to the Borrower or any Guarantor which concerns the operations of the Rigs or other properties owned or operated by the Borrower or any Guarantor and which would result in a material adverse effect. (k) All representations and warranties made by the Borrower herein or by the Borrower or any Guarantor pursuant to any Loan Document or made in any certificate or written statement delivered pursuant hereto or thereto (i) do not contain any untrue statement of or omit to state a material fact necessary to make the statements contained herein or therein not misleading and (ii) shall survive the making of the Loan hereunder and the execution and delivery to the Lenders of the Notes and any other Loan Document. 17 21 Section 3.2 Covenants of the Borrower. After the date of execution of this Agreement and until payment in full of the Notes and the termination of this Agreement and the other Loan Documents, the Borrower agrees that it will: (a) promptly inform the Lenders of any event which constitutes or will constitute, by giving of notice or lapse of time, or both, an Event of Default or materially and adversely affect its ability to fully perform its obligations under this Agreement and the Loan Documents to which it is a party; (b) pay and discharge, or cause to be paid and discharged, any taxes, assessments and governmental charges or levies that may be imposed upon the Borrower or upon its income or profits or upon any of its properties prior to the date on which penalties attach thereto and all lawful claims which, if unpaid, when due, might become a lien or charge upon its properties; provided, however, that this provision shall not be deemed to require payment of any taxes, assessments, governmental charges, levies or claims while the Borrower contests the validity thereof by appropriate proceedings in good faith and so long as it shall have set aside on its books adequate reserves with respect thereto; (c) preserve and maintain, or cause to be preserved or maintained, its existence in good standing in the state of its incorporation and in all other jurisdictions where it is currently conducting business and is required to be authorized to so conduct its business. (d) file or cause to be filed in such offices as shall be required or appropriate under any applicable Uniform Commercial Code of any State or any other statute of any other jurisdiction, and in such manner and form as the Agent may require or as may be reasonably necessary or appropriate under applicable law, any financing statement or statements or other instruments that may be reasonably necessary or desirable or that the Agent may request in order to create, perfect, preserve, continue, validate or satisfy the Agent's liens on and security interests and rights in collateral arising out of or related to this Agreement and any Loan Document; (e) promptly notify the Agent of any proposed change in its name or its assumed name, location of its registered place of business or the office where its records are kept or any principal place of business stated in Section 3.1(d) hereof; (f) promptly obtain and upon the reasonable request, deliver to the Agent all authorizations, approvals, consents and licenses and renewals thereof required under any applicable law or regulation with respect to this Agreement, the Loan Documents, and the ownership or operation of the Rigs which are the responsibility of the Borrower and it shall comply with the terms of the same except where non-compliance would not result in a material adverse effect; 18 22 (g) promptly notify the Lenders of any suit or proceedings brought against the Borrower or any Guarantor or, to the knowledge of the Borrower, threatened against or affecting it or any Guarantor which, if adversely determined, would reasonably be expected to have a material adverse effect; (h) upon the request of the Agent give the Lenders or the Agent or any representative of the Lenders or the Agent access during normal business hours to, and permit the Lenders or the Agent or such representative to inspect, all properties belonging to the Borrower or any Guarantor (including, but not limited to, the Rigs) and permit such representative to examine, copy and make extracts from such books, records and documents in the possession of the Borrower, relating to the affairs of the Borrower, as such representative may reasonably request. If requested by the Borrower, the Lenders and the Agent will enter into their standard confidentiality agreement respecting the affairs of the Borrower; (i) comply with and use its best efforts to cause its Subsidiaries, and its and their agents, contractors and sub-contractors (while such persons are acting within the scope of their contractual relationship with the Borrower or any Subsidiary) to so comply with all material, applicable environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder of all Governmental Agencies the non-compliance with which would result in a material adverse effect; and with the terms and conditions of all applicable permits, licenses, certificates and approvals of all Governmental Agencies now or hereafter granted or obtained with respect to the Rigs or other properties owned or operated by the Borrower or any Guarantor the non-compliance with which would result in a material adverse effect; unless such compliance would violate the laws or regulations of the jurisdictions in which the Rigs are operating. (i) The Borrower will use its best efforts and safety practices to prevent the unauthorized release, discharge, disposal, escape or spill of Hazardous Substances on or about the Rigs or other properties owned or operated by the Borrower or any Guarantor. (ii) The Borrower shall notify the Lenders in writing, within five (5) Business Days of any of the following events occurring after the date of this Agreement: A. Any written notification made by the Borrower or any Guarantor to any federal, state or local environmental agency required under any federal, state or local environmental statute, regulation or ordinance relating to a spill or unauthorized discharge or release of any Hazardous Substance to the environment at, from, or as a result of any operations on, the Rigs or other properties and operations owned or operated by the Borrower 19 23 or any Guarantor if such spill, discharge or release would result in a material adverse effect. B. Knowledge by a Responsible Officer of the Borrower or any Guarantor of receipt of service by the Borrower or any Guarantor of any complaint, compliance order, compliance schedule, notice letter, notice of violation, citation or other similar notice or any judicial demand by any court, federal, state or local environmental agency, alleging (i) any spill, unauthorized discharge or release of any Hazardous Substance to the environment from, or as a result of the operations on, the Rigs or other properties owned or operated by the Borrower or any Guarantor or (ii) violations of applicable laws, regulations or permits regarding the generation, storage, handling, treatment, transportation, recycling, release or disposal of Hazardous Substances on or as a result of operations on the Rigs or other properties and operations owned or operated by the Borrower or any Guarantor if such violation would result in a material adverse effect. C. It is understood by the parties hereto that the aforementioned notices are solely for the Agent's and the Lenders' information, may not otherwise be required by any federal, state or local environmental laws, regulations or ordinances, and are to be considered confidential information by the Agent and the Lenders. D. The term "environmental agency" as used herein shall include, but not be limited to, the United States Environmental Protection Agency, the Texas Railroad Commission, the United States Minerals Management Service, the United States Department of Transportation (in its administration of the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.) and other analogous or similar Governmental Agencies regulating or administering statutes, regulations or ordinances relating to or imposing liability or standards of conduct concerning the generation, storage, use, production, transportation, handling, treatment, recycling, release or disposal of any Hazardous Substance. (iii) The Borrower hereby agrees to indemnify and hold the Agent and the Lenders harmless from and against any and all claims, losses, liability, damages and injuries of any kind whatsoever asserted against the Agent and the Lenders with respect to or as a direct result of the presence, escape, seepage, spillage, release, leaking, discharge or migration from any Rig or other properties owned or operated by the Borrower or any Guarantor of any Hazardous Substance, including without limitation, any claims asserted or arising under any applicable environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated 20 24 thereunder of all Governmental Agencies, regardless of whether or not caused by or within the control of the Borrower or any Guarantor subject to the following: A. It is the parties' understanding that the Agent and the Lenders do not now, have never and do not intend in the future to exercise any operational control or maintenance over the Rigs or any other properties and operations owned or operated by the Borrower or any Guarantor, nor have they in the past, presently, or intend in the future to, maintain an ownership interest in the Rigs or any other properties owned or operated by either Borrower except as may arise upon enforcement of the Agent's rights under the Security Agreements and except as arising under the Lease. B. Should, however, the Agent or the Lenders hereafter exercise any ownership interest in or operational control over the Rigs or any other properties owned or operated by the Borrower or any Guarantor, other than pursuant to the Lease, but including but not limited to, through foreclosure, then the above stated indemnity and hold harmless shall be limited with respect to any actions or failures to act by the Agent or the Lenders subsequent to exercising such interest or operational control, to the extent such action or inaction by the Agent or the Lenders is found by a court or Governmental Agency with competent jurisdiction to have caused or made worse any condition for which liability is asserted, including but not limited to, the presence, escape, seepage, spillage, leaking, discharge or migration on or from the Rigs or other properties owned or operated by the Borrower or any Guarantor of any Hazardous Substance. C. The indemnity and hold harmless contained in this Subsection (i) shall not extend to the Agent or CIT in their capacity as an equity investor in the Borrower or as an owner of any property or interest as to which the Borrower is also owner but only to their capacity as a lender, a financial lessor, a holder of security interests, or a beneficiary of security interests. (j) not, without the prior written consent of the Lenders, (1) permit Bayard Drilling, L.P. to sell, transfer, lend, lease for a period longer than one hundred eighty (180) days or otherwise dispose of any of the Rigs, or (2) sell, transfer or otherwise dispose, or permit any Guarantor to sell, transfer or otherwise dispose, the whole or, in the reasonable opinion of the Lenders any substantial part of the business, property or other assets of the Borrower and the Guarantors, taken as a whole, whether by a single transaction or by a series of transactions, (related or not); provided, however, that the sale of any Rig with a Fair Market Value or for a price (whichever is less) of up to USD 1,000,000.00 in aggregate in any fiscal year shall not require the consent of the Lenders and the Agent agrees to release such assets from the lien of the Security Agreement; and provided further that the restriction contained in this Section 3.2(j) shall not apply to an Asset Sale other than a Rig if (a) such 21 25 Asset Sale results from the requisition of title to, seizure or forfeiture of any Property or assets or any actual or constructive total loss or an agreed or compromised total loss the Borrower or such Guarantor, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property; (b) at least 75% of such consideration consists of Cash Proceeds (or the assumption of Indebtedness of the Borrower or such Guarantor relating to the Capital Stock or Property or asset that was the subject of such Asset Sale and the unconditional release of the Borrower or such Guarantor from such Indebtedness); and the Borrower delivers to the Agent an Officers' Certificate certifying that such Asset Sale complies with clauses (a) and (b); provided, however that any Asset Sale pursuant to a condemnation, appropriation or other similar taking, including by deed in lieu of condemnation, or pursuant to the foreclosure or other enforcement of a Permitted Lien or exercise by the related lienholder of rights with respect thereto, including by deed or assignment in lieu of foreclosure shall not be required to satisfy the conditions and set forth in clauses (a) and (b) of this sentence. (k) not, other than pursuant to or permitted by the Loan Documents create, assume or permit to exist any encumbrance upon (i) the Rigs except: A. security interests on top drives to the extent that such security interests secure the financing by third parties of at least 80% of the purchase price of top drives; provided, however, that the aggregate purchase price of top drives shall not exceed USD 6,000,000.00; and provided further, that the financings for the purchase of top drives shall be repaid from the proceeds of contracts for the use of the top drives of equal or longer duration to the amortization schedules of such financings; B. liens for taxes, assessments or other governmental charges not yet due and payable or, if due and payable, which are being contested in good faith and for which adequate reserves have been established in accordance with generally accepted accounting principles in the U.S. but only if such liens have not been filed or recorded; C. statutory liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar liens imposed by law, which are incurred in the ordinary course of business for sums not more than thirty (30) days delinquent or which are being contested in good faith; provided that a reserve or other appropriate provision, if any, as shall be required by generally accepted accounting principles in the U.S., shall have been made therefor; D. liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, 22 26 statutory obligations, surety, stay, customs and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); E. deposits or other advances made in the ordinary course of business to secure liability for (A) insurance premiums and other liability to insurance carriers provided such deposits and other advances do not, in an aggregate amount, exceed USD 250,000.00 in any calendar year, or (B) worker's compensation claims or premiums or other liability to worker's compensation insurance carriers or administrators; F. a security interest on the Rigs and related drilling equipment in favor of Fleet to secure the Fleet Credit Facility; and or (ii) on Borrower's or any Guarantor's other assets except for Permitted Liens. (l) not, without the prior written consent of the Lenders (which consent shall not be unreasonably withheld) conduct or manage any business or activity other than a Related Business; (m) Borrower will not, in any transaction or series of transactions, consolidate with or merge into any other Person (other than a merger of a Subsidiary into Borrower in which Borrower is the continuing Person), or continue in a new jurisdiction or sell, convey, assign, transfer, lease or otherwise dispose of all or substantially all of the property and assets of Borrower and the Subsidiaries, taken as a whole, to any Person, unless (i) either (a) Borrower shall be the continuing Person or (b) the Person (if other than Borrower) formed by such consolidation or into which Borrower is merged, or the Person which acquires, by sale, assignment, conveyance, transfer, lease or disposition, all or substantially all of the property and assets of Borrower and the Subsidiaries, taken as a whole (such corporation or Person, the "Surviving Entity"), shall be a Person organized and validly existing under the laws of the United States of America, any political subdivision thereof or any state thereof or the District of Columbia, and shall expressly assume, the due and punctual payment of the principal of (and premium, if any) and interest on all the Notes and the performance of Borrower's covenants and obligations under this Agreement; (ii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such 23 27 transaction or series of transactions), no Event of Default shall have occurred and be continuing or would result therefrom; (iii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), the Borrower (or the Surviving Entity if the Borrower is not continuing) shall have a Tangible Net Worth equal to or greater than the Tangible Net Worth of Borrower immediately prior to such transactions; and (iv) immediately after giving effect to any such transaction or series of transactions on a pro forma basis as if such transaction or series of transactions had occurred on the first day of the Determination Period, the Borrower (or the Surviving Entity if the Borrower is not continuing) would be permitted to incur USD 1.00 of additional Indebtedness pursuant to the test described in Section 3.2(aa) hereof. (v) The provision of clause (iv) above shall not apply to any merger or consolidation into or with, or any such transfer of all or substantially all of the property and assets of the Borrower and the Subsidiaries taken as a whole into, the Borrower. (n) The Borrower will not, and will not permit any Subsidiary to, make any Restricted Payment, unless at the time of and after giving effect to the proposed Restricted Payment, (a) no Event of Default shall have occurred and be continuing (or would result therefrom), (b) Borrower could incur at least USD 1.00 of additional Indebtedness under the tests described in Section 3.2(z) below, and (c) the aggregate amount of all Restricted Payments declared or made on or after the Amendment Date by the Borrower or any Subsidiary shall not exceed the sum of (i) 50% (or if such Consolidated Net Income shall be a deficit, minus 100% of such deficit) of the aggregate Consolidated Net Income accrued during the period beginning on the first day of the fiscal quarter in which the Amendment Date falls and ending on the last day of the fiscal quarter ending immediately prior to the date of such proposed Restricted Payment, minus 100% of the amount of any write downs, write-offs and other negative extraordinary charges not otherwise reflected in Consolidated Net Income during such period, plus (ii) an amount equal to the aggregate net cash proceeds received by the Borrower, subsequent to the Amendment Date, from the issuance or sale (other than to a Subsidiary) of shares of its Capital Stock (excluding Redeemable Stock, but including Capital Stock issued upon the exercise of options, warrants or rights to purchase Capital Stock (other than Redeemable Stock) of the Borrower) and the liability (expressed as a positive number) as expressed on the face of a balance sheet in accordance with GAAP in respect of any Indebtedness of the Borrower or any of its Subsidiaries, or the carrying value of Redeemable Stock, which has been converted into, exchanged for or satisfied by the issuance of shares of Capital Stock (other than Redeemable Stock) of the Borrower, subsequent to the Amendment Date, plus (iii) 100% of the net reduction in Restricted 24 28 Investments, subsequent to the Amendment Date, in any Person, resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of property (but only to the extent such interest, dividends, repayments or other transfers of Property are not included in the calculation of Consolidated Net Income), in each case to the Borrower or any Subsidiary from any Person (including, without limitation, from Unrestricted Subsidiaries) or from predesignations of Unrestricted Subsidiaries as Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed in the case of any Person the amount of Restricted Investments previously made by the Borrower or any Subsidiary in such Person and in each such case which was treated as a Restricted Payment, plus (iv) USD 10,000,000.00. The foregoing provisions will not prevent (A) the payment of any dividend on Capital Stock of any class within sixty (60) days after the date of its declaration if at the date of declaration such payment would be permitted by the Indenture; (B) any repurchase or redemption of Capital Stock or Subordinated Indebtedness of the Borrower or a Subsidiary made by exchange for Capital Stock of the Borrower (other than Redeemable Stock), or out of the net cash proceeds from the substantially concurrent issuance or sale (other than to a Subsidiary) of Capital Stock of the Borrower (other than Redeemable Stock), provided that the next cash proceeds from such sale are excluded from computations under clause (c) (ii) above to the extent that such proceeds are applied to purchase or redeem such Capital Stock or Subordinated Indebtedness; (C) so long as no Event of Default shall have occurred and be continuing or should occur as a consequence thereof, any repurchase or redemption of Subordinated Indebtedness of the Borrower or a Subsidiary solely in exchange for, or out of the net cash proceeds from the substantially concurrent sale of, new Subordinated Indebtedness of the Company or a Subsidiary, so long as such Subordinated Indebtedness is permitted under Section 3.2(z) and (x) is subordinated to the Notes at least to the same extent as the Subordinated Indebtedness so exchanged, purchased or redeemed, (y) has a stated maturity later than the stated maturity of the Subordinated Indebtedness so exchanged, purchased or redeemed and (z) has an Average Life at the time incurred that is greater than the remaining Average Life of the Subordinated Indebtedness so exchanged, purchased or redeemed; (D) Investments in any Joint Ventures and foreign Subsidiaries not constituting Guarantors in an aggregate amount not to exceed USD 5,000,000.00; (E) the payment of any dividend or distribution by a Subsidiary of the Borrower or any of its Wholly Owned Subsidiaries; (F) so long as no Event of Default shall have occurred and be continuing or should occur as a consequence thereof, the repurchase, redemption or other acquisition or retirement for value of any Capital Stock of the Borrower held by any employee of the Borrower or any of its Subsidiaries, provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock pursuant to the terms of an employee benefit plan or employment or similar agreement shall not exceed USD 500,000.00 in any calendar year; and (G) the acquisition of Capital Stock by the Borrower in connection with the exercise of stock options or stock appreciation rights by way of cashless exercise or in connection with the satisfaction of withholding tax obligations. Notwithstanding the foregoing, the amount available for Investments in Joint Ventures and foreign Subsidiaries pursuant to clause (D) of the preceding sentence may be increased by the aggregate amount received by the Borrower and its Subsidiaries from a Joint Venture or a foreign Subsidiary on or before such date resulting 25 29 from payments of interest on Indebtedness, dividends, repayments of loans or advances or other transfers of Property made to such Joint Venture or foreign Subsidiary (but only to the extent such interest, dividends, repayments or other transfers of Property are not included in the calculation of Consolidated Net Income); Restricted Payments permitted to be made as described in the first sentence of this paragraph will be excluded in calculating the amount of Restricted Payments thereafter, except that any such Restricted Payments permitted to be made pursuant to clauses (A), (D), (E) (but only to the extent paid to someone other than the Borrower or any of its Wholly Owned Subsidiaries) and (F) will be included in calculating the amount of Restricted Payments thereafter. For purposes of this covenant, if a particular Restricted Payment involves a non-cash payment, including a distribution of assets, then such Restricted Payment shall be deemed to be an amount equal to the cash portion of such Restricted Payment, if any, plus an amount equal to the Fair Market Value of the non-cash portion of such Restricted Payment. (o) forthwith upon demand by the Agent and at the Borrower's sole cost and expense, execute and provide all such assurances and do all acts and things as the Agent or any receiver may reasonably require for: (i) perfecting or protecting the security created (or intended to be created) by any of the Loan Documents, including, without limitation, granting in favor of the Agent a security interest covering the security created (or intended to be created) by any of the Loan Documents with respect to any obligations of the Borrower hereafter owing to the Lenders; or (ii) preserving or protecting any of the rights of the Agent under any of the Loan Documents; or (iii) facilitating the appropriation or realization of any of the collateral assigned or granted to the Agent under any of the Loan Documents and enforcing the security constituted by any of the Loan Documents on or at any time after the same shall have become enforceable; or (iv) the exercise of any power, authority or discretion vested in the Agent under any of the Loan Documents; (p) deliver to the Lenders such financial or other information relating to it, any of the transactions contemplated by this Agreement or any of the Loan Documents, as may be reasonably requested by the Lenders and if requested by the Borrower, the Lenders and the Agent will enter into their standard confidentiality agreement respecting the affairs of the Borrower; (q) upon the request of the Agent, give the Lenders or the Agent or any representative of the Lenders or the Agent at any reasonable time, access to the Rigs and permit the Lenders or the Agent or such representative to inspect the Rigs and any part thereof, as the Lenders or the Agent or such representative may reasonably request and if requested by the Borrower, the Lenders and the Agent will enter into their standard confidentiality agreement respecting the affairs of the Borrower; (r) maintain all permits and certificates which are material and necessary to the operation of the Borrower's and the Guarantors' business under all applicable environmental, safety and public health laws and regulations applicable to the Borrower, the Guarantors and 26 30 the Rigs, and all other laws and regulations affecting or relating to the Rigs the failure to maintain which would have a material adverse effect; (s) deliver, or shall cause to be delivered, to each Lender at least two copies and as many additional copies as each Lender may reasonably require from time to time of, (i) the Borrower's audited annual consolidated financial statements (including the balance sheet and income statement of the Borrower) in a form consistent with generally accepted United States accounting principles and practices consistently applied, as soon as is practicable after the same have been issued but in any case within one hundred and twenty (120) days of the end of its fiscal year certified by Coopers & Lybrand or other auditors as may be acceptable to the Lenders that the consolidated financial statements present fairly, in all material respects, the financial position of the Borrower as of the date thereof, (ii) its quarterly consolidated and consolidating financial statements (including the balance sheet and income statement of the Borrower) in a form consistent with generally accepted United States accounting principles and practices consistently applied, as soon as is practicable after the end of each financial quarter but in any case within sixty (60) days of the end of its financial quarter certified by one of its Responsible Officers that the consolidated financial statements present fairly, in all material respects, the financial position of the Borrower as of the date thereof, (iii) such financial or other information relating to it, any of the transactions contemplated by this Agreement or any of the other Loan Documents, as may reasonably be requested by the Agent and generally made available to its other creditors, its shareholders and to any governmental authorities; (t) maintain, on a quarterly basis, a Cash Flow Coverage Ratio of at least 1.50:1.0 in 1998 and 1.75:1.0 thereafter; (u) maintain Total Available Liquidity of USD 3,000,000.00 in 1998; "Total Available Liquidity" shall be the sum of the Borrower's and Guarantor's (i) cash and cash equivalents (excluding cash or cash equivalents pledged to secure letters of credit, but only to the extent of accrued liabilities for workers compensation claims) and (ii) unused capacity available under the Fleet Credit Facility. (v) maintain, on a consolidated basis, a ratio of Total Liabilities to Tangible Net Worth not greater than 1.0:1.0 in 1998 and thereafter (excluding for purposes of this test the Total Liabilities and Tangible Net Worth of any Unrestricted Subsidiary); (w) maintain all permits and certificates which are material and necessary to the operation of the Borrower's and any Guarantor's business under all applicable environmental, safety and public health laws and regulations applicable to the Borrower, the Guarantors and the Rigs, and all other laws and regulations affecting or relating to the Rigs the failure to maintain which would have a material adverse effect; and 27 31 (x) deliver to each Lender, contemporaneously with the delivery to each Lender of the annual and quarterly financial statements specified in Section 3.3(g) above, its certificate (in form and substance satisfactory to the Lenders), signed by one of its Responsible Officers, (i) stating that such officer has reviewed the relevant terms of this Agreement, the other Loan Documents and all other agreements of the Borrower which evidence indebtedness for borrowed money and leases (the "Financial Obligation Agreements") and has made or caused to be made under his supervision, a review of the transactions and condition of the Borrower during the relevant fiscal quarter or year, as the case may be, and that such review has not disclosed the existence during such period, nor does such Responsible Officer have knowledge of the existence as at the date of such certificate, of any condition or event which constitutes an event of default under any of the Loan Documents or Financial Obligation Agreements, or which, after notice or lapse of time or both would constitute an event of default under any of the Loan Documents or Financial Obligation Agreements, or if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken or proposes to take with respect thereto, (ii) setting forth in form and detail satisfactory to the Lenders, the calculations respecting compliance with the financial covenants of this Agreement and (iii) for purposes of the annual certificate only, attaching and certifying as true and correct a certificate evidencing the insurance in place with respect to the Rigs and their operation. (y) deliver to each Lender on each anniversary of the Amendment Date a certification from a Responsible Officer that the Rigs and their related equipment are being maintained according to customary oil and gas drilling industry practice confirmed, if reasonably requested by the Lenders by an appraiser selected in accordance with Section 1.5(a)(iii) above. (z) not and will not permit any Guarantor to directly or indirectly, incur any Indebtedness (including Acquired Indebtedness), unless after giving pro forma effect to the incurrence of such Indebtedness, the Consolidated Interest Coverage Ratio for the Determination Period preceding the Transaction Date is at least 2.25 to 1.0. Notwithstanding the foregoing, the Borrower or any Guarantor (subject to the following paragraph) may incur Permitted Indebtedness. Any Indebtedness of a Person existing at time at which such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be incurred by such Subsidiary at the time at which it becomes a Subsidiary. (aa) subject to Section 3.2(z) above, the Borrower will not permit any Guarantor to, directly or indirectly, incur any Indebtedness or issue any Preferred Stock except: (i) Indebtedness or Preferred Stock issued to and held by the Borrower so long as any transfer of such Indebtedness or Preferred Stock to a Person other than the Borrower will be deemed to constitute an incurrence of such Indebtedness or Preferred Stock by the issuer thereof as of the date of such transfer; 28 32 (ii) Acquired Indebtedness or Preferred Stock of a Subsidiary issued and outstanding prior to the date on which such Subsidiary was acquired by the Borrower (other than Indebtedness or Preferred Stock issued in connection with or in anticipation of such acquisition); (iii) Three (3) term notes issued by the Company in favor of General Electric Capital Corp., secured by certain of the Company's top drives, upon which approximately $2.9 million was outstanding at May 15, 1998. (iv) Indebtedness described in clauses (b), (c), (d), (e), (f), (g), (h), (k) and (h) under the definition of Permitted Indebtedness contained in the Indenture; (v) Permitted Subsidiary Refinancing Indebtedness of such Subsidiary; (vi) Indebtedness or Preferred Stock issued in exchange for, or the proceeds of which are used to refinance, repurchase or redeem, Indebtedness or Preferred Stock described in clauses (i) and (iii) of this paragraph (the "Retired Indebtedness or Stock"), provided that the Indebtedness or the Preferred Stock so issued has (i) a principal amount or liquidation value, as the case may be, not in excess of the principal amount or liquidation value of the Retired Indebtedness or Stock plus related expenses for redemption and issuance, (ii) a final redemption date later than the stated maturity or final redemption date (if any) of the Retired Indebtedness or Stock and (iii) an Average Life at the time of issuance of such Indebtedness or Preferred Stock that is greater than the Average Life of the Retired Indebtedness or Stock; (vii) Indebtedness of a Subsidiary which represents the assumption by such Subsidiary of Indebtedness of another Subsidiary in connection with a merger of such Subsidiary, thereto existing on the Amendment Date shall assume or otherwise become responsible for any Indebtedness of an entity which is not a Subsidiary on the Issue Date, except to the extent that a Subsidiary would be permitted to incur such Indebtedness under this paragraph; (viii) Non-Recourse Indebtedness incurred by a foreign Subsidiary not constituting a Guarantor; and (ix) Indebtedness incurred to finance all or a part of the purchase price or construction repair or improvement cost of property acquired, constructed, repaired or improved after the Amendment Date. (bb) Not later than fifteen (15) days after the end of each month after the Amendment Date furnish to the Agent a schedule showing the precise location of each Rig and its contract status. 29 33 ARTICLE IV. EVENTS OF DEFAULT If any of the following events shall occur and be continuing, (each an "Event of Default"): (a) the Borrower shall fail to pay any principal of or interest on either Note, which failure shall continue for five (5) days after the date when due; (b) any representation or warranty made by the Borrower herein or made in any certificate or financial statement furnished to the Lenders or the Agent hereunder or under any of the Loan Documents shall prove to have been incorrect in any material respect when made; (c) default in the performance of any agreement, covenant, term or condition contained herein or in any Loan Document to be performed by the Borrower other than (a). above, if such default has continued for twenty (20) days after notice thereof by the Agent to the Borrower; (d) an event of default under any loan agreement, credit agreement, security agreement, guaranty agreement or lease agreement now existing or hereafter entered into by the Borrower or any Guarantor shall not have been remedied within any stated grace periods during such time as USD 7,500,000.00 or more is outstanding under such agreement; (e) Any of the following Events of Default shall occur: (i) the entry by a court of competent jurisdiction of one or more final judgments against the Borrower or any Guarantor in an uninsured or unindemnified aggregate amount in excess of USD 7,500,000.00 which is not discharged, waived, appealed, stayed, bonded or satisfied for a period of sixty (60) consecutive days; (ii) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Borrower or any Guarantor in an involuntary case or proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state, or foreign bankruptcy, insolvency, or other similar law or (B) a decree or order adjudging the Borrower or any Guarantor a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Borrower or any Guarantor under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state or foreign bankruptcy, insolvency, or similar law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Borrower or any Guarantor or of any substantial part of the property or assets of the Borrower or any Guarantor, or ordering the winding up or liquidation of the affairs of the Borrower or any Guarantor, and the continuance of 30 34 any such decree or order for relief or any such other decree or order unstayed and in effect for a period of sixty (60) consecutive days; (iii) (A) the commencement by the Borrower or any Guarantor of a voluntary case or proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state or foreign bankruptcy, insolvency or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent; or (B) the consent by the Borrower or any Guarantor to the entry of a decree or order for relief in respect of the Borrower or any Guarantor in an involuntary case or proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state, or foreign bankruptcy, insolvency or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against the Borrower or any Guarantor; or (C) the filing by the Borrower or any Guarantor of a petition or answer or consent seeking reorganization or relief under U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable Federal, state or foreign bankruptcy, insolvency or other similar law; or (D) the consent by the Borrower or any Guarantor to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Borrower or any Guarantor or of any substantial part of the Property or assets of the Borrower or any Guarantor or of any substantial part of the Property or assets of the Borrower or any Guarantor, or the making by the Borrower or any Guarantor of an assignment for the benefit of creditors; or (E) the admission by the Borrower or any Guarantor in writing of its inability to pay its debts generally as they become due; or (F) the taking of corporate action by the Borrower or any Guarantor in furtherance of any such action; or (iv) an Event of Default occurs under the Indenture or the Fleet Credit Facility; or (v) any Guaranty shall for any reason cease to be, or be asserted by the Borrower or any Guarantor, as applicable, not to be, in full force and effect (except pursuant to the release of any such Guaranty in accordance herewith), then the Agent, subject to Section 5.1(b) below, may by written notice to the Borrower (1) immediately terminate the commitment of the Lenders hereunder; (2)declare the principal of, and interest accrued to the date of such declaration on, the Notes together with all other amounts due hereunder or under any of the Loan Documents, to be forthwith due and payable, whereupon the same shall become forthwith due and payable (provided, however, no notice or declaration shall be required and such amounts shall be immediately due and payable upon the occurrence of an event described in Article IV(e)(iii) or (iv) hereof) and (3) exercise any remedies to which it may be entitled by any Loan Document or by applicable law. 31 35 ARTICLE V. THE AGENT Section 5.1 Appointment and Duties of Agent. (a) The parties hereto agree that The CIT Group/Equipment Financing, Inc. shall act, subject to the terms and conditions of this Article V, as the Agent for the Lenders in connection with the Loan, and to the extent set forth herein each Lender hereby irrevocably appoints, authorizes, empowers and directs the Agent to take such action on its behalf and to exercise such powers as are specifically delegated to the Agent herein or are reasonably incidental thereto in connection with the administration of and the enforcement of any rights or remedies with respect to this Agreement, the Notes and the other Loan Documents. It is expressly understood and agreed that the obligations of the Agent under the Loan Documents are only those expressly set forth in this Agreement. The Agent shall use reasonable diligence to examine the face of each document received by it hereunder to determine whether such documents, on its face, appears to be what it purports to be. However, the Agent shall not under any duty to examine into and pass upon the validity or genuineness of any documents received by it hereunder and the Agent shall be entitled to assume that any of the same which appears regular on its face is genuine and valid and what it purports to be. (b) The Agent shall: (i) as to matters not specifically referred to in Section 5.1(b)(ii) below, act pursuant to the instructions of the Lenders in all matters relating to the Loan Documents including but not limited to, all collateral for the Loan and waivers or amendments of the Loan Documents; and (ii) act pursuant to the instructions of The CIT Group/Equipment Financing, Inc. as to the Events of Default (and any waivers or remedies arising because of such defaults) referred to in Article IV. A. and E, above. Section 5.2 Discretion and Liability of Agent. Subject to Sections 5.1(b) above and 5.3 and 5.5 below, the Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it under any of the Loan Documents or otherwise, or with respect to taking or refraining from taking any action or actions which it may be able to take under any of the Loan Documents. Neither the Agent nor any of its directors, officers, employees, agents or representatives shall be liable for any action taken or omitted by it hereunder or in connection herewith, except for its own gross negligence or wilful misconduct. The Agent shall incur no liability under, or in respect of this Agreement or the other Loan Agreements by acting upon a notice, certificate, warranty or other paper or instrument reasonably believed by it to be genuine or authentic or to be signed by the proper party or parties, or with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment, or which may seem to it to be necessary or desirable in the premises. 32 36 Section 5.3 Event of Default. (a) The Agent shall be entitled to assume that no Event of Default or event which would constitute an Event of Default after notice or lapse of time, or both, has occurred and is continuing, unless the Agent has actual knowledge of such facts or has received notice from a Lender in writing that such Lender considers that an Event of Default or event which would constitute an Event of Default after notice or lapse of time, or both, has occurred and is continuing and which specifies the nature thereof. (b) In the event that the Agent shall acquire actual knowledge of any Event of Default or event which would constitute an Event of Default after notice or lapse of time, or both, the Agent shall promptly notify (either orally, confirmed in writing, or in writing) the Lenders of such Event of Default or event and (i) in the case of default under Article IV(a) or (e) above may, or if instructed in writing by The CIT Group/Equipment Financing, Inc. shall, take such action and assert such rights as are contemplated under this Agreement and (ii) in the case of any other default under Article IV above may in an emergency, or if requested in writing by the Lenders shall, take such action and assert such rights as are contemplated under this Agreement. The Agent shall be indemnified pro rata by the Lenders against any liability or expenses, including, but not limited to, travel expenses and internal and external counsel fees and expenses, incurred in connection with taking such action. The Agent may refrain from acting in accordance with any instructions from the Lenders until it shall have been indemnified to its satisfaction against any and all costs and expenses which it will or may expend or incur in complying with such instructions. Section 5.4 Consultation. When acting in connection with this Agreement, or the other Loan Documents, the Agent may engage and pay for the advice and services of any lawyers, accountants, surveyors, appraisers or other experts whose advice or services may to it appear necessary, expedient or desirable and the Agent shall be entitled to fully rely upon any opinion or such advice so obtained. Section 5.5 Communications to and from Agent. When any notice, approval, consent, waiver or other communication or action is required or may be delivered by the Lenders hereunder or the other Loan Documents, action by the Agent shall be effective for all purposes hereunder; provided, that upon any occasion requiring or permitting an approval, consent, waiver, election or other action on the part of the Lenders, unless action by the Agent alone, or only upon instruction of all of the Lenders, is expressly permitted or required hereunder, action shall be taken by the Agent for and on behalf of or for the benefit of all the Lenders as provided in Section 5.3 above. The Borrower may rely on any communication from the Agent hereunder or the other Loan Documents, and need not inquire into the propriety of or authorization for such communication. Upon receipt by the Agent from the Borrower or any Lender of any communication it will, in turn, promptly forward such communication to the Lenders; provided, however, that the Agent shall not be liable for any costs, expenses or losses arising from any failure to so forward any such communication. 33 37 Section 5.6 Limitations of Agency. Notwithstanding anything in the Loan Documents, expressed or implied, it is agreed by the parties hereto, that the Agent will act under the Loan Documents as Agent solely for the Lenders and only to the extent specifically set forth herein, and will, under no circumstances, be considered to be an agent or fiduciary of any nature whatsoever in respect to any other person. The Agent may generally engage in any business with the Borrower or any of their affiliates as if it was not the Agent. Section 5.7 No Representations or Warranty. (a) No Lender (including the Agent) makes to any other Lender any representation or any warranty, expressed or implied, or assumes any responsibility with respect to the Loan or the execution, construction or enforceability of the Loan Documents or any instrument or agreement executed by the Borrower or any other person in connection therewith. (b) The Agent takes no responsibility for the accuracy or completeness of any information concerning the Borrower distributed by the Agent in connection with the Loan nor for the truth of any representation or warranty given or made herein, nor for the validity, effectiveness, adequacy or enforceability of this Agreement or any of the other Loan Documents. Section 5.8 Lender Credit Decision. Each Lender acknowledges that it has independent of and without reliance upon any other Lender (including the Agent) or any information provided by any other Lender (including the Agent) and based on the financial statements of the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independent of and without reliance upon any other Lender (including the Agent) and based on such documents and information as it shall deem appropriate at that time, continue to make its own credit decisions in taking or not taking action under this Agreement and any other documents relating thereto. Section 5.9 Indemnity. Notwithstanding any of the provisions hereof, to the extent the Agent has not been so indemnified by the Borrower, the Lenders shall severally indemnify the Agent against any and all losses, costs, liabilities, damages or expenses, including but not limited to, reasonable travel expenses and internal and external counsel's reasonable fees and expenses, arising from, or in connection with, its performance as Agent hereunder and not caused by its gross negligence or willful misconduct. Section 5.10 Resignation. The Agent may resign as such at any time upon at least 30 days' prior notice to the Borrower and the Lenders, provided that such resignation shall not take effect until a successor agent has been appointed. In the event of a resignation by the Agent, the Lenders shall promptly appoint a successor agent from among the Lenders. 34 38 Section 5.11 Distribution. The Agent shall be responsible for promptly distributing each Lender's pro rata share of all net amounts received by the Agent under any of the Loan Documents. Each Lender shall be responsible for designating by written notice to the Agent the account to which such distribution shall be deposited. Section 5.12 Limitation of Suits. All rights of action and claims under this Agreement and the Security Agreements of the Lenders shall be prosecuted and enforced only by the Agent. The Lenders agree that they shall not independently institute any proceedings, judicial or otherwise, to enforce their rights against the Borrower under this Agreement or the Security Agreements. However, notwithstanding anything contained in this Section 5.12, the Lenders shall always retain their ability to retain independent counsel and to protect their rights under this Agreement and the other Loan Documents. Section 5.13 Right of Setoff. Upon the occurrence and during the continuation of any Event of Default, the Lenders each are hereby authorized at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower), to setoff and apply any and all deposits (general or special, time or demand, provisional or final, whether or not such setoff results in any loss of interest or other penalty, and including without limitation all certificates of deposit) at any time held by the Lenders and all of the indebtedness arising in connection with this Agreement irrespective of whether or not such Lender will have made any demand under this Agreement, the Notes or any other Loan Document. The Borrower also hereby grant to each of the Lenders a security interest in and hereby transfer, assign, set over and convey to each of the Lenders, as security for payment of the Loan, all such deposits, funds or property of the Borrower or indebtedness of any Lender to the Borrower. Should the right of any Lender to realize funds in any manner set forth hereinabove be challenged and any application of such funds be reversed, whether by court order or otherwise, the Lenders shall make restitution or refund to the Borrower pro rata in accordance with their respective portions of the Loan. Each Lender agrees to promptly notify the Borrower and the Agent after any such setoff and application, provided that the failure to give such notice will not affect the validity of such setoff and application. The rights of the Agent and the Lenders under this Section 5.13 are in addition to other rights and remedies (including without limitation other rights of setoff) which the Agent or the Lenders may have. Nothing contained herein shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrower to such Lender. This Section is subject to the terms and provision of Section 1.3 hereof. ARTICLE VI. MISCELLANEOUS Section 6.1 Notices. All notices, requests and demands shall be in writing (including telecopier transmission) given to or made upon the respective parties hereto as follows: 35 39 In the case of the Borrower, at Bayard Drilling Technologies, Inc. 4005 Northwest Expressway, Suite 400E Oklahoma City, Oklahoma 73116 Attention: Mr. James Brown Telecopier: (405) 879-3847 In the case of the Lenders, at The CIT Group/Equipment Financing, Inc. 1211 Avenue of the Americas New York, New York 10036 Attention: (a) Senior Vice President - Credit Telecopier: (212) 536-1385 (b) Legal Department Telecopier: (212) 536-1388 with a copy to The CIT Group/Equipment Financing, Inc. 1211 Avenue of the Americas New York, New York 10036 Attention: Mr. Bruce Halstead Telecopier: (212) 536-1385 and Fleet Capital Corporation 2711 North Haskell Suite 2100, LB21 Dallas, Texas 75204 Attention: Loan Administration Manager Telecopier: (214) 828-6530 In the case of the Agent, at The CIT Group/Equipment Financing, Inc. 1211 Avenue of the Americas New York, New York 10036 Attention: (a) Senior Vice President - Credit Telecopier: (212) 536-1385 (b) Legal Department Telecopier: (212) 536-1388 36 40 with a copy to The CIT Group/Equipment Financing, Inc. 1211 Avenue of the Americas New York, New York 10036 Attention: Mr. Bruce Halstead Telecopier: (212) 536-1385 or in such other manner as any party hereto shall designate by written notice to the other parties hereto. All such notices shall be effective upon delivery or three (3) days after being deposited in the United States mail with postage prepaid certified, return receipt requested in a correctly addressed wrapper, or upon receipt if delivered to Federal Express or similar courier company or transmitted by telefax during normal business hours. All notices, demands, requests, communications and other documents delivered hereunder or under the Loan Documents, unless submitted in the English language, shall be accompanied by certified English translation thereof. Section 6.2 No Waiver. No failure on the part of the Lenders or the Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Lenders or the Agent of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. Section 6.3 Applicable Law and Jurisdiction. (a) THIS AGREEMENT AND THE LOAN DOCUMENTS PROVIDED FOR HEREIN (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF AND THEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, OTHER THAN CONFLICT OF LAWS RULES THEREOF. Any legal action or proceeding against the Borrower with respect to this Agreement or any Loan Document may be brought in the courts of the State of New York, the U.S. Federal Courts in such state, sitting in the County of New York, or in the courts of any other jurisdiction where such action or proceeding may be properly brought, and the Borrower hereby irrevocably accept the jurisdiction of such courts for the purpose of any action or proceeding. The Borrower hereby designates and irrevocably appoints and empowers C T Corporation System (the "Process Agent"), currently located at 1633 Broadway, New York, New York 10019 in each case as its authorized agent to accept, receive and acknowledge for and on behalf of each and its property service of any and all process which may be served but only in any action, suit or proceeding of the nature referred to above in the State of New York and further agree that failure of such firm to give the Borrower any notice of any such service shall not impair or affect the validity of such service or of any judgment rendered in any action or proceeding based thereon. The Borrower hereby irrevocably authorizes and directs the Process Agent to accept such service on its behalf. The Borrower further irrevocably consents to the service of process out of said courts by the mailing thereof by the Agent by U.S. registered or certified mail postage prepaid to the party to be served at its address designated in Section 37 41 6.1. The Borrower agrees that a final judgment in any action or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment or in any other manner provided by law. Nothing in this Section 6.3 shall affect the right of the Lenders or the Agent to serve legal process in any other manner permitted by law or affect the right of the Lenders or the Agent to bring any action or proceeding against the Borrower or its properties in the courts of any other jurisdiction. To the extent that the Borrower has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to either itself or its property, the Borrower hereby irrevocably waives such immunity in respect of their obligations under this Agreement and the other Loan Documents. The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any Loan Document brought in the Supreme Court of the State of New York, County of New York or the U.S. District Court for the Southern District of New York, and hereby further irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. (b) THE LENDERS, THE AGENT AND THE BORROWER IRREVOCABLY WAIVE ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTE OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. Section 6.4 Severability. In the event that any provision of this Agreement is held to be void or unenforceable in any jurisdiction, all other provisions shall remain unaffected and be enforceable in accordance with their terms in such jurisdiction, and all provisions of this Agreement shall remain unaffected and shall be enforceable in accordance with their terms in all other jurisdictions. Section 6.5 Amendment. Neither this Agreement nor any provision hereof, including without limitation this Section 6.5, may be amended, modified, waived, discharged or terminated orally, but only by an instrument in writing signed by the Agent, the Lenders and the Borrower. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders, and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Agent. Section 6.6 Assignment and Participation. The Lenders shall have the right, provided they comply with all applicable state and federal securities laws, to assign or grant participation in all or any portion of the Loan outstanding under this Agreement or the Notes to any affiliate of the Lenders or to any foreign, federal or state banking institution, savings and loan institution or finance company upon thirty (30) days written notice to the Borrower of such assignment or participation; 38 42 provided, however, that CIT agrees that it will always retain a portion of the Loan and a percentage of the Loan outstanding under this Agreement equal to or greater than Fleet's. Section 6.7 Costs, Expenses and Taxes. The Borrower agrees to pay on demand all reasonable fees, costs and expenses in connection (i) with the preparation, execution, delivery, administration, amendment and enforcement of this Agreement, the Notes, the other Loan Documents and any other documents to be delivered hereunder and thereunder (including, without limitation, the appraisal and inspection reports required hereunder) and any amendment, modification or supplement hereto or thereto, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Lenders and the Agent, and any special counsel associated with them, and with respect thereto and the filing of any document or instrument in connection with any of the foregoing, (ii) with respect to reasonable fees and out of pocket expenses of counsel for advising the Lenders and the Agent as to their rights and responsibilities under this Agreement and the transactions contemplated thereby after an Event of Default or an event which, with the giving of notice or lapse of time, or both, shall have occurred, and (iii) with any filing or recording of any document or instrument. In addition, the Borrower shall pay any and all stamp and other taxes (including, without limitation penalties and interest assessed thereon) other than Excluded Income Taxes payable or determined to be payable in connection with the execution, delivery or performance of this Agreement and the Loan Documents and any other documents to be delivered hereunder and thereunder and agrees to save the Agent and Lenders harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. Section 6.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. Section 6.9 Section Headings. The headings of the various Sections and subsections of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 6.10 Merger. THIS AGREEMENT AND THE LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT AMONG THE BORROWER, THE AGENT AND THE LENDERS AND SUPERSEDE ALL PRIOR AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. 39 43 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BAYARD DRILLING TECHNOLOGIES, INC. By: /s/ DAVD E. GROSE, III ----------------------------------- Name: David E. Grose, III ----------------------------------- Title: Chief Financial Officer ----------------------------------- THE CIT GROUP/EQUIPMENT FINANCING, INC. By: /s/ BRUCE A. HALSTEAD ----------------------------------- Name: Bruce A. Halstead ----------------------------------- Title: Credit Officer ----------------------------------- FLEET CAPITAL CORPORATION By: /s/ BRUCE CLARK ----------------------------------- Name: Bruce Clark ----------------------------------- Title: Vice President ----------------------------------- THE CIT GROUP/EQUIPMENT FINANCING, INC., AS AGENT By: /s/ BRUCE A. HALSTEAD ----------------------------------- Name: Bruce A. Halstead ----------------------------------- Title: Credit Officer ----------------------------------- 40 EX-10.31 7 PURCHASE AGREEMENT DATED AS OF JUNE 19, 1998 1 EXHIBIT 10.31 $100,000,000 11% Series A Senior Notes Due 2005 of Bayard Drilling Technologies, Inc. PURCHASE AGREEMENT JUNE 19, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION LEHMAN BROTHERS INC. BT ALEX. BROWN DAIN RAUSCHER WESSELS 2 $100,000,000 11% Series A Senior Notes Due 2005 of Bayard Drilling Technologies, Inc. PURCHASE AGREEMENT JUNE 19, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION LEHMAN BROTHERS INC. BT ALEX. BROWN DAIN RAUSCHER WESSELS c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs: Bayard Drilling Technologies, Inc., a Delaware corporation (the "COMPANY"), proposes to issue and sell to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Lehman Brothers Inc., BT Alex. Brown and Dain Rauscher Wessels (each, an "INITIAL PURCHASER" and collectively, the "INITIAL PURCHASERS") an aggregate of $100,000,000 in principal amount of its 11% Series A Senior Notes Due 2005 (the "SERIES A NOTES"), subject to the terms and conditions set forth herein. The Series A Notes are to be issued pursuant to the provisions of an indenture (the "INDENTURE"), dated as of June 26, 1998, among the Company, the Guarantors (as defined below) and U.S. Trust Company of Texas, N.A., as trustee (the "TRUSTEE"). The Series A Notes and the Series B Notes (as defined below) issuable in exchange therefor are collectively referred to herein as the "NOTES." The Notes will be guaranteed (the "GUARANTEES") by each of the entities listed on Schedule A hereto (each, a "GUARANTOR" and collectively, the "GUARANTORS"). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Indenture. 1. OFFERING MEMORANDUM. The Series A Notes will be offered and sold to the Initial Purchasers pursuant to one or more exemptions from the registration requirements under the Securities Act of 1933, as amended (the "SECURITIES ACT"). The Company and the Guarantors have prepared a preliminary offering memorandum, dated June 5, 1998 (the "PRELIMINARY OFFERING -2- 3 MEMORANDUM") and a final offering memorandum, dated June 19, 1998 (the "OFFERING MEMORANDUM"), relating to the Series A Notes and the Guarantees. Upon original issuance thereof, and until such time as the same is no longer required pursuant to the Indenture, the Series A Notes shall bear the following legend: "THIS NOTE (OR ITS PREDECESSOR) AND ANY GUARANTEE HEREOF HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR I THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER: (1) REPRESENTS THAT (i) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (a "QIB"), OR (ii) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (i) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (ii) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (iii) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (iv) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (v) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. -3- 4 AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING." 2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations, warranties and covenants contained in this Agreement, and subject to the terms and conditions contained herein, the Company agrees to issue and sell to the Initial Purchasers, and each Initial Purchaser agrees severally and not jointly, to purchase from the Company the principal amounts of Series A Notes set forth opposite the name of such Initial Purchaser on Schedule B hereto at a purchase price equal to 97.25% of the principal amount thereof (the "PURCHASE PRICE"). 3. TERMS OF OFFERING. The Initial Purchasers have advised the Company that the Initial Purchasers will make offers (the "EXEMPT RESALES") of the Series A Notes purchased hereunder on the terms set forth in the Offering Memorandum, as amended or supplemented, solely (i) to persons whom the Initial Purchasers reasonably believe to be "qualified institutional buyers" as defined in Rule 144A under the Securities Act ("QIBS") and (ii) persons permitted to purchase the Series A Notes in offshore transactions in reliance upon Regulation S under the Securities Act (each, a "REGULATION S PURCHASER") (such persons specified in clauses (i) and (ii) being referred to herein as the "ELIGIBLE PURCHASERS"). The Initial Purchasers will offer the Series A Notes to Eligible Purchasers initially at a price equal to 100% of the principal amount thereof. Such price may be changed at any time without notice. Holders (including subsequent transferees) of the Series A Notes will have the registration rights set forth in the registration rights agreement (the "REGISTRATION RIGHTS AGREEMENT"), to be dated the Closing Date, in substantially the form of Exhibit A hereto, for so long as such Series A Notes constitute "TRANSFER RESTRICTED SECURITIES" (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, the Company and the Guarantors will agree to file with the Securities and Exchange Commission (the "COMMISSION") under the circumstances set forth therein, (i) a registration statement under the Securities Act (the "EXCHANGE OFFER REGISTRATION STATEMENT") relating to the Company's 11% Series B Senior Notes Due 2005 (the "SERIES B NOTES"), to be offered in exchange for the Series A Notes (such offer to exchange being referred to as the "EXCHANGE OFFER") and the Guarantees thereof and (ii) a shelf registration statement pursuant to Rule 415 under the Securities Act (the "SHELF REGISTRATION STATEMENT" and, together with the Exchange Offer Registration Statement, the "REGISTRATION STATEMENTS") relating to the resale by certain holders of the Series A Notes and to use their reasonable efforts to cause such Registration Statements to be declared and remain effective and usable for the periods specified in the Registration Rights Agreement and to consummate the Exchange Offer. This Agreement, the Indenture, the Notes, the Guarantees and the Registration Rights Agreement are hereinafter sometimes referred to collectively as the "OPERATIVE DOCUMENTS." -4- 5 4. DELIVERY AND PAYMENT. (a) DeliveRy of, and payment of the Purchase Price for, the Series A Notes shall be made at the offices of Baker & Botts, L.L.P., 1 Shell Plaza, 910 Louisiana, Houston, Texas 77002, or such other location as may be mutually acceptable. Such delivery and payment shall be made at 9:00 a.m., New York City time, on June 26, 1998, or at such other time on the same date or such other date as shall be agreed upon by the Initial Purchasers and the Company. The time and date of such delivery and the payment for the Series A Notes are herein called the "CLOSING DATE." (b) One or more of the Series A Notes in definitive global form, registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), having an aggregate principal amount corresponding to the aggregate principal amount of the Series A Notes (collectively, the "GLOBAL NOTE"), shall be delivered by the Company to the Initial Purchasers (or as the Initial Purchasers direct) in each case with any transfer taxes thereon duly paid by the Company against payment by the Initial Purchasers of the Purchase Price therefor by wire transfer in same day funds to the order of the Company. The Global Note shall be made available to the Initial Purchasers for inspection not later than 9:30 a.m., New York City time, on the business day immediately preceding the Closing Date. 5 AGREEMENTS OF THE COMPANY AND THE GUARANTORS. Each of the Company and the Guarantors hereby agrees with the Initial Purchasers as follows: (a) To advise the Initial Purchasers promptly and, if requested by the Initial Purchasers, confirm such advice in writing, (i) of the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of any Series A Notes for offering or sale in any jurisdiction designated by the Initial Purchasers pursuant to Section 5(e) hereof, or the initiation of any proceeding for such purposes and (ii) of the happening of any event during the period referred to in Section 5(c) below which makes any statement of a material fact made in the Preliminary Offering Memorandum or the Offering Memorandum untrue or that requires any additions to or changes in the Preliminary Offering Memorandum or the Offering Memorandum in order to make the statements therein not misleading. If at any time any state securities commission or other federal or state regulatory authority shall issue an order suspending the qualification or exemption of any Series A Notes under any state securities or Blue Sky laws, the Company and the Guarantors will use their reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish the Initial Purchasers and those persons identified by the Initial Purchasers to the Company as many copies of the Preliminary Offering Memorandum and the Offering Memorandum, and any amendments or supplements thereto, as the Initial Purchasers may reasonably request for the time period specified in Section 5(c). Subject to the Initial Purchasers' compliance with their representations and warranties and agreements set forth in Section 7 hereof, the Company consents to the use of the Preliminary Offering Memorandum and the Offering -5- 6 Memorandum, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchasers in connection with Exempt Resales. (c) During such period as in the opinion of counsel for the Initial Purchasers an Offering Memorandum is required by law to be delivered in connection with Exempt Resales by the Initial Purchasers and in connection with market-making activities of the Initial Purchasers for so long as any Series A Notes are outstanding, (i) not to make any amendment or supplement to the Offering Memorandum of which the Initial Purchasers shall not previously have been advised or to which the Initial Purchasers shall reasonably object after being so advised unless the Company shall have determined based on the advice of counsel that such amendment or supplement is required by law; and (ii) to prepare promptly upon the Initial Purchasers' reasonable request, any amendment or supplement to the Offering Memorandum which in the opinion of counsel for the Initial Purchasers is necessary in connection with such Exempt Resales or such market-making activities. (d) If during the period referred to in Section 5(c) above any event shall occur or condition shall exist as a result of which, in the opinion of counsel for the Initial Purchasers, it becomes necessary to amend or supplement the Offering Memorandum in order to make the statements therein, in the light of the circumstances when such Offering Memorandum is delivered to an Eligible Purchaser, not misleading, or if, in the opinion of counsel for the Initial Purchasers, it is necessary to amend or supplement the Offering Memorandum to comply with any applicable law, forthwith to prepare an appropriate amendment or supplement to such Offering Memorandum so that the statements therein, as so amended or supplemented, will not, in the light of the circumstances when it is so delivered, be misleading, or so that such Offering Memorandum will comply with applicable law, and to furnish to the Initial Purchasers and such other persons as the Initial Purchasers may specify such number of copies thereof as the Initial Purchasers may reasonably request. (e) Prior to the sale of all Series A Notes pursuant to Exempt Resales as contemplated hereby, to cooperate with the Initial Purchasers and counsel for the Initial Purchasers in connection with the registration or qualification of the Series A Notes for offer and sale to the Initial Purchasers and pursuant to Exempt Resales under the state securities or Blue Sky laws of such jurisdictions as the Initial Purchasers may request, to continue such registration or qualification in effect so long as required for Exempt Resales and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that neither the Company nor any Guarantor shall be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Preliminary Offering Memorandum, the Offering Memorandum or Exempt Resales, in any jurisdiction in which it is not now so subject. (f) So long as any of the Series A Notes are outstanding prior to the consummation of the Exchange Offer, to furnish to the Initial Purchasers as soon as available copies of all reports or other communications furnished by the Company or any of the Guarantors to its -6- 7 security holders or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company or any of the Guarantors is listed and such other publicly available information concerning the Company and/or its subsidiaries as the Initial Purchasers may reasonably request. (g) So long as any of the Series A Notes remain outstanding prior to the consummation of the Exchange Offer and during any period in which the Company and the Guarantors are not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), to make available to any holder of Series A Notes in connection with any sale thereof and any prospective purchaser of such Series A Notes from such holder, the information ("RULE 144A INFORMATION") required by Rule 144A(d)(4) under the Securities Act. (h) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of the obligations of the Company and the Guarantors under this Agreement, including: (i) the fees, disbursements and expenses of counsel to the Company and the Guarantors and accountants of the Company and the Guarantors in connection with the sale and delivery of the Series A Notes to the Initial Purchasers and pursuant to Exempt Resales, and all other fees and expenses in connection with the preparation, printing and distribution of the Preliminary Offering Memorandum, the Offering Memorandum and all amendments and supplements to any of the foregoing (including financial statements) prior to or during the period specified in Section 5(c), including the mailing and delivering of copies thereof to the Initial Purchasers and persons designated by them in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Series A Notes to the Initial Purchasers and pursuant to Exempt Resales, including any transfer or other taxes payable thereon, (iii) all costs of printing or producing this Agreement, the other Operative Documents and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Series A Notes, (iv) all expenses in connection with the registration or qualification of the Series A Notes and the Guarantees for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any preliminary and supplemental Blue Sky memoranda in connection therewith (including the filing fees and fees and disbursements of counsel for the Initial Purchasers in connection with such registration or qualification and memoranda relating thereto), (v) the cost of printing certificates representing the Series A Notes and the Guarantees, (vi) all expenses and listing fees in connection with the application for quotation of the Series A Notes in the National Association of Securities Dealers, Inc. ("NASD") Automated Quotation System - PORTAL ("PORTAL"), (vii) the fees and expenses of the Trustee and the Trustee's counsel in connection with the Indenture, the Notes and the Guarantees, (viii) the costs and charges of any transfer agent, registrar and/or depositary (including DTC), (ix) any fees charged by rating agencies for the rating of the Notes, (x) all costs and expenses of the Exchange Offer and any Registration Statement, as set forth in the Registration Rights Agreement, and (xi) all other costs and expenses incident to the performance of the obligations of the Company and the Guarantors hereunder for which provision is not otherwise made in this Section. -7- 8 (i) To use its reasonable best efforts to effect the inclusion of the Series A Notes in PORTAL and to maintain the listing of the Series A Notes on PORTAL for so long as the Series A Notes are outstanding. (j) To obtain the approval of DTC for "book-entry" transfer of the Notes, and to comply in all material respects with all of its agreements set forth in the representation letters of the Company and the Guarantors to DTC relating to the approval of the Notes by DTC for "book-entry" transfer. (h) During the period beginning on the date hereof and continuing to and including the Closing Date, not to offer, sell, contract to sell or otherwise transfer or dispose of any debt securities of the Company or any Guarantor or any warrants, rights or options to purchase or otherwise acquire debt securities of the Company or any Guarantor substantially similar to the Notes and the Guarantees (other than (i) the Notes and the Guarantees and (ii) commercial paper issued in the ordinary course of business), without the prior written consent of the Initial Purchasers. (l) Not to sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) that would be integrated with the sale of the Series A Notes to the Initial Purchasers or pursuant to Exempt Resales in a manner that would require the registration of any such sale of the Series A Notes under the Securities Act. (m) Not to voluntarily claim, and to actively resist any attempts to claim, the benefit of any usury laws against the holders of any Notes and the related Guarantees. (n) To cause the Exchange Offer to be made in the appropriate form to permit Series B Notes and guarantees thereof by the Guarantors registered pursuant to the Securities Act to be offered in exchange for the Series A Notes and the Guarantees and to comply with all applicable federal and state securities laws in connection with the Exchange Offer. (o) To comply with all of its agreements set forth in the Registration Rights Agreement. (p) To use its reasonable best efforts to do and perform all things required or necessary to be done and performed under this Agreement by it prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Series A Notes and the Guarantees. 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE GUARANTORS. As of the date hereof, each of the Company and the Guarantors represents and warrants to, and agrees with, each Initial Purchaser that: (a) The Preliminary Offering Memorandum and the Offering Memorandum do not, and any supplement or amendment to them will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements -8- 9 therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph (a) do not apply to statements in or omissions from the Preliminary Offering Memorandum or the Offering Memorandum (or any supplement or amendment thereto) based upon information relating to any Initial Purchaser furnished to the Company in writing by such Initial Purchaser expressly for use therein. No stop order preventing the use of the Preliminary Offering Memorandum or the Offering Memorandum, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Securities Act, has been issued. (b) Each of the Company and its subsidiaries set forth on Schedule C hereto (the "MATERIAL SUBSIDIARIES") has been duly incorporated or formed, is validly existing as a corporation, limited liability company or limited partnership in good standing under the laws of its jurisdiction of incorporation or formation and has the corporate or limited liability company power and authority (or the requisite authority under its limited partnership agreement and the partnership laws of its jurisdiction of formation) to carry on its business as described in the Preliminary Offering Memorandum and the Offering Memorandum and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation or limited liability company authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (c) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights. (d) All of the outstanding shares of capital stock or other evidences of ownership of each of the Company's Material Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature (each, a "LIEN"). (e) This Agreement has been duly authorized, executed and delivered by the Company and each of the Guarantors. (f) The Indenture has been duly authorized by the Company and each of the Guarantors and, on the Closing Date, will have been validly executed and delivered by the Company and each of the Guarantors. When the Indenture has been duly executed and delivered by the Company, each of the Guarantors and the Trustee, the Indenture will be a valid and binding agreement of the Company and each Guarantor, enforceable against the Company and each Guarantor in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or similar laws affecting creditors' rights generally and subject to general -9- 10 principles of equity regardless of whether such enforcement is sought in a proceeding at law or in equity (the "Enforceability Exceptions"). On the Closing Date, the Indenture will conform in all material respects to the requirements of the Trust Indenture Act of 1939, as amended (the "TIA" or "TRUST INDENTURE ACT"), and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. (g) The Series A Notes have been duly authorized and, on the Closing Date, will have been validly executed and delivered by the Company. When the Series A Notes have been issued, executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, the Series A Notes will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to the Enforceability Exceptions. On the Closing Date, the Series A Notes will conform as to legal matters to the description thereof contained in the Offering Memorandum. (h) On the Closing Date, the Series B Notes will have been duly authorized by the Company. When the Series B Notes are issued, executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the Series B Notes will be entitled to the benefits of the Indenture and will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to the Enforceability Exceptions. (i) The Guarantee to be endorsed on the Series A Notes by each Guarantor has been duly authorized by such Guarantor and, on the Closing Date, will have been duly executed and delivered by each such Guarantor. When the Series A Notes have been issued, executed and authenticated in accordance with the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, the Guarantee of each Guarantor endorsed thereon will be entitled to the benefits of the Indenture and will be the valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, subject to the Enforceability Exceptions. On the Closing Date, the Guarantees to be endorsed on the Series A Notes will conform as to legal matters to the description thereof contained in the Offering Memorandum. (j) The Guarantee to be endorsed on the Series B Notes by each Guarantor has been duly authorized by such Guarantor and, when issued, will have been duly executed and delivered by each such Guarantor. When the Series B Notes have been issued, executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the Guarantee of each Guarantor endorsed thereon will be entitled to the benefits of the Indenture and will be the valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, subject to the Enforceability Exceptions. When the Series B Notes are issued, authenticated and delivered, the Guarantees to be endorsed on the Series B Notes will conform as to legal matters to the description thereof in the Offering Memorandum. -10- 11 (k) The Registration Rights Agreement has been duly authorized by the Company and each of the Guarantors and, on the Closing Date, will have been duly executed and delivered by the Company and each of the Guarantors. When the Registration Rights Agreement has been duly executed and delivered, the Registration Rights Agreement will be a valid and binding agreement of the Company and each of the Guarantors, enforceable against the Company and each Guarantor in accordance with its terms, subject to the Enforceability Exceptions. On the Closing Date, the Registration Rights Agreement will conform as to legal matters to the description thereof in the Offering Memorandum. (l) Neither the Company nor any of its Material Subsidiaries is (i) in violation of its respective charter or bylaws or other organizational documents or (ii) in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument to which the Company or any of its Material Subsidiaries is a party or by which the Company or any of its Material Subsidiaries or their respective property is bound, except with respect to item (ii) for such defaults that would not reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (m) The execution, delivery and performance of this Agreement and the other Operative Documents by the Company and each of the Guarantors, the compliance by the Company and each of the Guarantors with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or bylaws or other organizational documents of the Company or any of its Material Subsidiaries, (iii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, any indenture, loan agreement, mortgage, lease or other agreement or instrument to which the Company or any of its Material Subsidiaries is a party or by which the Company or any of its Material Subsidiaries or their respective property is bound, (iv) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property, or (v) result in the suspension, termination or revocation of any Authorization (as defined below) of the Company or any of its Material Subsidiaries or any other impairment of the rights of the holder of any such Authorization; except with respect to items (i), (iii), (iv) and (v) for such consents, approvals, authorizations, orders or qualifications which if not made or obtained, or conflicts, breaches, violations or defaults which if existing, or suspensions, terminations or revocations which if existing, would not reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole. (n) There are no legal or governmental proceedings pending or, to the Company's knowledge, threatened to which the Company or any of its Material Subsidiaries is or could be a party or to which any of their respective property is or could be subject that are required to be -11- 12 described in the Preliminary Offering Memorandum or the Offering Memorandum and are not so described; nor are there any statutes, regulations, contracts or other documents that are required to be described in the Preliminary Offering Memorandum or the Offering Memorandum that are not so described as required. (o) Neither the Company nor any of its Material Subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS") or any provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries taken as a whole. (p) Except as disclosed in the Offering Memorandum, there are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization granted thereunder, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries taken as a whole. (q) Each of the Company and its Material Subsidiaries has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "AUTHORIZATION") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including without limitation under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. Each such Authorization is valid and in full force and effect and each of the Company and its Material Subsidiaries is in substantial compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and, to the knowledge of the Company, no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other material impairment of the rights of the holder of any such Authorization; and, except as disclosed in the Offering Memorandum, such Authorizations contain no restrictions that are burdensome to the Company or any of its Material Subsidiaries; and, except as disclosed in the Offering Memorandum; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the -12- 13 aggregate, reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries taken as a whole. (r) Coopers & Lybrand L.L.P. are independent public accountants with respect to the Company and the Guarantors, as required by the Securities Act. (s) The consolidated financial statements included in the Preliminary Offering Memorandum and the Offering Memorandum (and any amendment or supplement thereto), together with related notes, present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated therein at the respective dates or for the respective periods to which they apply; such statements and related notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other historical financial and statistical information and data set forth in the Preliminary Offering Memorandum and the Offering Memorandum (and any amendment or supplement thereto) are, in all material respects, accurately presented and, except as otherwise stated therein, prepared on a basis consistent with such financial statements and the books and records of the Company. (t) The Company is not and, after giving effect to the offering and sale of the Series A Notes and the application of the proceeds thereof as described in the Offering Memorandum, will not be, an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. (u) Except as described in the Offering Memorandum, there are no contracts, agreements or understandings between the Company or any Guarantor and any person granting such person the right to require the Company or such Guarantor to file a registration statement under the Securities Act with respect to any securities of the Company or such Guarantor or to require the Company or such Guarantor to include such securities with the Notes and Guarantees registered pursuant to any registration statement. (V) Neither the Company nor any of its subsidiaries nor any agent thereof acting on behalf of them has taken, and none of them will take, any action that might cause this Agreement or the issuance or sale of the Series A Notes to violate Regulation G (12 C.F.R. Part 207), Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of Governors of the Federal Reserve System. (w) No "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act (i) has imposed (or has informed the Company or any Guarantor that it is considering imposing) any condition (financial or otherwise) on the Company's or any Guarantor's retaining any rating assigned to the Company or any Guarantor, or any securities of the Company or any Guarantor or (ii) has indicated to the Company or any Guarantor that is considering (A) the downgrading, suspension, or withdrawal of, or any review for a possible change that does not indicate the direction of the possible change in, any rating -13- 14 so assigned or (B) any change in the outlook for any rating of the Company or any Guarantor, or any securities of the Company or any Guarantor. (x) Since the respective dates as of which information is given in the Offering Memorandum other than as set forth in the Offering Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries has incurred any material liability or obligation, direct or contingent, except for trade payables and other similar liabilities incurred in the ordinary course of business. (y) Each certificate signed by any officer of the Company and delivered at the Closing to the Initial Purchasers or counsel for the Initial Purchasers shall be deemed to be a representation and warranty by the Company to the Initial Purchasers as to the matters covered thereby. (z) The Company and its subsidiaries have good and indefeasible title to all real property and good and marketable title to all personal property owned by them and which is material to the business of the Company and its subsidiaries, taken as a whole, in each case free and clear of all liens, encumbrances and defects except such as are described in the Offering Memorandum or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries and which are material to the business of the Company and its subsidiaries, taken as a whole, are held by them under valid, subsisting and enforceable leases. (aa) The Company and each of its Material Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and neither the Company nor any of its Material Subsidiaries has received notice from any insurer which indicates that the Company or such Material Subsidiary will not be able to renew its existing insurance coverage as and when such coverage expires. (bb) No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any of its subsidiaries on the other hand, which is required by the Securities Act to be described in the Preliminary Offering Memorandum or the Offering Memorandum which is not so described. -14- 15 (cc) The pro forma financial statements of the Company and its subsidiaries and the related notes thereto set forth in the Preliminary Offering Memorandum and the Offering Memorandum (and any supplement or amendment thereto) have been prepared on a basis consistent with the historical financial statements of the Company and its subsidiaries, give effect to the assumptions used in the preparation thereof on a reasonable basis and in good faith and present fairly the historical and proposed transactions contemplated by the Preliminary Offering Memorandum and the Offering Memorandum. The other pro forma financial and statistical information and data set forth in the Preliminary Offering Memorandum and the Offering Memorandum (and any supplement or amendment thereto) are, in all material respects, accurately presented and prepared on a basis consistent with the historical or pro forma financial statements of the Company. (dd) The Company and each of its Material Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (ee) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided. (ff) Each of the Preliminary Offering Memorandum and the Offering Memorandum, as of its date, contains all the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the Securities Act. (gg) When the Series A Notes and the Guarantees are issued and delivered pursuant to this Agreement, neither the Series A Notes nor the Guarantees will be of the same class (within the meaning of Rule 144A under the Securities Act) as any security of the Company or the Guarantors that is listed on a national securities exchange registered under Section 6 of the Exchange Act or that is quoted in a United States automated inter-dealer quotation system. (hh) No form of general solicitation or general advertising (as defined in Regulation D under the Securities Act) was used by the Company, the Guarantors or any of their respective representatives (other than the Initial Purchasers, as to whom the Company and the Guarantors make no representation) in connection with the offer and sale of the Series A Notes contemplated hereby, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or -15- 16 any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. No securities of the same class as the Series A Notes have been issued and sold by the Company within the six-month period immediately prior to the date hereof. (ii) Prior to the effectiveness of any Registration Statement, the Indenture is not required to be qualified under the TIA. (jj) None of the Company, the Guarantors nor any of their respective affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company and the Guarantors make no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S under the Securities Act ("REGULATION S") with respect to the Series A Notes or the Guarantees. (kk) The Series A Notes offered and sold in reliance on Regulation S have been and will be offered and sold only in offshore transactions. (ll) The sale of the Series A Notes pursuant to Regulation S is not part of a plan or scheme to evade the registration provisions of the Securities Act. (mm) No registration under the Securities Act of the Series A Notes or the Guarantees is required for the sale of the Series A Notes and the Guarantees to the Initial Purchasers as contemplated hereby or for the Exempt Resales, assuming the accuracy of the Initial Purchasers' representations and warranties and agreements set forth in Section 7 hereof. The Company and the Guarantors acknowledge that the Initial Purchasers and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 9 hereof, counsel to the Company and the Guarantors and counsel to the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 7. INITIAL PURCHASERS' REPRESENTATIONS AND WARRANTIES. Each of the Initial Purchasers, severally and not jointly, represents and warrants to the Company and the Guarantors, and agrees that: (a) Such Initial Purchaser is a QIB with such knowledge and experience in financial and business matters as is necessary in order to evaluate the merits and risks of an investment in the Series A Notes. (b) Such Initial Purchaser (A) is not acquiring the Series A Notes with a view to any distribution thereof or with any present intention of offering or selling any of the Series A Notes in a transaction that would violate the Securities Act or the securities laws of any state of the United States or any other applicable jurisdiction and (B) will be reoffering and reselling the Series A Notes only (x) to QIBs in reliance on the exemption from the registration requirements of the Securities -16- 17 Act provided by Rule 144A and (y) in offshore transactions in reliance upon Regulation S of the Securities Act. (c) Such Initial Purchaser agrees that no form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) has been or will be used by such Initial Purchaser or any of its representatives in connection with the offer and sale of the Series A Notes pursuant hereto, including, but not limited to, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. (d) Such Initial Purchaser agrees that, in connection with Exempt Resales, such Initial Purchaser will solicit offers to buy the Series A Notes only from, and will offer to sell the Series A Notes only to, Eligible Purchasers. Each Initial Purchaser further agrees that it will offer to sell the Series A Notes only to, and will solicit offers to buy the Series A Notes only from, (A) Eligible Purchasers that the Initial Purchaser reasonably believes are QIBs and (B) Regulation S Purchasers, in each case, that agree that (x) the Series A Notes purchased by them may be resold, pledged or otherwise transferred within the time period referred to under Rule 144(k) (taking into account the provisions of Rule 144(d) under the Securities Act, if applicable) under the Securities Act, as in effect on the date of the transfer of such Series A Notes, only (I) to the Company or any of its subsidiaries, (II) to a person whom the seller reasonably believes is a QIB purchasing for its own account or for the account of a QIB in a transaction meeting the requirements of Rule 144A under the Securities Act, (III) in an offshore transaction (as defined in Rule 902 under the Securities Act) meeting the requirements of Rule 904 of the Securities Act, (IV) in a transaction meeting the requirements of Rule 144 under the Securities Act, (V) in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel acceptable to the Company) or (VI) pursuant to an effective registration statement and, in each case, in accordance with the applicable securities laws of any state of the United States or any other applicable jurisdiction and (y) they will deliver to each person to whom such Series A Notes or an interest therein is transferred a notice substantially to the effect of the foregoing. (e) Such Initial Purchaser and its affiliates or any person acting on its or their behalf have not engaged and will not engage in any directed selling efforts within the meaning of Regulation S with respect to the Series A Notes or the Guarantees. (f) The Series A Notes offered and sold by such Initial Purchaser pursuant hereto in reliance on Regulation S have been and will be offered and sold only in offshore transactions. (G) The sale of the Series A Notes offered and sold by such Initial Purchaser pursuant hereto in reliance on Regulation S is not part of a plan or scheme to evade the registration provisions of the Securities Act. -17- 18 Such Initial Purchaser acknowledges that the Company and the Guarantors and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 9 hereof, counsel to the Company and the Guarantors and counsel to the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and such Initial Purchaser hereby consents to such reliance. 8. INDEMNIFICATION. (a) The Company and each Guarantor agree, jointly and severally, to indemnify and hold harmless each Initial Purchaser, its directors, its officers and each person, if any, who controls such Initial Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum (or any amendment or supplement thereto), the Preliminary Offering Memorandum or any Rule 144A Information provided by the Company or any Guarantor to any holder or prospective purchaser of Series A Notes pursuant to Section 5(h) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Initial Purchaser furnished in writing to the Company by such Initial Purchaser; provided, however, that the foregoing indemnity agreement with respect to any Preliminary Offering Memorandum shall not inure to the benefit of any Initial Purchaser in connection with any losses, claims, damages and liabilities and judgments if a copy of the Offering Memorandum (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given to the person asserting such losses, claims, damages, liabilities or judgments at or prior to the written confirmation of the sale of the Series A Notes to such person, and if the Offering Memorandum (as so amended and supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or judgment, unless such failure to deliver such amended or supplemented Offering Memorandum was a result of noncompliance by the Company with its delivery obligations under Section 5 hereof. (b) Each Initial Purchaser agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantors, and their respective directors, managers and officers and each person, if any, who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) the Company or the Guarantors, to the same extent as the foregoing indemnity from the Company and the Guarantors to such Initial Purchaser but only with reference to information relating to such Initial Purchaser furnished in writing to the Company by such Initial Purchaser expressly for use in the Preliminary Offering Memorandum or the Offering Memorandum (or any amendment or supplement thereto). -18- 19 (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), the Initial Purchaser shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Initial Purchaser). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for (i) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Initial Purchasers, their officers and directors and all persons, if any, who control any Initial Purchaser within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and (ii) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for the Company and the Guarantors, their respective directors, managers, officers and all persons, if any, who control the Company and the Guarantors within the meaning of either such Section, and all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Initial Purchasers, their officers and directors and such control persons of any Initial Purchasers, such firm shall be designated in writing by DLJ. In the case of any such separate firm for the Company and the Guarantors and such directors, officers and control persons of the Company and the Guarantors, such firm shall be designated in writing by the Company. The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action effected with the indemnifying party's written consent, which consent will not be unreasonably withheld. Notwithstanding the immediately preceding sentence, if in any case where the fees and expenses of counsel are at the expense of the indemnifying party and an indemnified party shall have requested the indemnifying party to reimburse the indemnified party for such fees and expenses of counsel actually incurred by it, such indemnifying party agrees that it shall be liable for any settlement of any action effected without its written consent if (i) such settlement is entered into more than 60 days after the receipt by such indemnifying party of the aforesaid request (ii) such indemnifying party shall have received notice -19- 20 of the proposed settlement being entered into at least 20 days prior to such settlement being entered into and (iii) prior to the date of such settlement such indemnifying party shall have failed to reimburse the indemnified party in accordance with such request for reimbursement (or, if within 30 days of the receipt of the aforesaid request, the indemnifying party shall have made a good faith written challenge to the reasonableness of the amount of the reimbursement requested or the sufficiency of the documentation supporting the reimbursement requested (which challenge shall specifically set forth the amount of the requested reimbursement which the indemnifying party in good faith believes to be unreasonable or the basis for the good faith claim as to the insufficiency of any supporting documentation), this sentence shall only apply if such indemnifying party shall not have reimbursed the indemnified party for the amount which is not being so challenged). No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 8 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors, on the one hand, and the Initial Purchasers on the other hand from the offering of the Series A Notes or (ii) if the allocation provided by clause 8(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantors, on the one hand and the Initial Purchasers, on the other hand, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Series A Notes (after discounts and commissions, but before deducting expenses) received by the Company, and the total discounts and commissions received by the Initial Purchasers, bear to the total price to investors of the Series A Notes, in each case as set forth in the table on the cover page of the Offering Memorandum. The relative fault of the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Guarantors, on the one hand, or the Initial Purchasers, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. -20- 21 The Company, the Guarantors and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Series A Notes purchased by it hereunder and resold to Eligible Purchasers were offered to the Eligible Purchasers exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations to contribute pursuant to this Section 8(d) are several in proportion to the respective principal amount of Series A Notes purchased by each of the Initial Purchasers hereunder and not joint. (e) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. 9. CONDITIONS OF INITIAL PURCHASERS' OBLIGATIONS. The several obligations of the Initial Purchasers to purchase the Series A Notes under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company and the Guarantors contained in this Agreement shall be true and correct (in the case of representations and warranties that are qualified as to materiality) or true and correct in all material respects (in the case of representations and warranties that are not so qualified) on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) On or after the date hereof, (i) there shall not have occurred any downgrading, suspension or withdrawal of, nor shall any notice have been given of any potential or intended downgrading, suspension or withdrawal of, or of any review (or of any potential or intended review) for a possible change that does not indicate the direction of the possible change in, any rating of the Company or any Guarantor or any securities of the Company or any Guarantor (including, without limitation, the placing of any of the foregoing ratings on credit watch with negative or developing implications or under review with an uncertain direction) by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act, -21- 22 (ii) there shall not have occurred any change, nor shall any notice have been given of any potential or intended change, in the outlook for any rating of the Company or any Guarantor or any securities of the Company or any Guarantor by any such rating organization and (iii) no such rating organization shall have given notice that it has assigned (or is considering assigning) a lower rating to the Series A Notes than that on which the Series A Notes were marketed. (c) You shall have received on the Closing Date a certificate dated the Closing Date, signed by James E. Brown and David E. Grose, in their respective capacities as the Chief Executive Officer and Chief Financial Officer of the Company, confirming the matters set forth in Sections 6(y), 9(a) and 9(b) and stating that the Company and each of the Guarantors has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Company or such Guarantor on or prior to the Closing Date. (d) Since the respective dates as of which information is given in the Offering Memorandum other than as set forth in the Offering Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there shall not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries shall have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Series A Notes on the terms and in the manner contemplated in the Offering Memorandum. (e) You shall have received on the Closing Date an opinion (in a form reasonably satisfactory to you and counsel for the Initial Purchasers) dated the Closing Date, of Baker & Botts, L.L.P., counsel for the Company and the Guarantors, or McAfee & Taft A Professional Corporation, Oklahoma counsel for the Company and the Guarantors, with respect to the portions of the opinions rendered below involving questions of Oklahoma law, to the effect that: (i) Each of the Company and its Material Subsidiaries which are corporations has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own, lease and operate its property and to conduct its business as described in the Offering Memorandum; Bayard Drilling, L.L.C. has been duly formed and is validly existing as a limited liability company in good standing under the Delaware Limited Liability Company Act and has all requisite power and -22- 23 authority under its limited liability company agreement and the Delaware Limited Liability Company Act to own, lease and operate its property and to conduct its business as described in the Offering Memorandum; and Bayard Drilling, L.P. has been duly formed and is validly existing as a limited partnership in good standing under the Delaware Revised Uniform Limited Partnership Act and has all requisite power and authority under its agreement of limited partnership and the Delaware Revised Uniform Limited Partnership Act to own, lease and operate its property and to conduct its business as described in the Offering Memorandum; (ii) Each of the Company and its Material Subsidiaries is duly qualified and is in good standing as a foreign corporation or foreign limited liability company or foreign limited partnership (as the case may be) authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; provided however that (i) in rendering such opinion as to the jurisdictions in which the Company and its Material Subsidiaries do business or own or lease property, such counsel may rely solely upon certificates of officers of the Company and (ii) in rendering such opinion as to whether each of the Company and its Material Subsidiaries is duly qualified and in good standing in such jurisdictions, such counsel may rely solely upon certificates of governmental officials of such jurisdictions; (iii) All of the outstanding shares of capital stock of each of the Material Subsidiaries which are corporations have been duly authorized and validly issued and are fully paid and non-assessable; all of the outstanding limited liability company interests in Bayard Drilling L.L.C. have been duly authorized and validly issued in accordance with the limited liability company agreement of Bayard Drilling L.L.C. in exchange for the capital contributions specified therein; all of the outstanding limited partnership interests in Bayard Drilling, L.P. have been duly authorized and validly issued in accordance with the limited partnership agreement of Bayard Drilling, L.P. in exchange for the capital contributions specified therein; and, to the Company's knowledge, all of the outstanding shares of capital stock or limited liability company interests, as the case may be, of the Material Subsidiaries are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any perfected security interest; (iv) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and each Guarantor and has been executed and delivered by the Company and each Guarantor; (v) The Series A Notes have been duly authorized by all necessary corporate action on the part of the Company and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement and the Indenture, will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to the Enforceability Exceptions; -23- 24 (vi) The Guarantees have been duly authorized by all necessary corporate action on the part of each Guarantor and, when the Series A Notes are executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, the Guarantees endorsed thereon will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Guarantors, enforceable against the Guarantors in accordance with their terms, subject to the Enforceability Exceptions; (vii) The Indenture has been duly authorized by all necessary corporate action on the part of the Company and each Guarantor, has been executed and delivered by the Company and each Guarantor and is a valid and binding agreement of the Company and each Guarantor, enforceable against the Company and each Guarantor in accordance with its terms, subject to the Enforceability Exceptions and subject to any limitations on the enforceability thereof imposed by the applicable provisions of federal or state securities laws or principles of public policy underlying such laws; provided, however, that such counsel shall not be required to opine upon the enforceability of the indemnification and contribution provisions contained in the Indenture; (viii) The Registration Rights Agreement has been duly authorized by all necessary corporate action on the part of the Company and each Guarantor, has been executed and delivered by the Company and each Guarantor and is a valid and binding agreement of the Company and each Guarantor, enforceable against the Company and each Guarantor in accordance with its terms, subject to the Enforceability Exceptions and subject to any limitations on the enforceability thereof imposed by the applicable provisions of federal or state securities laws or principles of public policy underlying such laws; provided, however, that such counsel shall not be required to opine upon the enforceability of the indemnification and contribution provisions contained in the Registration Rights Agreement; (ix) The Series B Notes have been duly authorized by all necessary corporate action on the part of the Company; (x) The statements under the captions, "Management" (solely with respect to the terms of the employment agreements and indemnification agreements discussed therein, and under the captions "1997 Stock Option and Stock Award Plan" and "1997 Non-Employee Directors' Stock Option Plan" and the agreements relating to existing awards granted under such stock plans), "Certain Relationships and Related Transactions" (solely with respect to (i) the terms of the registration rights agreements and the stockholders and voting agreement discussed therein, (ii) the matters described under the captions "--Certain Arrangements Related to the Consolidation Transactions--The Formation Transactions--Chesapeake Option," "--Chesapeake Drilling Agreements" and "--Oliver Companies' Put Rights," (iii) the matters described under the captions "--Certain Arrangements Related to the Consolidation Transactions--The Ward Acquisition," and "--The Bonray Acquisition," and (iv) the matters described under the captions "--Certain Financing Arrangements," -24- 25 "--Chesapeake Transactions" and "--Other Related Party Transactions and Arrangements--Fees Paid to Energy Spectrum Advisors"), "Description of Notes" and "Plan of Distribution" in the Offering Memorandum, insofar as such statements constitute a summary of the legal matters or documents referred to therein, are accurate and fairly present the information set forth therein, in each case in all material respects; (xi) No consent, approval, authorization or order of, or qualification with, any Applicable Governmental Authority (as hereinafter defined) is required pursuant to any Applicable Laws (as hereinafter defined) for the execution and delivery of this Agreement and the other Operative Documents by the Company and each Guarantor, the performance by the Company and each Guarantor of its respective obligations hereunder and thereunder or the consummation by the Company and each Guarantor of the transactions contemplated hereby and thereby, except for (i) the filing and effectiveness of a registration statement by the Company and the Guarantors with the Commission pursuant to the Securities Act and qualification of the Indenture under the Trust Indenture Act and (ii) any such consent, approval, authorization, order or qualification which (A) has been made or obtained prior to the Closing Date or (B) may be required under applicable state or foreign securities or Blue Sky laws (as to which such counsel need not express an opinion) or (C) if not made or obtained would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; (xii) The execution and delivery of this Agreement and the other Operative Documents by the Company and each Guarantor, the performance by the Company and each Guarantor of its obligations hereunder and thereunder and the consummation by the Company and each Guarantor of the transactions contemplated hereby and thereby will not (i) result in a violation of the terms of the certificate of incorporation, bylaws, certificate of formation, limited liability company agreement or agreement of limited partnership (in each case, as applicable) of the Company or the Material Subsidiaries, (ii) result in a breach or violation of or constitute (either alone or with notice or the passage of time, or both) a default under, any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company or its Material Subsidiaries is a party or by which the Company, the Material Subsidiaries or their properties are bound that is included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, or (iii) result in a violation of any Applicable Laws to which the Company, the Material Subsidiaries or their properties are subject or any judgment, decree or order of any Applicable Governmental Authority that specifically names the Company, the Material Subsidiaries or is directed at their property (provided, however, that such counsel need not express an opinion with respect to compliance with any federal or state securities or antifraud law, rule or regulation except as otherwise specifically stated in the opinion of such counsel); except for any such violation, breach or default referred to in clause (i), (ii) or (iii) above which would not have a material adverse effect on the Company and its subsidiaries taken as a whole; -25- 26 (xiii) To the knowledge of such counsel, there are no legal or governmental proceedings pending or threatened against the Company or any of the Material Subsidiaries or by which any of their respective property is or could be subject that are required to be described in the Preliminary Offering Memorandum or the Offering Memorandum and are not so described; (xiv) The Company is not and, after giving effect to the offering and sale of the Series A Notes and the application of the proceeds thereof as described in the Offering Memorandum, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xvi) The Indenture complies as to form in all material respects with the requirements of the TIA, and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. It is not necessary in connection with the offer, sale and delivery of the Series A Notes to the Initial Purchasers in the manner contemplated by this Agreement or in connection with the Exempt Resales to qualify the Indenture under the TIA; and (xvi) No registration under the Securities Act of the Series A Notes is required for the sale of the Series A Notes to the Initial Purchasers as contemplated by this Agreement or for the Exempt Resales assuming (i) each Initial Purchaser is a QIB or a Regulation S Purchaser, (ii) the purchasers who buy the Series A Notes in the Exempt Resales are Eligible Purchasers, (iii) the accuracy of, and compliance with, the Initial Purchaser's representations and agreements contained in Section 7 of this Agreement, (iv) the accuracy of the representations of the Company and the Guarantors set forth in Sections 6(jj), (kk) and (ll) of this Agreement, (v) receipt by the purchasers to whom the Initial Purchasers initially resell the Series A Notes of a copy of the Offering Memorandum at or prior to the delivery of confirmation of sale and (vi) the certificates representing the Series A Notes bear the legends contemplated by the Indenture. As used herein, (i) the term "APPLICABLE LAWS" means the General Corporation Law of the State of Delaware, the contract laws of the State of New York, the laws of the State of Texas and the laws of the United States of America that, in the experience of such counsel, are normally applicable to transactions of the type contemplated by this Agreement and (ii) the term "APPLICABLE GOVERNMENTAL AUTHORITY" means any governmental authority or body of the United States of America or the State of Texas or the State of New York or (solely with respect to the General Corporation Law of the State of Delaware) the State of Delaware. Such opinion shall also include a statement to the effect that although such counsel did not independently verify, are not passing upon and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Offering Memorandum (except to the extent stated in paragraph (e)(x) above), they advise you that -26- 27 no facts have come to their attention which lead them to believe that the Offering Memorandum (other than (i) the financial statements (including the notes thereto and the auditors' report thereon) included therein, and (ii) the other financial and statistical information included therein, as to which such counsel need express no opinion), as of its date and as of the Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The opinion of Baker & Botts, L.L.P. or such other counsel as described in Section 9(e) above shall be rendered to you at the request of the Company and the Guarantors, and shall so state therein. (f) You shall have received on the Closing Date an opinion, dated the Closing Date, of Andrews & Kurth L.L.P., counsel for the Initial Purchasers, in form and substance reasonably satisfactory to the Initial Purchasers. In giving such opinions with respect to the matters covered by the last paragraph of Section 9(e), Baker & Botts, L.L.P. and Andrews & Kurth L.L.P. may state that their opinion and belief are based upon their participation in the preparation of the Offering Memorandum and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (g) The Initial Purchasers shall have received, at the time this Agreement is executed and at the Closing Date, letters dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Initial Purchasers from Coopers & Lybrand L.L.P. and Grant Thornton L.L.P., independent public accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to the Initial Purchasers with respect to the financial statements and certain financial information contained in the Offering Memorandum. (h) The Series A Notes shall have been approved by the NASD for trading and duly listed in PORTAL. (i) The Initial Purchasers shall have received a counterpart, conformed as executed, of the Indenture which shall have been entered into by the Company, the Guarantors and the Trustee. (j) The Company and the Guarantors shall have executed the Registration Rights Agreement and the Initial Purchasers shall have received an original copy thereof, duly executed by the Company and the Guarantors. (k) The Company shall have consummated the TransTexas Acquisition, as defined in the Offering Memorandum. -27- 28 (l) Neither the Company nor the Guarantors shall have failed at or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company or the Guarantors, as the case may be, at or prior to the Closing Date. 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by the Initial Purchasers by written notice to the Company if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in the Initial Purchasers' judgment, is material and adverse and, in the Initial Purchasers' judgment, makes it impracticable to market the Series A Notes on the terms and in the manner contemplated in the Offering Memorandum, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company or any Guarantor on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date any one or more of the Initial Purchasers shall fail or refuse to purchase the Series A Notes which it or they have agreed to purchase hereunder on such date and the aggregate principal amount of the Series A Notes which such defaulting Initial Purchaser or Initial Purchasers, as the case may be, agreed but failed or refused to purchase is not more than one-tenth of the aggregate principal amount of the Series A Notes to be purchased on such date by all Initial Purchasers, each non-defaulting Initial Purchaser shall be obligated severally, in the proportion which the principal amount of the Series A Notes set forth opposite its name in Schedule B bears to the aggregate principal amount of the Series A Notes which all the non-defaulting Initial Purchasers, as the case may be, agreed but failed or refused to purchase on such date; provided that in no event shall the aggregate principal amount of the Series A Notes which any Initial Purchaser has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 10 by an amount in excess of one-ninth of such principal amount of the Series A Notes without the written consent of such Initial Purchaser. If on the Closing Date any Initial Purchaser or Initial Purchasers shall fail or refuse to purchase Series A Notes and the aggregate principal amount of the Series A Notes with -28- 29 respect to which such default or defaults occur is more than one-tenth of the aggregate principal amount of the Series A Notes to be purchased by all Initial Purchasers and arrangements satisfactory to the Initial Purchasers and the Company for purchase of such the Series A Notes are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Initial Purchaser, the Company or the Guarantors. In any such case which does not result in termination of this Agreement, either the Initial Purchasers or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Offering Memorandum or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Initial Purchaser from liability in respect of any default of any such Initial Purchaser under this Agreement. 11. MISCELLANEOUS. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company or any Guarantor, to Bayard Drilling Technologies, Inc., 4005 N.W. Expressway, Suite 550E, Oklahoma City, OK 73116, and (ii) if to any Initial Purchaser, to it c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. 12. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, the Guarantors and the Initial Purchasers set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Series A Notes, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of the Initial Purchasers, the officers or directors of the Initial Purchasers, any person controlling the Initial Purchasers, the Company, any Guarantor, the officers, managers or directors of the Company or any Guarantor, or any person controlling the Company or any Guarantor, (ii) acceptance of the Series A Notes and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Series A Notes are not delivered by or on behalf of the Company as provided herein (other than as a result of any termination of this Agreement pursuant to Section 10 or a breach on the part of the Initial Purchasers), the Company and each Guarantor, jointly and severally, agree to reimburse the several Initial Purchasers for all out-of-pocket expenses (including, without limitation, the fees and disbursements of counsel) reasonably incurred by them in connection with the proposed offering of the Series A Notes. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(i) hereof. The Company and each Guarantor also agree, jointly and severally, to reimburse the several Initial Purchasers, their directors and officers and any persons controlling any of the Initial Purchasers within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act for any and all fees and expenses (including, without limitation, the fees and disbursements of counsel) reasonably incurred by them in connection with enforcing their rights hereunder (including, without limitation, pursuant to Section 8 hereof). The Initial Purchasers also agree, jointly and severally, to reimburse the Company and the Guarantors for any and all fees and expenses (including, without limitation, the fees and disbursements of counsel) reasonably incurred -29- 30 by them in connection with enforcing their rights hereunder (including, without limitation, pursuant to Section 8 hereof). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Guarantors, the Initial Purchasers, the Initial Purchasers' directors and officers, any controlling persons referred to herein, the directors, officers and managers of the Company and the Guarantors and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Series A Notes from the Initial Purchasers merely because of such purchase. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. -30- 31 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Guarantors and the Initial Purchasers. Very truly yours, BAYARD DRILLING TECHNOLOGIES, INC. By: /s/ JAMES E. BROWN ----------------------------------- James E. Brown President BAYARD DRILLING, L.L.C. By: /s/ JAMES E. BROWN ----------------------------------- James E. Brown President BAYARD DRILLING, L.P. By: Bayard Drilling, L.L.C., its general partner By: /s/ JAMES E. BROWN ----------------------------------- James E. Brown President BONRAY DRILLING CORPORATION By: /s/ JAMES E. BROWN ----------------------------------- James E. Brown President TREND DRILLING CO. By: /s/ JAMES E. BROWN ----------------------------------- James E. Brown President -31- 32 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION LEHMAN BROTHERS INC. BT ALEX. BROWN DAIN RAUSCHER WESSELS By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION, on its own behalf and on behalf of the Initial Purchasers By: /s/ DWIGHT SCOTT ----------------------------------- Name: Dwight Scott Title: Senior Vice President -32- 33 SCHEDULE A GUARANTORS Bayard Drilling, L.L.C. Bayard Drilling, L.P. Bonray Drilling Corporation Trend Drilling Co. -33- 34
SCHEDULE B Principal Amount Initial Purchaser of Notes of Notes -------------------------- ---------------- Donaldson, Lufkin & Jenrette Securities Corporation............................ $ 60,000,000 Lehman Brothers...................................... $ 20,000,000 BT Alex. Brown....................................... $ 15,000,000 Dain Rauscher........................................ $ 5,000,000 ------------ Total................................................ $100,000,000 ------------
-34- 35 SCHEDULE C MATERIAL SUBSIDIARIES OF THE COMPANY Bayard Drilling, L.L.C. Bayard Drilling, L.P. Bonray Drilling Corporation Trend Drilling Co. -35- EX-10.32 8 WAIVER OF CERTAIN RIGHTS - JUNE 2, 1998 1 Exhibit 10.32 WAIVER OF CERTAIN RIGHTS UNDER SECOND AMENDED AND RESTATED STOCKHOLDERS AND VOTING AGREEMENT THIS WAIVER OF CERTAIN RIGHTS UNDER SECOND AMENDED AND RESTATED STOCKHOLDERS AND VOTING AGREEMENT is dated June 2, 1998. Capitalized terms used herein but not defined herein have the meanings assigned to such terms in the Stockholders Agreement. WHEREAS, as a result of the consummation of the DLB Distribution (as defined in the Stockholders Agreement), on or about April 28, 1998, the Persons comprising the DLB Group (consisting of Charles E. Davidson, Mark Liddell and Mike Liddell), acquired certain shares of common stock, par value $0.01 per share ("Common Stock"), of the Company previously held by Bonray Holding, L.L.C., a Delaware limited liability company and subsidiary of DLB Oil & Gas, Inc., an Oklahoma corporation; WHEREAS, pursuant to the terms of the Stockholders Agreement, as of May 11, 1998, each member of the DLB Group entered into a Supplemental Agreement (as defined in the Stockholders Agreement), whereby each such person agreed that (i) his ownership of Stock (as defined in the Stockholders Agreement) shall be subject to, and that he shall comply with, all of the terms and conditions of the Stockholders Agreement; (ii) he shall not effect any Transfer (as defined in the Stockholders Agreement) of such Stock except in compliance with the provisions thereof; WHEREAS, Section 3.1 of the Stockholders Agreement generally provides, among other things, that in connection with any election for members of the Board of Directors, the Company shall, at the request of the DLB Designator (as defined in the Stockholders Agreement), include in the slate of directors recommended by the Board of Directors to the stockholders of the Company for election as directors one representative designated by the DLB Designator so long as the DLB Group holds 5% or more of the outstanding Common Stock, and that vacancies in the DLB Director position will be filled by another Person designated by the DLB Designator; WHEREAS, in order to more clearly establish that the members of the DLB Group are not controlling persons or affiliates of the Company, each of them seeks to waive certain rights and to release the Company and the other Continuing Stockholder Parties from certain obligations, under the Stockholders Agreement; NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and accepted each of the undersigned hereby irrevocably waives all rights granted to him under Section 3.1 of the 2 Stockholders Agreement including the right to designate a DLB Designee under the Stockholders Agreement or to designate any Person to fill any vacancy in the DLB Director position. IN WITNESS WHEREOF, this document has been executed as the date first written above. /s/ Charles E. Davidson --------------------------------------- CHARLES E. DAVIDSON /s/ Mark Liddell --------------------------------------- MARK LIDDELL /s/ Mike Liddell --------------------------------------- MIKE LIDDELL EX-21.1 9 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF BAYARD DRILLING TECHNOLOGIES, INC. Bayard Drilling, L.L.C. Bayard Drilling, L.P. Bonray Drilling Corporation Trend Drilling Co. EX-23.1 10 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-4, to be filed on or about July 21, 1998, of our report dated February 19, 1998, on our audit of the financial statements and financial statement schedules of Bayard Drilling Technologies, Inc. We also consent to the reference to our firm under the caption "Experts". /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------------ PricewaterhouseCoopers LLP Oklahoma City, Oklahoma July 20, 1998 2 EX-23.2 11 CONSENT OF GRANT THORNTON LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS We have issued our report dated January 20, 1997, accompanying the financial statements of Bayard Drilling Technologies, Inc. contained in the Form S-4 Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts". /s/ GRANT THORNTON LLP ------------------------------------ Grant Thornton LLP Oklahoma City, Oklahoma July 20, 1998 3 EX-25.1 12 FORM T-1 STATEMENT OF ELIGIBILITY OF TRUSTEE 1 EXHIBIT 25.1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM T-1 STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)_________ --------------- U.S. TRUST COMPANY OF TEXAS, N.A. (Exact name of trustee as specified in its charter) 75-2353745 (State of incorporation (I.R.S. employer if not a national bank) identification No.) 2001 Ross Ave, Suite 2700 75201 Dallas, Texas (Zip Code) (Address of trustee's principal executive offices) Compliance Officer U.S. Trust Company of Texas, N.A. 2001 Ross Ave, Suite 2700 Dallas, Texas 75201 (214) 754-1200 (Name, address and telephone number of agent for service) --------------- Bayard Drilling Technologies, Inc. (Exact name of obligor as specified in its charter) Delaware 73-1508021 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 4005 Northwest Expressway, Suite 550E Oklahoma City, Oklahoma 73116 (Address of principal executive offices) (Zip Code) --------------- 11% Senior Notes Due 2005, Series B (Title of the indenture securities) - ------------------------------------------------------------------------------- 2 GENERAL 1. General Information. Furnish the following information as to the Trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Reserve Bank of Dallas (11th District), Dallas, Texas (Board of Governors of the Federal Reserve System) Federal Deposit Insurance Corporation, Dallas, Texas The Office of the Comptroller of the Currency, Dallas, Texas (b) Whether it is authorized to exercise corporate trust powers. The Trustee is authorized to exercise corporate trust powers. 2. Affiliations with Obligor and Underwriters. If the obligor or any underwriter for the obligor is an affiliate of the Trustee, describe each such affiliation. None. 3. Voting Securities of the Trustee. Furnish the following information as to each class of voting securities of the Trustee: As of May 6, 1998 - ------------------------------------------------------------------------------- Col A. Col B. - ------------------------------------------------------------------------------- Title of Class Amount Outstanding - ------------------------------------------------------------------------------- Capital Stock - par value $100 per share 5,000 shares 4. Trusteeships under Other Indentures. Not Applicable 5. Interlocking Directorates and Similar Relationships with the Obligor or Underwriters. Not Applicable 3 6. Voting Securities of the Trustee Owned by the Obligor or its Officials. Not Applicable 7. Voting Securities of the Trustee Owned by Underwriters or their Officials. Not Applicable 8. Securities of the Obligor Owned or Held by the Trustee. Not Applicable 9. Securities of Underwriters Owned or Held by the Trustee. Not Applicable 10. Ownership or Holdings by the Trustee of Voting Securities of Certain Affiliates or Security Holders of the Obligor. Not Applicable 11. Ownership or Holdings by the Trustee of any Securities of a Person Owning 50 Percent or More of the Voting Securities of the Obligor. Not Applicable 12. Indebtedness of the Obligor to the Trustee. Not Applicable 13. Defaults by the Obligor. Not Applicable 14. Affiliations with the Underwriters. Not Applicable 15. Foreign Trustee. Not Applicable 16. List of Exhibits. T-1.1 - A copy of the Articles of Association of U.S. Trust Company of Texas, N.A.; incorporated herein by reference to Exhibit T-1.1 filed with Form T-1 Statement, Registration No. 22-21897. 4 16. (con't.) T-1.2 - A copy of the certificate of authority of the Trustee to commence business; incorporated herein by reference to Exhibit T-1.2 filed with Form T-1 Statement, Registration No. 22-21897. T-1.3 - A copy of the authorization of the Trustee to exercise corporate trust powers; incorporated herein by reference to Exhibit T-1.3 filed with Form T-1 Statement, Registration No. 22-21897. T-1.4 - A copy of the By-laws of the U.S. Trust Company of Texas, N.A., as amended to date; incorporated herein by reference to Exhibit T-1.4 filed with Form T-1 Statement, Registration No. 22-21897. T-1.6 - The consent of the Trustee required by Section 321(b)of the Trust Indenture Act of 1939. T-1.7 - A copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority. NOTE As of May 6, 1998, the Trustee had 5,000 shares of Capital Stock outstanding, all of which are owned by U.S. T.L.P.O. Corp. As of May 6, 1998, U.S. T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of which are owned by U.S. Trust Corporation. U.S. Trust Corporation had outstanding 19,142,000.00 shares of $5 par value Common Stock as of February 24, 1998. The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation. In as much as this Form T-1 is filed prior to the ascertainment by the Trustee of all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10 and 11, the answers to said Items are based upon incomplete information. Items 2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by an amendment to this Form T-1. In answering any items in this Statement of Eligibility and Qualification which relates to matters peculiarly within the knowledge of the obligors or their directors or officers, or an underwriter for the obligors, the Trustee has relied upon information furnished to it by the obligors and will rely on information to be furnished by the obligors or such underwriter, and the Trustee disclaims responsibility for the accuracy or completeness of such information. --------------- 5 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, U.S Trust Company of Texas, N.A., a national banking association organized under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Dallas, and State of Texas on the 20th day of July, 1998. U.S. Trust Company of Texas, N.A., Trustee By: /s/ MELISSA SCOTT --------------------------- Melissa Scott Vice President 6 EXHIBIT T-1.6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939 as amended in connection with the proposed issue of Bayard Drilling Technologies, Inc. 11% Senior Notes Due 2005, Series B, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefore. U.S. Trust Company of Texas, N.A. By: /s/ MELISSA SCOTT --------------------------------- Melissa Scott Vice President EX-99.1 13 FORM OF LETTER OF TRANSMITTAL 1 EXHIBIT 99.1 LETTER OF TRANSMITTAL TO TENDER FOR EXCHANGE 11% SENIOR NOTES DUE 2005, SERIES A OF BAYARD DRILLING TECHNOLOGIES, INC. PURSUANT TO THE PROSPECTUS DATED JULY ____, 1998 THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P. M., NEW YORK CITY TIME, ON _____________________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). PLEASE READ CAREFULLY THE ATTACHED INSTRUCTIONS If you desire to accept the Exchange Offer, this Letter of Transmittal should be completed, signed, and submitted to the Exchange Agent:
By Registered or By Overnight Courier: By Hand: Certified Mail: U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A. 770 Broadway 111 Broadway P.O. Box 841 13th Floor-Corporate Trust Operations Lower Level Cooper Station New York, New York 10003-9598 New York, New York 10006-1906 New York, New York 10276-0841 Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. FOR ANY QUESTIONS REGARDING THIS LETTER OF TRANSMITTAL OR FOR ANY ADDITIONAL INFORMATION, YOU MAY CONTACT THE EXCHANGE AGENT BY TELEPHONE AT (800) 225-2398. The undersigned hereby acknowledges receipt of the Prospectus dated July ____, 1998 (the "Prospectus") of Bayard Drilling Technologies, Inc., a Delaware corporation (the "Issuer"), and this Letter of Transmittal (the "Letter of Transmittal"), that together constitute the Issuer's offer (the "Exchange offer") to exchange $1,000 in principal amount of its 11% Senior Notes due 2005, Series B (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement, for each $1,000 in principal amount of its outstanding 11% Senior Notes due 2005, Series A (the "Old Notes"), of which $100,000,000 aggregate principal amount is outstanding. Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus. The undersigned hereby tenders the Old Notes described in Box 1 below (the "Tendered Notes") pursuant to the terms and conditions described in the Prospectus and this Letter of Transmittal. The undersigned is the registered owner of all the Tendered Notes and the undersigned represents that it has received from each beneficial owner of the Tendered Notes ("Beneficial Owners") a duly completed and executed form of "Instructions to Registered Holder and/or Book-Entry Transfer Facility Participant from Beneficial Owner" accompanying this Letter of Transmittal, instructing the undersigned to take the action described in this Letter of Transmittal. 2 Subject to, and effective upon, the acceptance for exchange of the Tendered Notes, the undersigned hereby exchanges, assigns, and transfers to, or upon the order of, the Issuer, all right, title, and interest in, to, and under the Tendered Notes. Please issue the Exchange Notes exchanged for Tendered Notes in the name(s) of the undersigned. Similarly, unless otherwise indicated under "Special Delivery Instructions" below (Box 3), please send or cause to be sent the certificates for the Exchange Notes (and accompanying documents, as appropriate) to the undersigned at the address shown below in Box 1. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as the true and lawful agent and attorney in fact of the undersigned with respect to the Tendered Notes, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (i) deliver the Tendered Notes to the Issuer or cause ownership of the Tendered Notes to be transferred to, or upon the order of, the Issuer, on the books of the registrar for the Old Notes and deliver all accompanying evidences of transfer and authenticity to, or upon the order of, the Issuer upon receipt by the Exchange Agent, as the undersigned's agent, of the Exchange Notes to which the undersigned is entitled upon acceptance by the Issuer of the Tendered Notes pursuant to the Exchange Offer, and (ii) receive all benefits and otherwise exercise all rights of beneficial ownership of the Tendered Notes, all in accordance with the terms of the Exchange Offer. The undersigned understands that tenders of Old Notes pursuant to the procedures described under the caption "The Exchange Offer," in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Issuer upon the terms and subject to the conditions of the Exchange Offer, subject only to withdrawal of such tenders on the terms set forth in the Prospectus under the caption "The Exchange Offer-Withdrawal of Tenders." All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and any Beneficial Owner(s), and every obligation of the undersigned or any Beneficial Owners hereunder shall be binding upon the heirs, representatives, successors, and assigns of the undersigned and such Beneficial Owner(s). The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, exchange, assign, and transfer the Tendered Notes and that the Issuer will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges, encumbrances, and adverse claims when the Tendered Notes are acquired by the Issuer as contemplated herein. The undersigned and each Beneficial Owner will, upon request, execute and deliver any additional documents reasonably requested by the Issuer or the Exchange Agent as necessary or desirable to complete and give effect to the transactions contemplated hereby. The undersigned hereby represents and warrants that the information set forth in Box 2 is true and correct. By accepting the Exchange Offer, the undersigned hereby represents and warrants that (i) the Exchange Notes to be acquired by the undersigned and any Beneficial Owner(s) in connection with the Exchange Offer are being acquired by the undersigned and any Beneficial Owner(s) in the ordinary course of business of the undersigned and any Beneficial Owner(s), (ii) the undersigned and each Beneficial Owner are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the Exchange Notes, (iii) neither the undersigned nor any Beneficial Owner is an "affiliate," as defined in Rule 405 under the Securities Act, of the Issuer, and (iv) the undersigned and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer with the intention or for the purpose of distributing the Exchange Notes must comply with the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (together with the rules and regulations promulgated thereunder, the "Securities Act"), in connection with a secondary resale of the Exchange Notes acquired by such person and cannot rely on the position of the Staff of the Securities and Exchange Commission (the "Commission") set forth in the no-action letters that are discussed in the section of the Prospectus entitled "The Exchange Offer." In addition, by accepting the Exchange Offer, the undersigned hereby (i) represents and warrants that, if the undersigned or any Beneficial Owner of the Old Notes is a Participating Broker-Dealer, such Participating Broker-Dealer acquired the Old Notes for its own account as a result of market-making activities or other trading activities and has not entered into any arrangement or understanding with the Company or any affiliate of the Company (within the meaning of Rule 405 under the Securities Act) to distribute the Exchange Notes to be received in the 2 3 Exchange Offer, and (ii) acknowledges that, by receiving Exchange Notes for its own account in exchange for Old Notes, where such Old Notes were acquired as a result of market-making activities or other trading activities, such Participating Broker-Dealer will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes (provided that, by so acknowledging and by delivering a prospectus such Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act). Holders of Old Notes whose Old Notes are accepted for exchange will not receive accrued interest on such Old Notes for any period from and after the last date to which interest has been paid or duly provided for on such Old Notes prior to the original issue date of the Exchange Notes or, if no such interest has been paid or duly provided for, will not receive any accrued interest on such Old Notes, and the undersigned waives the right to receive any interest on such Old Notes accrued from and after the last date to which interest has been paid or duly provided for on such Old Notes or, if no such interest has been paid or duly provided for, from and after June 26, 1998. [__] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED HEREWITH. [__] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE "USE OF GUARANTEED DELIVERY" BELOW (BOX 4). [__] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE "USE OF BOOK-ENTRY TRANSFER" BELOW (BOX 5). PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING THE BOXES
======================================================================================================================== BOX 1 DESCRIPTION OF OLD NOTES TENDERED (Attach additional signed pages, if necessary) AGGREGATE PRINCIPAL AGGREGATE NAME(S) AND ADDRESS(ES) OF REGISTERED OLD CERTIFICATE AMOUNT PRINCIPAL NOTE HOLDER(S), EXACTLY AS NAME(S) APPEAR(S) NUMBER(S) OF REPRESENTED BY AMOUNT ON NOTE CERTIFICATE(S) OLD NOTES* CERTIFICATE(S) TENDERED** - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ TOTAL ========================================================================================================================
* Need not be completed by persons tendering by book-entry transfer. ** The minimum permitted tender is $1,000 in principal amount of Old Notes. All other tenders must be in integral multiples of $1,000 of principal amount. Unless otherwise indicated in this column, the principal amount of all Old Note Certificates identified in this Box 1 or delivered to the Exchange Agent herewith shall be deemed tendered. See Instruction 4. 3 4
======================================================================================================================== BOX 2 BENEFICIAL OWNER(S) STATE OF PRINCIPAL RESIDENCE OF EACH PRINCIPAL AMOUNT OF TENDERED NOTES BENEFICIAL OWNER OF TENDERED NOTES HELD FOR ACCOUNT OF BENEFICIAL OWNER - ----------------------------------------------------- ------------------------------------------------------------- - ----------------------------------------------------- ------------------------------------------------------------- - ----------------------------------------------------- ------------------------------------------------------------- - ----------------------------------------------------- ------------------------------------------------------------- - ----------------------------------------------------- ------------------------------------------------------------- - ----------------------------------------------------- ------------------------------------------------------------- ========================================================================================================================
======================================================================================================================== BOX 3 - ------------------------------------------------------------------------------------------------------------------------ SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 5, 6 AND 7) - ------------------------------------------------------------------------------------------------------------------------ TO BE COMPLETED ONLY IF EXCHANGE NOTES EXCHANGED FOR OLD NOTES AND UNTENDERED NOTES ARE TO BE SENT TO SOMEONE OTHER THAN THE UNDERSIGNED, OR TO THE UNDERSIGNED AT AN ADDRESS OTHER THAN THAT SHOWN ABOVE. Mail Exchange Note(s) and any untendered Old Notes to: Name(s): ----------------------------------------------------------------------------------------------------------------------- (please print) Address: ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- (include Zip Code) Tax Identification or Social Security No.: ========================================================================================================================
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======================================================================================================================== BOX 4 - ------------------------------------------------------------------------------------------------------------------------ USE OF GUARANTEED DELIVERY (SEE INSTRUCTION 2) TO BE COMPLETED ONLY IF OLD NOTES ARE BEING TENDERED BY MEANS OF A NOTICE OF GUARANTEED DELIVERY. Name(s) of Registered Holder(s): ----------------------------------------------------------------------------------------------------------------------- Date Of Execution of Notice of Guaranteed Delivery: ------------------------------------------------------------------- Name of Institution which Guaranteed Delivery: ------------------------------------------------------------------------ ========================================================================================================================
======================================================================================================================== BOX 5 USE OF BOOK-ENTRY TRANSFER (SEE INSTRUCTION 1) TO BE COMPLETED ONLY IF DELIVERY OF TENDERED NOTES IS TO BE MADE BY BOOK-ENTRY TRANSFER. Name of Tendering Institution: ----------------------------------------------------------------------------------------- Account Number: ------------------------------------------------------------------------------------------------------- Transaction Code Number: ----------------------------------------------------------------------------------------------- ========================================================================================================================
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======================================================================================================================== BOX 6 TENDERING HOLDER SIGNATURE (SEE INSTRUCTIONS 1 AND 5) IN ADDITION, COMPLETE SUBSTITUTE FORM W-9 X Signature Guarantee ------------------------------------------------ X (If required by Instruction 5) ------------------------------------------------ (Signature of Registered Authorized Signature Holder(s) or Authorized Signatory) X --------------------------------------------------- Note: The above lines must be signed by the registered holder(s) of Old Notes as their name(s) Name: appear(s) on the Old Notes or by persons(s) ----------------------------------------------- authorized to become registered holder(s) (evidence (please print) of which authorization must be transmitted with this Letter of Transmittal). If signature is by a Title: trustee, executor, administrator, guardian, ---------------------------------------------- attorney-in-fact, officer, or other person acting in a fiduciary or representative capacity, such person Name of Firm: must set forth his or her full title below. See --------------------------------------- Instruction 5. (Must be an Eligible Institution as defined in Instruction 2) Address: -------------------------------------------- Name(s): -------------------------------------------- ---------------------------------------------- ---------------------------------------------- Capacity: (include Zip Code) --------------------------------------------- Street Address: Area Code and Telephone Number: --------------------------------------- ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- (include Zip Code) Dated: ---------------------------------------------- Area Code and Telephone Number: ---------------------------------- Tax Identification or Social Security Number: ---------------------------------- ========================================================================================================================
======================================================================================================================== BOX 7 BROKER-DEALER STATUS - ------------------------------------------------------------------------------------------------------------------------ [__] Check this box if the Beneficial Owner of the Old Notes is a Participating Broker-Dealer and such Participating Broker-Dealer acquired the Old Notes for its own account as a result of market-making activities or other trading activities. In such case, you will be sent extra copies of the Prospectus. ========================================================================================================================
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PAYOR'S NAME: BAYARD DRILLING TECHNOLOGIES, INC. - ------------------------------------------------------------------------------------------------------------------------- Name (if joint names, list first and circle the name of the person or entity whose number you enter in Part 1 below. See instructions if your name has changed.) --------------------------------------------------------------------------------------------------------- Address --------------------------------------------------------------------------------------------------------- City, State and ZIP Code SUBSTITUTE --------------------------------------------------------------------------------------------------------- FORM W-9 Department List account number(s) here (optional) of the Treasury --------------------------------------------------------------------------------------------------------- Internal Revenue Service PART 1--PLEASE PROVIDE YOUR TAXPAYER Social IDENTIFICATION NUMBER ("TIN") IN THE BOX Security AT RIGHT AND CERTIFY BY SIGNING AND Number or DATING BELOW TIN --------------------------------------------------------------------------------------------------------- PART 2--Check the box if you are NOT subject to backup withholding under the provisions of section 3406(a)(1)(C) of the Internal Revenue Code because (1) you have not been notified that you are subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to backup withholding. [__] - ------------------------------------------------------------------------------------------------------------------------- CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION PART 3-- PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE. Awaiting SIGNATURE DATE TIN [ ] ------------------------ ---------------------- -- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
7 8 INSTRUCTIONS TO LETTER OF TRANSMITTAL FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES. A properly completed and duly executed copy of this Letter of Transmittal, including Substitute Form W-9, and any other documents required by this Letter of Transmittal must be received by the Exchange Agent at its address set forth herein, and either certificates for Tendered Notes must be received by the Exchange Agent at its address set forth herein or such Tendered Notes must be transferred pursuant to the procedures for book-entry transfer described in the Prospectus under the caption "Exchange Offer-Procedures for Tendering" (and a confirmation of such transfer received by the Exchange Agent), in each case prior to 5:00 p.m., New York time, on the Expiration Date. The method of delivery of certificates for Tendered Notes, this Letter of Transmittal and all other required documents to the Exchange Agent is at the election and risk of the tendering holder and the delivery will be deemed made only when actually received by the Exchange Agent. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. Instead of delivery by mail, it is recommended that the Holder use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. No Letter of Transmittal or Old Notes should be sent to the Company. Neither the Issuer nor the registrar is under any obligation to notify any tendering holder of the Issuer's acceptance of Tendered Notes prior to the closing of the Exchange Offer. 2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Old Notes but whose Old Notes are not immediately available, and who cannot deliver their Old Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent prior to the Expiration Date must tender their Old Notes according to the guaranteed delivery procedures set forth below, including completion of Box 4. Pursuant to such procedures: (i) such tender must be made by or through a firm which is a member of a recognized Medallion Program approved by the Securities Transfer Association Inc. (an "Eligible Institution") and the Notice of Guaranteed Delivery must be signed by the holder; (ii) prior to the Expiration Date, the Exchange Agent must have received from the holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by mail or hand delivery) setting forth the name and address of the holder, the certificate number(s) of the Tendered Notes and the principal amount of Tendered Notes, stating that the tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, this Letter of Transmittal together with the certificates representing the Old Notes and any other required documents will be deposited by the Eligible Institution with the Exchange Agent; and (iii) such properly completed and executed Letter of Transmittal, as well as all other documents required by this Letter of Transmittal and the certificate(s) representing all Tendered Notes in proper form for transfer, must be received by the Exchange Agent within five New York Stock Exchange trading days after the Expiration Date. Any holder who wishes to tender Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery relating to such Old Notes prior to 5:00 p.m., New York time, on the Expiration Date. Failure to complete the guaranteed delivery procedures outlined above will not, of itself, affect the validity or effect a revocation of any Letter of Transmittal form properly completed and executed by an Eligible Holder who attempted to use the guaranteed delivery process. 3. BENEFICIAL OWNER INSTRUCTIONS TO REGISTERED HOLDERS. Only a holder in whose name Tendered Notes are registered on the books of the registrar (or the legal representative or attorney-in-fact of such registered holder) may execute and deliver this Letter of Transmittal. Any Beneficial Owner of Tendered Notes who is not the registered holder must arrange promptly with the registered holder to execute and deliver this Letter of Transmittal on his or her behalf through the execution and delivery to the registered holder of the Instructions to Registered Holder and/or Book-Entry Transfer Facility Participant from Beneficial Owner form accompanying this Letter of Transmittal. 4. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in integral multiples of $1,000 in principal amount. If less than the entire principal amount of Old Notes held by the holder is tendered, the tendering holder should fill in the principal amount tendered in the column labeled "Aggregate Principal Amount Tendered" of the box entitled "Description of Old Notes Tendered" (Box 1) above. The entire principal amount of Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of all Old Notes held by the holder is not tendered, then Old Notes for the principal amount of Old Notes not 8 9 tendered and Exchange Notes issued in exchange for any Old Notes tendered and accepted will be sent to the Holder at his or her registered address, unless a different address is provided in the appropriate box on this Letter of Transmittal, as soon as practicable following the Expiration Date. 5. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the registered holder(s) of the Tendered Notes, the signature must correspond with the name(s) as written on the face of the Tendered Notes without alteration, enlargement or any change whatsoever. If any of the Tendered Notes are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any Tendered Notes are held in different names, it will be necessary to complete, sign and submit as many separate copies of the Letter of Transmittal as there are different names in which Tendered Notes are held. If this Letter of Transmittal is signed by the registered holder(s) of Tendered Notes, and Exchange Notes issued in exchange therefor are to be issued (and any untendered principal amount of Old Notes is to be reissued) in the name of the registered holder(s), then such registered holder(s) need not and should not endorse any Tendered Notes, nor provide a separate bond power. In any other case, such registered holder(s) must either properly endorse the Tendered Notes or transmit a properly completed separate bond power with this Letter of Transmittal, with the signature(s) on the endorsement or bond power guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of any Tendered Notes, such Tendered Notes must be endorsed or accompanied by appropriate bond powers, in each case, signed as the name(s) of the registered holder(s) appear(s) on the Tendered Notes, with the signature(s) on the endorsement or bond power guaranteed by an Eligible Institution. If this Letter of Transmittal or any Tendered Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations, or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and, unless waived by the Issuer, evidence satisfactory to the Issuer of their authority to so act must be submitted with this Letter of Transmittal. Endorsements on Tendered Notes or signatures on bond powers required by this Instruction 5 must be guaranteed by an Eligible Institution. Signatures on this Letter of Transmittal must be guaranteed by an Eligible Institution unless the Tendered Notes are tendered (i) by a registered holder who has not completed the box set forth herein entitled "Special Delivery Instructions" (Box 3) or (ii) by an Eligible Institution. 6. SPECIAL DELIVERY INSTRUCTIONS. Tendering holders should indicate, in the applicable box (Box 3), the name and address to which the Exchange Notes and/or substitute Old Notes for principal amounts not tendered or not accepted for exchange are to be sent, if different from the name and address of the person signing this Letter of Transmittal. In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. 7. TRANSFER TAXES. The Issuer will pay all transfer taxes, if any, applicable to the exchange of Tendered Notes pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any reason other than the transfer and exchange of Tendered Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or on any other person) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with this Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. Except as provided in this Instruction 7, it will not be necessary for transfer tax stamps to be affixed to the Tendered Notes listed in this Letter of Transmittal. 9 10 8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that the holder(s) of any Tendered Notes which are accepted for exchange must provide the Issuer (as payor) with its correct taxpayer identification number ("TIN"), which, in the case of a holder who is an individual, is his or her social security number. If the Issuer is not provided with the correct TIN, the Holder may be subject to backup withholding and a $50 penalty imposed by the Internal Revenue Service. (If withholding results in an over-payment of taxes, a refund may be obtained.) Certain holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. To prevent backup withholding, each holder of Tendered Notes must provide such holder's correct TIN by completing the Substitute Form W-9 set forth herein, certifying that the TIN provided is correct (or that such holder is awaiting a TIN), and that (i) the holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of failure to report all interest or dividends or (ii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the Tendered Notes are registered in more than one name or are not in the name of the actual owner, consult the "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for information on which TIN to report. The Issuer reserves the right in its sole discretion to take whatever steps are necessary to comply with the Issuer's obligation regarding backup withholding. 9. VALIDITY OF TENDERS. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of Tendered Notes will be determined by the Issuer in its sole discretion, which determination will be final and binding. The Issuer reserves the right to reject any and all Old Notes not validly tendered or any Old Notes the Issuer's acceptance of which would, in the opinion of the Issuer or their counsel, be unlawful. The Issuer also reserves the right to waive any conditions of the Exchange Offer or defects or irregularities in tenders of Old Notes as to any ineligibility of any holder who seeks to tender Old Notes in the Exchange Offer. The interpretation of the terms and conditions of the Exchange Offer (including this Letter of Transmittal and the instructions hereto) by the Issuer shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Issuer shall determine. Neither the Issuer, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. 10. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend, waive or modify any of the conditions in the Exchange Offer in the case of any Tendered Notes. 11. NO CONDITIONAL TENDER. No alternative, conditional, irregular, or contingent tender of Old Notes or transmittal of this Letter of Transmittal will be accepted. 12. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any tendering Holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated herein for further instructions. 13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance and requests for additional copies of the Prospectus or this Letter of Transmittal may be directed to the Exchange Agent at the address indicated herein. Holders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Exchange Offer. 14. ACCEPTANCE OF TENDERED NOTES AND ISSUANCE OF EXCHANGE NOTES; RETURN OF OLD NOTES. Subject to the terms and conditions of the Exchange Offer, the Issuer will accept for exchange all validly tendered Old Notes as soon as practicable after the Expiration Date and will issue Exchange Notes therefor as soon as practicable thereafter. For purposes of the Exchange Offer, the Issuer shall be deemed to have accepted tendered Old 10 11 Notes when, as and if the Issuer has given written or oral notice (immediately followed in writing) thereof to the Exchange Agent. If any Tendered Notes are not exchanged pursuant to the Exchange Offer for any reason, such unexchanged Old Notes will be returned, without expense, to the undersigned at the address shown in Box 1 or at a different address as may be indicated herein under "Special Delivery Instructions" (Box 3). 15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the procedures set forth in the Prospectus under the caption "The Exchange Offer." 11 EX-99.2 14 FORM OF NOTICE OF GUARANTEED DELIVERY 1 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY WITH RESPECT TO 11% SENIOR NOTES DUE 2005, SERIES A OF BAYARD DRILLING TECHNOLOGIES, INC. PURSUANT TO THE PROSPECTUS DATED JULY ____, 1998 This form must be used by a holder of 11% Senior Notes due 2005, Series A (the "Old Notes") of Bayard Drilling Technologies, Inc., a Delaware corporation (the "Company"), who wishes to tender Old Notes to the Exchange Agent pursuant to the guaranteed delivery procedures described in "The Exchange Offer - Guaranteed Delivery Procedures" of the Company's Prospectus, dated July ____, 1998 (the "Prospectus") and in Instruction 2 to the related Letter of Transmittal. Any holder who wishes to tender Old Notes pursuant to such guaranteed delivery procedures must ensure that the Exchange Agent receives this Notice of Guaranteed Delivery prior to the Expiration Date of the Exchange Offer. Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus or the Letter of Transmittal. THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON _____________________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). U.S. TRUST COMPANY OF TEXAS, N.A. (the "Exchange Agent")
By Registered or By Overnight Courier: By Hand: Certified Mail: U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A. 770 Broadway 111 Broadway P.O. Box 841 13th Floor-Corporate Trust Operations Lower Level Cooper Station New York, New York 10003-9598 New York, New York 10006-1906 New York, New York 10276-0841 Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. 2 This form is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tenders to the Company, upon the terms and subject to the conditions set forth in the Prospectus and the related Letter of Transmittal, receipt of which is hereby acknowledged, the principal amount of Old Notes set forth below pursuant to the guaranteed delivery procedures set forth in the Prospectus and in Instruction 2 of the Letter of Transmittal. The undersigned hereby tenders the Old Notes listed below:
CERTIFICATE NUMBER(S) (IF KNOWN) OF OLD NOTES OR ACCOUNT NUMBER AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL AT THE BOOK-ENTRY FACILITY AMOUNT REPRESENTED AMOUNT TENDERED - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE - ------------------------------------------------------------------------------- Signature of Registered Holder(s) or Authorized Signatory: Date: , 1998 - ---------------------------------- ----------------- Address: - ---------------------------------- ------------------------------- Names(s) of Registered Holder(s): ------------------------------- Area Code and Telephone No. - ---------------------------------- --------------------- - ---------------------------------- This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly as their name(s) appear on certificates for Old Notes or on a security position listing as the owner of Old Notes, or by person(s) authorized to become Holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information. Please print name(s) and address(es) Name(s): ----------------------------------------------------------------------- - ------------------------------------------------------------------------------- Capacity: --------------------------------------------------------------------- Address(es): ------------------------------------------------------------------ - ------------------------------------------------------------------------------- 2 3 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or is a commercial bank or trust company having an office or correspondent in the United States, or is otherwise an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, guarantees deposit with the Exchange Agent of the Letter of Transmittal (or facsimile thereof), together with the Old Notes tendered hereby in proper form for transfer (or confirmation of the book-entry transfer of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility described in the prospectus under the caption "The Exchange Offer - Guaranteed Delivery Procedures" and in the Letter of Transmittal) and any other required documents, all by 5:00 p.m., New York time, on the fifth New York Stock Exchange trading day following the Expiration Date. Name of Firm -------------------------- --------------------------------- (Authorized Signature) Address: ------------------------------- Name ------------------------------- ----------------------------- (Include Zip Code) (Please Print) Area Code and Tel. No. Title ---------------- --------------------------- Dated ,1998 ----------------- DO NOT SEND SECURITIES WITH THIS FORM. ACTUAL SURRENDER OF SECURITIES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL. 3 4 INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY 1. Delivery of this Notice of Guaranteed Delivery. A properly completed and duly executed copy of this Notice of Guaranteed Delivery and any other documents required by this Notice of Guaranteed Delivery must be received by the Exchange Agent at its address set forth herein prior to the Expiration Date. The method of delivery of this Notice of Guaranteed Delivery and any other required documents to the Exchange Agent is at the election and sole risk of the holder, and the delivery will be deemed made only when actually received by the Exchange Agent. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. As an alternative to delivery by mail, the holders may wish to consider using an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. For a description of the guaranteed delivery procedures, see Instruction 2 of the Letter of Transmittal. 2. Signatures on this Notice of Guaranteed Delivery. If this Notice of Guaranteed Delivery is signed by the registered holder(s) of the Old Notes referred to herein, the signature must correspond with the name(s) written on the face of the Old Notes without alteration, enlargement, or any change whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of the Book-Entry Transfer Facility whose name appears on a security position listing as the owner of the Old Notes, the signature must correspond with the name shown on the security position listing as the owner of the Old Notes. If this Notice of Guaranteed Delivery is signed by a person other than the registered holder(s) of any Old Notes listed or a participant of the Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by appropriate bond powers, signed as the name of the registered holder(s) appears on the Old Notes or signed as the name of the participant shown on the Book-Entry Transfer Facility's security position listing. If this Notice of Guaranteed Delivery is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and submit with the Letter of Transmittal evidence satisfactory to the Company of such person's authority to so act. 3. Requests for Assistance or Additional Copies. Questions and requests for assistance and requests for additional copies of the Prospectus may be directed to the Exchange Agent at the address specified in the Prospectus. Holders may also contact their broker, dealer, commercial bank, trust company, or other nominee for assistance concerning the Exchange Offer. 4 EX-99.3 15 FORM OF TENDER INSTRUCTIONS 1 EXHIBIT 99.3 INSTRUCTIONS TO REGISTERED HOLDER AND/OR BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER OF BAYARD DRILLING TECHNOLOGIES, INC. 11% SENIOR NOTES DUE 2005, SERIES A To Registered Holder and/or Participant of the Book-Entry Transfer Facility: The undersigned hereby acknowledges receipt of the Prospectus, dated July ____, 1998 (the "Prospectus") of Bayard Drilling Technologies, Inc., a Delaware corporation (the "Company"), and the accompanying Letter of Transmittal (the "Letter of Transmittal"), that together constitute the Company's offer (the "Exchange Offer"). Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus. This will instruct you, the registered holder and/or book-entry transfer facility participant, as to action to be taken by you relating to the Exchange Offer with respect to the 11% Senior Notes due 2005, Series A (the "Old Notes") held by you for the account of the undersigned. The aggregate face amount of the Old Notes held by you for the account of the undersigned is (FILL IN AMOUNT) : $ ___________________ of the 11% Series A Senior Notes due 2005 With respect to the Exchange Offer, the undersigned hereby instructs you (CHECK APPROPRIATE BOX): [ ] TO TENDER the following Old Notes held by you for the account of the undersigned (INSERT PRINCIPAL AMOUNT OF NOTES TO BE TENDERED, IF ANY): $ [ ] NOT TO TENDER any Old Notes held by you for the account of the undersigned. If the undersigned instructs you to tender the Old Notes held by you for the account of the undersigned, it is understood that you are authorized (a) to make, on behalf of the undersigned (and the undersigned, by its signature below, hereby makes to you), the representation and warranties contained in the Letter of Transmittal that are to be made with respect to the undersigned as a beneficial owner, including but not limited to the representations that (i) the undersigned is acquiring the Exchange Notes in the ordinary course of business of the undersigned, (ii) the undersigned is not participating, does not participate, and has no arrangement or understanding with any person to participate in the distribution of the Exchange Notes, (iii) the undersigned acknowledges that any person participating in the Exchange Offer for the purpose of distributing the Exchange Notes must comply with the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Act"), in connection with a secondary resale transaction of the Exchange Notes acquired by such person and cannot rely on the position of the Staff of the Securities and Exchange Commission set forth in no-action letters that are discussed in the section of the Prospectus entitled "The Exchange Offer - Resale of the Exchange Notes," and (iv) the undersigned is not an "affiliate," as defined in Rule 405 under the Act, of the Company; (b) to agree, on behalf of the undersigned, as set forth in the Letter of Transmittal; and (c) to take such other action as necessary under the Prospectus or the Letter of Transmittal to effect the valid tender of such Old Notes. 2 SIGN HERE Name of Beneficial Owner(s): --------------------------------------------------- Signature(s): ----------------------------------------------------------------- Names (please print): --------------------------------------------------------- Address: ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- Telephone Number: -------------------------------------------------------------- Taxpayer Identification or Social Security Number: ----------------------------- Date: ------------------------------------------------------------------------- 2 -----END PRIVACY-ENHANCED MESSAGE-----