-----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, I7T/YERHqRkdS3rXMjGfbbz+TPCvHaMnFPTnLTNPVr4+Nj1tKPlfOukjuo8wnL9C pqJ5M7zxiHgAKVagad4R9w== 0000950129-05-002050.txt : 20050307 0000950129-05-002050.hdr.sgml : 20050307 20050307164920 ACCESSION NUMBER: 0000950129-05-002050 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050307 DATE AS OF CHANGE: 20050307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NABORS INDUSTRIES LTD CENTRAL INDEX KEY: 0001163739 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 980363970 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-49887 FILM NUMBER: 05664497 BUSINESS ADDRESS: STREET 1: 2ND FLOOR INT'L TRADING CENTER STREET 2: WARRENS, P.O. BOX 905E CITY: ST. MICHAEL BARBADOS STATE: D0 ZIP: 0000 BUSINESS PHONE: 2464219471 MAIL ADDRESS: STREET 1: 2ND FLOOR INT'L TRADING CENTER STREET 2: WARRENS, P.O. BOX 905E CITY: ST. MICHAEL BARBADOS STATE: D0 ZIP: 0000 10-K 1 h22801e10vk.txt NABORS INDUSTRIES LTD.- DECEMBER 31, 2004 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 COMMISSION FILE NUMBER: 000-49887 ---------- NABORS INDUSTRIES LTD. INCORPORATED IN BERMUDA 2ND FLOOR, INTERNATIONAL TRADING CENTRE WARRENS P.O. BOX 905E ST. MICHAEL, BARBADOS (246) 421-9471 98-0363970 (I.R.S. Employer Identification No.) ---------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT OF 1934:
NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED ------------------- ---------------------------- Common Shares, $.001 par value per share The American Stock Exchange, LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES [X] NO [ ] The aggregate market value of the 112,391,895 common shares held by non-affiliates of the registrant, based upon the closing price of our common shares as of the last business day of our most recently completed second fiscal quarter, June 30, 2004, of $45.22 per share as reported on the American Stock Exchange, was $5,082,361,492. Common Shares held by each officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of common shares, par value $.001 per share, outstanding as of February 28, 2005 was 150,423,275. In addition, our subsidiary, Nabors Exchangeco (Canada) Inc., had 216,149 exchangeable shares outstanding as of February 28, 2005 that are exchangeable for Nabors common shares on a one-for-one basis, and have essentially identical rights as Nabors Industries Ltd. common shares, including but not limited to voting rights and the right to receive dividends, if any. DOCUMENTS INCORPORATED BY REFERENCE (TO THE EXTENT INDICATED HEREIN) Specified portions of the 2005 Notice of Annual Meeting of Shareholders and Proxy Statement (Part III) ================================================================================ NABORS INDUSTRIES LTD. FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 TABLE OF CONTENTS PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Repurchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules
Our internet address is www.nabors.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. A glossary of drilling terms used in this document can be found on our website. The SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. FORWARD-LOOKING STATEMENTS We often discuss expectations regarding our future markets, demand for our products and services, and our performance in our annual and quarterly reports, press releases, and other written and oral statements. Statements that relate to matters that are not historical facts are "forward-looking statements" within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These "forward-looking statements" are based on an analysis of currently available competitive, financial and economic data and our operating plans. They are inherently uncertain and investors should recognize that events and actual results could turn out to be significantly different from our expectations. By way of illustration, when used in this document, words such as "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "will," "should," "could," "may," "predict" and similar expressions are intended to identify forward-looking statements. You should consider the following key factors when evaluating these forward-looking statements: - fluctuations in worldwide prices of and demand for natural gas and oil; - fluctuations in levels of natural gas and oil exploration and development activities; -1- - fluctuations in the demand for our services; - the existence of competitors, technological changes and developments in the oilfield services industry; - the existence of operating risks inherent in the oilfield services industry; - the existence of regulatory and legislative uncertainties; - the possibility of changes in tax laws; - the possibility of political instability, war or acts of terrorism in any of the countries in which we do business; and - general economic conditions. Our businesses depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Therefore, a sustained increase or decrease in the price of natural gas or oil, which could have a material impact on exploration, development and production activities, could also materially affect our financial position, results of operations and cash flows. The above description of risks and uncertainties is by no means all-inclusive, but is designed to highlight what we believe are important factors to consider. For a more detailed description of risk factors, please see "Part I - Item 1 - BUSINESS - RISK FACTORS". Unless the context requires otherwise, references in this Annual Report on Form 10-K to "we," "us," "our," or "Nabors" means Nabors Industries Ltd. and, where the context requires, includes our subsidiaries. PART I ITEM 1. BUSINESS INTRODUCTION. Nabors is the largest land drilling contractor in the world, with almost 600 land drilling rigs. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South and Central America, the Middle East, the Far East and Africa. We are also one of the largest land well-servicing and workover contractors in the United States and Canada. We own approximately 700 land workover and well-servicing rigs in the United States, primarily in the southwestern and western United States, and approximately 215 land workover and well-servicing rigs in Canada. Nabors is a leading provider of offshore platform workover and drilling rigs, and owns 43 platform, 19 jack-up units and three barge rigs in the United States and multiple international markets. These rigs provide well-servicing, workover and drilling services. We have a 50% ownership interest in a joint venture in Saudi Arabia, which owns 17 rigs. We also offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in selected domestic and international markets. We time charter a fleet of 33 marine transportation and supply vessels, which provide transportation of drilling materials, supplies and crews for offshore operations. We manufacture and lease or sell top drives for a broad range of drilling applications, directional drilling systems, rig instrumentation and data collection equipment, and rig reporting software. We have also made selective investments in oil and gas exploration, development and production activities. Nabors was formed as a Bermuda-exempt company on December 11, 2001. Through predecessors and acquired entities, Nabors has been continuously operating in the drilling sector since the early 1900s. Our principal executive offices are located at 2nd Fl. International Trading Centre, Warrens, St. Michael, Barbados. Our phone number at our principal executive offices is (246) 421-9471. OUR FLEET OF RIGS. - - Land Rigs. A land-based drilling rig generally consists of engines, a drawworks, a mast (or derrick), pumps to circulate the drilling fluid (mud) under various pressures, blowout preventers, drill string and related equipment. The engines power the different pieces of equipment, including a rotary table or top drive that turns the drill string, causing the drill bit to bore through the subsurface rock layers. Rock cuttings are carried to the surface by the circulating drilling fluid. The intended well depth, bore hole diameter and drilling site conditions are the principal factors that determine the size and type of rig most suitable for a particular drilling job. A land-based workover or well-servicing rig consists of a mobile carrier, engine, drawworks and a mast. The primary function of a workover or well-servicing rig is to act as a hoist so that pipe, sucker rods and down-hole equipment can be run into and out of a well. Land-based drilling, workover and well-servicing rigs can be moved between well sites and between geographic areas of operations by using -2- our fleet of cranes, loaders and transport vehicles. Because of size and cost considerations, well servicing and workover rigs are used for these operations rather than the larger drilling rigs. - - Platform Rigs. Platform rigs provide offshore workover, drilling and re-entry services. Our platform rigs have drilling and/or well-servicing or workover equipment and machinery arranged in modular packages that are transported to, and assembled and installed on, fixed offshore platforms owned by the customer. Fixed offshore platforms are steel tower-like structures that either stand on the ocean floor or are moored floating structures. The top portion, or platform, sits above the water level and provides the foundation upon which the platform rig is placed. We also own several land rigs modified for offshore work for drilling on mudslide and selected conventional offshore platforms. These rigs generally are self-elevating and modular. - - Jack-up Rigs. Jack-up rigs are mobile, self-elevating drilling and workover platforms equipped with legs that can be lowered to the ocean floor until a foundation is established to support the hull, which contains the drilling and/or workover equipment, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, helicopter landing deck and other related equipment. The rig legs may operate independently or have a mat attached to the lower portion of the legs in order to provide a more stable foundation in soft bottom areas. Many of our jack-up rigs are of cantilever design -- a feature that permits the drilling platform to be extended out from the hull, allowing it to perform drilling or workover operations over adjacent, fixed platforms. Nabors' shallow workover jack-up rigs generally are subject to a maximum water depth of approximately 125 feet, while some of our jack-up rigs may drill in water depths as shallow as 13 feet. Nabors also has deeper water depth capacity jack-up rigs that are capable of drilling at depths between 8 feet and 150 to 250 feet. The water depth limit of a particular rig is determined by the length of the rig's legs and the operating environment. Moving a rig from one drill site to another involves lowering the hull down into the water until it is afloat and then jacking up its legs with the hull floating. The rig is then towed to the new drilling site. - - Inland Barge Rigs. One of Nabors' barge rigs is a full-size drilling unit. Nabors also owns two workover inland barge rigs. These barges are designed to perform plugging and abandonment, well service or workover services in shallow inland, coastal or offshore waters. Our barge rigs can operate at depths between three and twenty feet. Additional information regarding the geographic markets in which we operate and our business segments can be found in Note 17 of the Notes to Consolidated Financial Statements included in Part II Item 8 below. CUSTOMERS; TYPES OF DRILLING CONTRACTS. Our customers include major oil and gas companies, foreign national oil and gas companies and independent oil and gas companies. No customer accounted for greater than 10% of consolidated revenues in 2004 or in 2003. On land in the U.S. Lower 48 states and Canada, we typically contract on a single-well basis, with extensions subject to mutual agreement on pricing and other significant terms. Contracts relating to offshore drilling and land drilling in Alaska and international markets generally provide for longer terms, usually from one to five years. Offshore workover projects are often on a single-well basis. We generally are awarded drilling contracts through competitive bidding, although we occasionally enter into contracts by direct negotiation. Most of our single-well contracts are subject to termination by the customer on short notice, but some can be firm for a number of wells or a period of time, and may provide for early termination compensation in certain circumstances. The contract terms and rates may differ depending on a variety of factors, including competitive conditions, the geographical area, the geological formation to be drilled, the equipment and services to be supplied, the on-site drilling conditions and the anticipated duration of the work to be performed. In recent years, all of our drilling contracts have been daywork contracts. A daywork contract generally provides for a basic rate per day when drilling (the dayrate for us providing a rig and crew) and for lower rates when the rig is moving, or when drilling operations are interrupted or restricted by equipment breakdowns, adverse weather conditions or other conditions beyond our control. In addition, daywork contracts may provide for a lump sum fee for the mobilization and demobilization of the rig, which in most cases approximates our incurred costs. A daywork contract differs from a footage contract (in which the drilling contractor is paid on the basis of a rate per foot drilled) and a turnkey contract (in which the drilling contractor is paid for drilling a well to a specified depth for a fixed price). -3- WELL SERVICING AND WORKOVER SERVICES. Although some wells in the United States flow oil to the surface without mechanical assistance, most are in mature production areas that require pumping or some other form of artificial lift. Pumping oil wells characteristically require more maintenance than flowing wells because of the operation of the mechanical pumping equipment installed. - - Well-Servicing/Maintenance Services. We provide maintenance services on the mechanical apparatus used to pump or lift oil from producing wells. These services include, among other things, repairing and replacing pumps, sucker rods and tubing. We provide the rigs, equipment and crews for these tasks, which are performed on both oil and natural gas wells, but which are more commonly required on oil wells. Maintenance services typically take less than 48 hours to complete. Well-servicing rigs generally are provided to customers on a call-out basis. We are paid an hourly rate and work typically is performed five days a week during daylight hours. - - Workover Services. Producing oil and natural gas wells occasionally require major repairs or modifications, called "workovers." Workovers normally are carried out with a well-servicing rig that includes additional specialized accessory equipment, which may include rotary drilling equipment, mud pumps, mud tanks and blowout preventers. A workover may last anywhere from a few days to several weeks. - - Completion Services. The kinds of activities necessary to carry out a workover operation are essentially the same as those that are required to "complete" a well when it is first drilled. The completion process may involve selectively perforating the well casing at the depth of discrete producing zones, stimulating and testing these zones and installing down-hole equipment. The completion process may take a few days to several weeks. - - Production and Other Specialized Services. We also can provide other specialized services, including onsite temporary fluid-storage facilities, the provision, removal and disposal of specialized fluids used during certain completion and workover operations, and the removal and disposal of salt water that often is produced in conjunction with the production of oil and natural gas. We also provide plugging services for wells from which the oil and natural gas has been depleted or further production has become uneconomical. OIL AND GAS INVESTMENTS. Through our Ramshorn investments subsidiary, Nabors makes selective investments in oil and gas exploration, development and production operations. Additional information about recent activities for this segment can be found in Part II Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Oil and Gas. OTHER SERVICES. Our Canrig drilling technologies subsidiary manufactures top drives, which are installed on both onshore and offshore drilling rigs. Our top drives are marketed throughout the world. During the last three years, approximately 45% of our top drive sales were made to other Nabors companies. We also rent top drives and provide top drive installation, repair and maintenance services to our customers. Our EPOCH well services subsidiary offers rig instrumentation equipment, including sensors, proprietary RIGWATCH(TM) software and computerized equipment that monitors the real-time performance of a rig. In addition, EPOCH specializes in daily reporting software for drilling operations, making this data available through the internet via mywells.com. EPOCH also provides mudlogging services. Our Ryan Energy Technologies subsidiary manufactures and sells directional drilling and rig instrumentation and data collection services to oil and gas exploration and service companies. Nabors has a 50% interest in Peak Oilfield Services Company, a general partnership with a subsidiary of Cook Inlet Region, Inc., a leading Alaskan native corporation. Peak Oilfield Services provides heavy equipment to move drilling rigs, water, other fluids and construction materials, primarily on Alaska's North Slope and in the Cook Inlet region. The partnership also provides construction and maintenance for ice roads, pads, facilities, equipment, drill sites and pipelines. Our Peak USA subsidiary provides hauling and maintenance services for customers in the U.S. Lower 48. We time charter a fleet of 33 offshore support vessels, including one crew boat, which operate in the Gulf of Mexico, Trinidad and the Middle East and provide marine transportation of drilling materials, supplies and crews for offshore rig operations and support for other offshore facilities. The supply vessels are used as freight-carrying vessels for bringing drill pipe, tubing, casing, drilling mud and other equipment to drilling rigs and production platforms. -4- OUR EMPLOYEES. As of December 31, 2004, Nabors employed approximately 19,776 persons, of whom approximately 2,516 were employed by unconsolidated affiliates. We believe our relationship with our employees generally is good. On October 18, 2000, the National Labor Relations Board ("NLRB") confirmed the selection of a collective bargaining representative at our Alaska drilling subsidiary. The unit covers most non-supervisory drilling and related field personnel working on or about our rigs within the State of Alaska. Negotiations with the union commenced during 2000; an agreement was reached with representatives of the union in December 2002; was submitted to the union membership for ratification; and was rejected by the membership in the first quarter 2003. We anticipate that the continuation of a collective bargaining unit at our Alaska drilling subsidiary will not have any material adverse impact on the operations of that entity or Nabors as a whole. During the first quarter 2003 the NLRB commenced a suit asserting that our subsidiary committed an unfair labor practice in failing to adequately bargain with the collective bargaining representative in connection with a change in Nabors' medical insurance program. The administrative law judge who heard the case ruled in Nabors' favor and the matter was appealed to an appeals panel of the NLRB, which affirmed the judge's ruling. The matter was not further appealed and is now concluded. On February 10, 2004, the Alaska State District Council of Laborers filed a charge with the NLRB alleging that our subsidiary committed an unfair labor practice by threatening certain employees for the purpose of inducing them to alter a Pro-Active Safety Report. That charge since has been withdrawn. On January 27, 2005, the Alaska State District Council of Laborers filed a charge with the NLRB alleging that our subsidiary committed an unfair labor practice by denying an employee representation during an interview in connection with an investigation into allegations made by the employee of certain misconduct by others. Nabors denies the allegations, believes that it has meritorious defenses and further believes that the outcome of the dispute will not have a material adverse effect on our financial position, results of operations or cash flows. Certain rig employees in Argentina and Australia are represented by collective bargaining units. SEASONALITY. Our Canadian and Alaskan drilling and workover operations are subject to seasonal variations as a result of weather conditions and generally experience reduced levels of activity and financial results during the second calendar quarter of each year. Seasonality does not have a material impact on the remaining portions of our business. Our overall financial results reflect the seasonal variations experienced in our Canadian and Alaskan operations. RESEARCH AND DEVELOPMENT. Research and development does not constitute a material part of our overall business. However, technology is of growing importance to our business and management expects to maintain its competitive position technologically with the internal development of technology or through strategic acquisitions. INDUSTRY/COMPETITIVE CONDITIONS. To a large degree, Nabors' businesses depend on the level of capital spending by oil and gas companies for exploration, development and production activities. A sustained increase or decrease in the price of natural gas or oil could have a material impact on exploration, development and production activities by our customers and could also affect materially our financial position, results of operations and cash flows. See "Risk Factors - Fluctuations in oil and gas prices could adversely affect drilling activity and Nabors' revenues, cash flows and profitability." Our industry remains competitive. The number of rigs continues to exceed demand in many of our markets, resulting in strong price competition. Many rigs can be readily moved from one region to another in response to changes in levels of activity, which may result in an oversupply of rigs in such areas. Many of the total available contracts are currently awarded on a bid basis, which further increases competition based on price. The land drilling, workover and well-servicing market is generally more competitive than the offshore market due to the larger number of rigs and market participants. In all of our geographic market areas, we believe price and availability and condition of equipment are the most significant factors in determining which drilling contractor is awarded a job. Other factors include the availability of trained personnel possessing the required specialized skills; the overall quality of service and safety record; and domestically, the ability to offer ancillary services. In international markets, experience in operating in certain environments and customer alliances also have been factors in the selection of Nabors. -5- Certain competitors are present in more than one of Nabors' operating regions, although no one competitor operates in all of these areas. In the U.S. Lower 48 states, there are several hundred competitors with smaller national, regional or local rig operations. In domestic land workover and well-servicing, we compete with Key Energy Services, Inc. and with numerous other competitors having smaller regional or local rig operations. In Canada and offshore, Nabors competes with many firms of varying size, several of which have more significant operations in those areas than Nabors. Internationally, Nabors competes directly with various contractors at each location where it operates. Nabors believes that the market for land drilling, workover and well-servicing contracts will continue to be competitive for the foreseeable future. Our other operating segments represent a relatively smaller part of our business, and we have numerous competitors in each area. Our Canrig subsidiary is one of the six major manufacturers of top drives. Its largest competitors are Varco, Tesco and National Oilwell. EPOCH's largest competitor in the manufacture of rig instrumentation systems is Varco's Totco subsidiary. Mudlogging services are provided by a number of entities that serve the oil and gas industry on a regional basis. EPOCH competes for mudlogging customers with Sperry Sun and Baker Hughes in the Gulf Coast region, California and Alaska. In the U.S. Lower 48 states, there are hundreds of rig transportation companies, and there are at least three or four that compete with Peak USA in each of its operating regions. In Alaska, Peak Oilfield Services principally competes with Alaska Petroleum Contractors for road, pad and pipeline maintenance, and is one of many drill site and road construction companies, the largest of which is VECO Corporation. OUR BUSINESS STRATEGY. Since 1987, with the installation of our current management team, Nabors has adhered to a consistent strategy aimed at positioning our company to grow and prosper in good times and to mitigate adverse effects during periods of poor market conditions. We have continued to strive to attain a financial posture that would allow us to capitalize on market weakness by adding to our business base, thereby enhancing our upside potential at reasonable costs. The principal elements of our strategy have been to: - - Maintain flexibility to respond to changing conditions. - - Maintain a conservative and flexible balance sheet. - - Build cost effectively a base of premium assets. - - Build and maintain low operating costs through economies of scale. - - Develop and maintain long-term, mutually attractive relationships with key customers and vendors. - - Build a diverse business in long-term, sustainable and worthwhile geographic markets. - - Recognize and seize opportunities as they arise. - - Continually improve safety, quality and efficiency. - - Implement leading edge technology where cost-effective to do so. Our business strategy is designed to allow us to grow and remain profitable in any market environment. The major developments in our business in the past year illustrate our implementation of this strategy and its continuing success. RISK FACTORS In addition to the other information set forth elsewhere in this Form 10-K, the following factors should be carefully considered when evaluating Nabors. FLUCTUATIONS IN OIL AND GAS PRICES COULD ADVERSELY AFFECT DRILLING ACTIVITY AND OUR REVENUES, CASH FLOWS AND PROFITABILITY Our operations are materially dependent upon the level of activity in oil and gas exploration and production. Both short-term and long-term trends in oil and gas prices affect the level of such activity. Oil and gas prices and, therefore, the level of drilling, exploration and production activity can be volatile. Worldwide military, political and economic events, including initiatives by the Organization of Petroleum Exporting Countries, may affect both the demand for, and the supply of, oil and gas. Weather conditions, governmental regulation (both in the United States and elsewhere), levels of consumer demand, the availability of pipeline capacity, and other factors beyond our control may also affect the supply of and demand for oil and gas. We believe that any prolonged reduction in oil and gas prices would depress the level of exploration and production activity. This would likely result in a corresponding decline in the demand for our services and could have a material adverse effect on our revenues, cash flows and profitability. Lower oil and gas prices could also cause our customers to seek to terminate, renegotiate or fail to honor our drilling contracts; affect the fair market value of our rig fleet which in turn could trigger a write-down for accounting purposes; affect our ability to retain skilled rig personnel; and affect -6- our ability to obtain access to capital to finance and grow our business. There can be no assurances as to the future level of demand for our services or future conditions in the oil and gas and oilfield services industries. WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY WITH EXCESS DRILLING CAPACITY, WHICH MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS The oilfield services industry in which we operate is very competitive. Contract drilling companies compete primarily on a regional basis, and competition may vary significantly from region to region at any particular time. Many drilling, workover and well-servicing rigs can be moved from one region to another in response to changes in levels of activity and provided market conditions warrant, which may result in an oversupply of rigs in an area. In many markets in which we operate, the number of rigs available for use exceeds the demand for rigs, resulting in price competition. Most drilling and workover contracts are awarded on the basis of competitive bids, which also results in price competition. The land drilling market generally is more competitive than the offshore drilling market because there are larger numbers of rigs and competitors. THE NATURE OF OUR OPERATIONS PRESENTS INHERENT RISKS OF LOSS THAT, IF NOT INSURED OR INDEMNIFIED AGAINST, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS Our operations are subject to many hazards inherent in the drilling, workover and well-servicing industries, including blowouts, cratering, explosions, fires, loss of well control, loss of hole, damaged or lost drilling equipment and damage or loss from inclement weather or natural disasters. Any of these hazards could result in personal injury or death, damage to or destruction of equipment and facilities, suspension of operations, environmental damage and damage to the property of others. Our offshore operations are also subject to the hazards of marine operations including capsizing, grounding, collision, damage from heavy weather or sea conditions and unsound ocean bottom conditions. In addition, our international operations are subject to risks of war, civil disturbances or other political events. Generally, drilling contracts provide for the division of responsibilities between a drilling company and its customer, and we seek to obtain indemnification from our customers by contract for certain of these risks. To the extent that we are unable to transfer such risks to customers by contract or indemnification agreements, we seek protection through insurance. However, there is no assurance that such insurance or indemnification agreements will adequately protect us against liability from all of the consequences of the hazards described above. The occurrence of an event not fully insured or indemnified against, or the failure of a customer or insurer to meet its indemnification or insurance obligations, could result in substantial losses. In addition, there can be no assurance that insurance will be available to cover any or all of these risks, or, even if available, that it will be adequate or that insurance premiums or other costs will not rise significantly in the future, so as to make such insurance prohibitive. It is likely that we will face continued upward pressure in our upcoming insurance renewals, our premiums and deductibles will be higher, and certain insurance coverage either will be unavailable or more expensive than it has been in the past. Moreover, our insurance coverage generally provides that we assume a portion of the risk in the form of an insurance coverage deductible. We expect that we may choose to increase the levels of deductibles (and thus assume a greater degree of risk) from time to time in order to minimize the effect of insurance premium increases. THE PROFITABILITY OF OUR INTERNATIONAL OPERATIONS COULD BE ADVERSELY AFFECTED BY WAR, CIVIL DISTURBANCE OR POLITICAL OR ECONOMIC TURMOIL We derive a significant portion of our business from international markets, including major operations in Canada, the Middle East, the Far East and South and Central America. These operations are subject to various risks, including the risk of war, civil disturbances and governmental activities that may limit or disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair compensation. In certain countries, our operations may be subject to the additional risk of fluctuating currency values and exchange controls. In the international markets in which we operate, we are subject to various laws and regulations that govern the operation and taxation of our business and the import and export of our equipment from country to country, the imposition, application and interpretation of which can prove to be uncertain. CHANGES TO OR NONCOMPLIANCE WITH GOVERNMENTAL REGULATION OR EXPOSURE TO ENVIRONMENTAL LIABILITIES COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS The drilling of oil and gas wells is subject to various federal, state, local and foreign laws, rules and regulations. Our cost of compliance with these laws and regulations may be substantial. For example, federal law imposes a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages from such spills. As an owner and operator of onshore and offshore rigs and transportation equipment, we may be deemed to be a responsible party under federal law. In addition, our well-servicing, workover and production services operations routinely involve the -7- handling of significant amounts of waste materials, some of which are classified as hazardous substances. Our operations and facilities are subject to numerous state and federal environmental laws, rules and regulations, including, without limitation, laws concerning the containment and disposal of hazardous substances, oilfield waste and other waste materials, the use of underground storage tanks and the use of underground injection wells. We generally require customers to contractually assume responsibility for compliance with environmental regulations. However, we are not always successful in allocating to customers all of these risks nor is there any assurance that the customer will be financially able to bear those risks assumed. We employ personnel responsible for monitoring environmental compliance and arranging for remedial actions that may be required from time to time and also use outside experts to advise on and assist with our environmental compliance efforts. Liabilities are recorded when the need for environmental assessments and/or remedial efforts become known or probable and the cost can be reasonably estimated. Laws protecting the environment generally have become more stringent than in the past and are expected to continue to become more so. Violation of environmental laws and regulations can lead to the imposition of administrative, civil or criminal penalties, remedial obligations; and in some cases injunctive relief. Such violations could also result in liabilities for personal injuries, property damage, and other costs and claims. Under the Comprehensive Environmental Response, Compensation and Liability Act, also known as CERCLA or Superfund, and related state laws and regulations, liability can be imposed jointly on the entire group of responsible parties or separately on any one of the responsible parties, without regard to fault or the legality of the original conduct on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. Under CERCLA, such persons may be liable for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. Changes in federal and state environmental regulations may also negatively impact oil and natural gas exploration and production companies, which in turn could have a material adverse effect on us. For example, legislation has been proposed from time to time in Congress which would reclassify certain oil and natural gas production wastes as hazardous wastes, which would make the reclassified wastes subject to more stringent handling, disposal and clean-up requirements. If enacted, such legislation could dramatically increase operating costs for oil and natural gas companies and could reduce the market for our services by making many wells and/or oilfields uneconomical to operate. The Oil Pollution Act of 1990, as amended, contains provisions specifying responsibility for removal costs and damages resulting from discharges of oil into navigable waters or onto the adjoining shorelines. In addition, the Outer Continental Shelf Lands Act provides the federal government with broad discretion in regulating the leasing of offshore oil and gas production sites. Because our offshore support vessel operations rely on offshore oil and gas exploration and production, if the government were to exercise its authority under this law to restrict the availability of offshore oil and gas leases, such an action could have a material adverse effect on our offshore support vessel operations. It is possible that future changes to tax laws (including tax treaties) could have an impact on our ability to realize the tax savings recorded to date as well as future tax savings as a result of our corporate reorganization, depending on any responsive action taken by us. RECENT LEGISLATION COULD CURTAIL OUR ABILITY TO TIME CHARTER VESSELS IN U.S. COASTWISE TRADE Our Sea Mar division time charters supply vessels to offshore operators in U.S. waters. The vessels are owned by one of our financing company subsidiaries, but are operated and managed by a U.S. citizen-controlled company pursuant to long-term bareboat charters. As a result of recent legislation, beginning in August 2007 Sea Mar will no longer be able to use this arrangement to qualify vessels for employment in the U.S. coastwise trade. Accordingly, we will be required to restructure the arrangement, redeploy the vessels outside the United States, or sell the vessels by no later than such time. As of December 31, 2004, the net assets of Sea Mar totaled approximately $159.8 million. During 2004 Sea Mar had income before income taxes totaling $2.3 million. AS A HOLDING COMPANY, WE DEPEND ON OUR SUBSIDIARIES TO MEET OUR FINANCIAL OBLIGATIONS We are a holding company with no significant assets other than the stock of our subsidiaries. In order to meet our financial needs, we rely exclusively on repayments of interest and principal on intercompany loans made by us to our operating subsidiaries and income from dividends and other cash flow from such subsidiaries. There can be no assurance that -8- our operating subsidiaries will generate sufficient net income to pay upstream dividends or cash flow to make payments of interest and principal to us in respect of their intercompany loans. In addition, from time to time, our operating subsidiaries may enter into financing arrangements which may contractually restrict or prohibit such upstream payments to us. There may also be adverse tax consequences associated with making dividend payments upstream. WE DO NOT CURRENTLY INTEND TO PAY DIVIDENDS We have not paid any cash dividends on our common shares since 1982. Nabors does not currently intend to pay any cash dividends on its common shares. However, we note that there have been recent positive industry trends and changes in tax law providing more favorable treatment of dividends. As a result, we can give no assurance that we will not reevaluate our position on dividends in the future. BECAUSE OUR OPTION, WARRANT AND CONVERTIBLE SECURITIES HOLDERS HAVE A CONSIDERABLE NUMBER OF COMMON SHARES AVAILABLE FOR ISSUANCE AND RESALE, SIGNIFICANT ISSUANCES OR RESALES IN THE FUTURE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON SHARES As of February 28, 2005, we had 400,000,000 authorized common shares, of which 150,423,275 shares were outstanding. In addition, 34,410,812 common shares were reserved for issuance pursuant to option and employee benefit plans, and 18,476,525 shares were reserved for issuance upon conversion or repurchase of outstanding zero coupon convertible debentures and zero coupon senior exchangeable notes. In addition, up to 216,149 of our common shares could be issuable on exchange of the shares of Nabors Exchangeco (Canada) Inc. We also may sell up to $700 million of securities of various types in connection with a shelf registration statement declared effective on January 16, 2003 by the Securities and Exchange Commission. The sale, or availability for sale, of substantial amounts of our common shares in the public market, whether directly by us or resulting from the exercise of warrants or options (and, where applicable, sales pursuant to Rule 144) or the conversion into common shares, or repurchase of debentures and notes using common shares, would be dilutive to existing security holders, could adversely affect the prevailing market price of our common shares and could impair our ability to raise additional capital through the sale of equity securities. PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS MAY DETER A CHANGE OF CONTROL TRANSACTION AND DECREASE THE LIKELIHOOD OF A SHAREHOLDER RECEIVING A CHANGE OF CONTROL PREMIUM Our board of directors is divided into three classes, with each class serving a staggered three-year term. In addition, our board of directors has the authority to issue a significant amount of common shares and up to 25,000,000 preferred shares and to determine the price, rights (including voting rights), conversion ratios, preferences and privileges of the preferred shares, in each case without further vote or action by the holders of the common shares. Although we have no present plans to issue preferred shares, the classified board and our board's ability to issue additional preferred shares may discourage, delay or prevent changes in control of Nabors that are not supported by our board, thereby possibly preventing certain of our shareholders from realizing a possible premium on their shares. In addition, the requirement in the indenture for Series B of our $700 million zero coupon senior exchangeable notes due 2023 to pay a make-whole premium in the form of an increase in the exchange rate in certain circumstances could have the effect of making a change in control of Nabors more expensive. WE HAVE A SUBSTANTIAL AMOUNT OF DEBT OUTSTANDING We had approximately $2.0 billion in debt outstanding at December 31, 2004, resulting in a funded debt to capital ratio of 0.41:1 and a net funded debt to capital ratio of 0.17:1. Both of these ratios are a method for calculating the amount of leverage a company has in relation to its capital. ACQUISITIONS AND DIVESTITURES We have grown from a land drilling business centered in the U.S. Lower 48, Canada and Alaska to an international business with operations on land and offshore in many of the major oil, gas and geothermal markets in the world. At the beginning of 1990, our fleet consisted of 44 land drilling rigs in Canada, Alaska and in various international markets. Today, Nabors' worldwide fleet consists of almost 600 land drilling rigs, approximately 700 domestic and 215 international land workover and well-servicing rigs, 43 offshore platform rigs, 19 jack-up units, three barge rigs and a large component of trucks and fluid hauling vehicles. This growth was fueled in part by strategic acquisitions. Although Nabors continues to examine opportunities, there can be no assurance that attractive rigs or other acquisition opportunities will continue to be available, that the pricing will be economical or that we will be successful in making such acquisitions in the future. -9- From time to time, we may sell a subsidiary or group of assets outside of our core markets or business, if it is economically advantageous for us to do so. ENVIRONMENTAL COMPLIANCE Nabors does not presently anticipate that compliance with currently applicable environmental regulations and controls will significantly change its competitive position, capital spending or earnings during 2005. Nabors believes it is in material compliance with applicable environmental rules and regulations, and the cost of such compliance is not material to the business or financial condition of Nabors. For a more detailed description of the environmental laws and regulations applicable to Nabors operations, see above under Risk Factors -- Noncompliance with governmental regulation or exposure to environmental liabilities could adversely affect Nabors' results of operations. ITEM 2. PROPERTIES Many of the international drilling rigs and certain of the Alaska rigs in our fleet are supported by mobile camps which house the drilling crews and a significant inventory of spare parts and supplies. In addition, we own various trucks, forklifts, cranes, earth moving and other construction and transportation equipment, which are used to support the drilling and logistics operations. Nabors and its subsidiaries own or lease executive and administrative office space in St. Michael, Barbados (principal executive office); Houston, Texas; Anchorage, Alaska; Harvey, Houma, Iberia, and New Iberia, Louisiana; Bakersfield, California; Magnolia, Texas; Calgary and Nisku, Alberta, Canada; Sana'a, Yemen; Dubai, U.A.E.; Dhahran, Saudi Arabia; and Anaco, Venezuela. We also own or lease a number of facilities and storage yards used in support of operations in each of our geographic markets. Nabors and its subsidiaries own certain mineral interests in connection with their investing and operating activities. Nabors does not consider these properties to be material to its overall operations. Additional information about our properties can be found in Notes 2 and 5 (each, under the caption "Property, Plant and Equipment") and 13 (under the caption "Operating Leases") of the Notes to Consolidated Financial Statements in Part II Item 8 below. The revenues and property, plant and equipment by geographic area for the fiscal years ended December 31, 2002, 2003 and 2004, can be found in Note 17 of the Notes to Consolidated Financial Statements in Part II Item 8 below. A description of our rig fleet is included under the caption "Introduction" in Part I Item 1 - Business. Nabors' management believes that our equipment and facilities are adequate to support our current level of operations as well as an expansion of drilling operations in those geographical areas where we may expand. ITEM 3. LEGAL PROCEEDINGS Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of their business. In the opinion of management, our ultimate liability with respect to these pending lawsuits is not expected to have a significant or material adverse effect on our consolidated financial position, results of operation or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -10- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES I. MARKET AND SHARE PRICES. Our shares are traded on the American Stock Exchange under the symbol "NBR". At December 31, 2004, there were approximately 2,218 shareholders of record. We have not paid any cash dividends on our common shares since 1982. Nabors does not currently intend to pay any cash dividends on its common shares. However, we note that there have been recent positive industry trends and changes in tax law providing more favorable treatment of dividends. As a result, we can give no assurance that we will not reevaluate our position on dividends in the future. The following table sets forth the reported high and low sales prices of our common shares as reported on the American Stock Exchange.
SHARE PRICE --------------- CALENDAR YEAR HIGH LOW - ------------- ------ ------ 2003 First quarter $42.60 $32.20 Second quarter 45.85 37.65 Third quarter 40.50 33.87 Fourth quarter 42.52 35.76 2004 First quarter 49.32 41.01 Second quarter 47.70 40.02 Third quarter 47.87 41.25 Fourth quarter 54.25 45.87
II. DIVIDEND POLICY. See "Part I - Item 1 - Business - Risk Factors - We do not currently intend to pay dividends." III. SHAREHOLDER MATTERS. Bermuda has exchange controls which apply to residents in respect of the Bermudian dollar. As an exempt company, Nabors is considered to be nonresident for such controls; consequently, there are no Bermuda governmental restrictions on the Company's ability to make transfers and carry out transactions in all other currencies, including currency of the United States. There is no reciprocal tax treaty between Bermuda and the United States regarding withholding taxes. Under existing Bermuda law, there is no Bermuda income or withholding tax on dividends, if any, paid by Nabors to its shareholders. Furthermore, no Bermuda tax or other levy is payable on the sale or other transfer (including by gift or on the death of the shareholder) of Nabors common shares (other than by shareholders resident in Bermuda). -11- ITEM 6. SELECTED FINANCIAL DATA OPERATING DATA (1)(2)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIO DATA) Revenues and other income: Operating revenues $2,394,031 $1,880,003 $1,466,443 $2,201,736 $1,388,660 $666,429 $1,008,169 Earnings (losses) from unconsolidated affiliates 4,057 10,183 14,775 26,334 26,283 3,757 (305) Investment income 50,064 33,813 36,961 56,437 39,451 12,908 1,275 ---------- ---------- ---------- ---------- ---------- -------- ---------- Total revenues and other income 2,448,152 1,923,999 1,518,179 2,284,507 1,454,394 683,094 1,009,139 ---------- ---------- ---------- ---------- ---------- -------- ---------- Costs and other deductions: Direct costs 1,572,649 1,276,953 973,910 1,366,967 938,651 446,597 663,551 General and administrative expenses 195,388 165,403 141,895 135,496 106,504 65,288 77,026 Depreciation and amortization 254,939 226,528 187,665 184,119 148,087 98,152 84,949 Depletion 45,460 8,599 7,700 5,777 4,326 1,741 -- Interest expense 48,507 70,740 67,068 60,722 35,370 30,395 15,463 Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net (4,629) 1,153 (833) (26,186) (8,287) (4,708) (31,831) ---------- ---------- ---------- ---------- ---------- -------- ---------- Total costs and other deductions 2,112,314 1,749,376 1,377,405 1,726,895 1,224,651 637,465 809,158 ---------- ---------- ---------- ---------- ---------- -------- ---------- Income before income taxes 335,838 174,623 140,774 557,612 229,743 45,629 199,981 Income tax expense (benefit) 33,381 (17,605) 19,285 200,162 92,387 17,925 74,993 ---------- ---------- ---------- ---------- ---------- -------- ---------- Net income $ 302,457 $ 192,228 $ 121,489 $ 357,450 $ 137,356 $ 27,704 $ 124,988 ========== ========== ========== ========== ========== ======== ========== Earnings per diluted share $ 1.92 $ 1.25 $ .81 $ 2.24 $ .90 $ .23 $ 1.16 Weighted average number of diluted common shares outstanding 164,030 156,897 149,997 168,790 152,417 120,449 112,555 Capital expenditures and acquisitions of businesses (3) $ 544,429 $ 353,138 $ 702,843 $ 803,241 $ 334,279 $837,732 $ 315,057 Interest coverage ratio (4) 14.1 : 1 6.8 : 1 6.0 : 1 13.3 : 1 11.8 : 1 5.8 : 1 19.4 : 1 TWELVE MONTHS ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30, (UNAUDITED) ------------------------ 1997 1997 1996 ------------ ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIO DATA) Revenues and other income: Operating revenues $1,114,758 $1,028,853 $ 719,604 Earnings (losses) from unconsolidated affiliates 274 450 139 Investment income 4,056 15,384 8,052 ---------- ---------- --------- Total revenues and other income 1,119,088 1,044,687 727,795 ---------- ---------- --------- Costs and other deductions: Direct costs 774,856 737,780 539,665 General and administrative expenses 72,478 70,371 56,862 Depreciation and amortization 72,350 66,391 46,117 Depletion -- -- -- Interest expense 16,323 16,520 11,884 Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net (26,382) (28,785) (8,333) ---------- ---------- --------- Total costs and other deductions 909,625 862,277 646,195 ---------- ---------- --------- Income before income taxes 209,463 182,410 81,600 Income tax expense (benefit) 73,443 67,602 11,100 ---------- ---------- --------- Net income $ 136,020 $ 114,808 $ 70,500 ========== ========== ========= Earnings per diluted share $ 1.24 $ 1.08 $ .75 Weighted average number of diluted common shares outstanding 113,793 111,975 93,752 Capital expenditures and acquisitions of businesses (3) $ 381,196 $ 399,895 $ 177,925 Interest coverage ratio (4) 18.3 : 1 16.1 : 1 11.7 : 1
BALANCE SHEET DATA (1)(2)
AS OF DECEMBER 31, ---------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT RATIO DATA) Cash and cash equivalents, and short-term and long-term marketable and non-marketable securities $1,411,047 $1,579,090 $1,345,799 $ 918,637 $ 550,953 $ 111,666 $ 47,340 Working capital 381,658 917,274 618,454 700,816 524,437 195,817 36,822 Property, plant and equipment, net 3,275,495 2,990,792 2,801,067 2,451,386 1,835,039 1,678,664 1,127,154 Total assets 5,862,609 5,602,692 5,063,872 4,151,915 3,136,868 2,398,003 1,465,907 Long-term debt 1,201,686 1,985,553 1,614,656 1,567,616 854,777 482,600 217,034 Shareholders' equity $2,929,393 $2,490,275 $2,158,455 $1,857,866 $1,806,468 $1,470,074 $ 867,469 Funded debt to capital ratio: Gross (5) 0.41 : 1 0.48 : 1 0.49 : 1 0.46 : 1 0.32 : 1 0.25 : 1 0.26 : 1 Net (6) 0.17 : 1 0.22 : 1 0.26 : 1 0.26 : 1 0.15 : 1 0.20 : 1 0.17 : 1 AS OF DECEMBER 31, AS OF SEPTEMBER 30, (UNAUDITED) ---------------------- 1997 1997 1996 ------------ ---------- --------- (IN THOUSANDS, EXCEPT RATIO DATA) Cash and cash equivalents, and short-term and long-term marketable and non-marketable securities $ 42,135 $ 53,323 $ 115,866 Working capital 62,571 70,872 172,091 Property, plant and equipment, net 923,402 861,393 511,203 Total assets 1,281,306 1,234,232 871,274 Long-term debt 226,299 229,507 229,504 Shareholders' equity $ 767,340 $ 727,843 $ 457,822 Funded debt to capital ratio: Gross (5) 0.27 : 1 0.27 : 1 0.35 : 1 Net (6) 0.20 : 1 0.20 : 1 0.21 : 1
(1) Our acquisitions' results of operations and financial position have been included beginning on the respective dates of acquisition and include Ryan Energy Technologies, Inc. (October 2002), Enserco Energy Service Company Inc. (April 2002), Command Drilling Corporation (November 2001), Pool Energy Services Co. (November 1999), Bayard Drilling Technologies, Inc. (April 1999), New Prospect Drilling Company (May 1998), Can-Tex Drilling & Exploration, Ltd. land rigs (May 1998), Veco Drilling, Inc. land rigs (November 1997), Diamond L Drilling & Production land rigs (November 1997), Cleveland Drilling Company, Inc. (August 1997), Chesley Pruet Drilling Company (April 1997), Adcor-Nicklos Drilling Company (January 1997, retroactive to October 1996), Noble Drilling Corporation land rigs (December 1996), Exeter Drilling Company and its subsidiary, and J.W. Gibson Well Services Company (April 1996). The results of operations also reflect the disposition of our UK North Sea (November 1996) and J.W. Gibson (January 1998) operations. (2) We changed our fiscal year end from September 30 to December 31, effective for the fiscal year beginning January 1, 1998. (3) Represents capital expenditures and the portion of the purchase price of acquisitions allocated to fixed assets and goodwill based on their fair market value. (4) The interest coverage ratio is computed by calculating the sum of income before income taxes, interest expense, depreciation and amortization, and depletion expense and then dividing by interest expense. This ratio is a method for calculating the amount of cash flows available to cover interest expense. (5) The gross funded debt to capital ratio is calculated by dividing funded debt by funded debt plus capital. Funded debt is defined as the sum of (1) short-term borrowings, (2) current portion of long-term debt and (3) long-term debt. Capital is defined as shareholders' equity. (6) The net funded debt to capital ratio is calculated by dividing net funded debt by net funded debt plus capital. Net funded debt is defined as the sum of (1) short-term borrowings, (2) current portion of long-term debt and (3) long-term debt and then subtracting cash and cash equivalents and marketable and non-marketable securities. Capital is defined as shareholders' equity. -12- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NATURE OF OPERATIONS Nabors is the largest land drilling contractor in the world. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South and Central America, the Middle East, the Far East and Africa. Nabors also is one of the largest land well-servicing and workover contractors in the United States and Canada and is a leading provider of offshore platform workover and drilling rigs in the United States and multiple international markets. To further supplement and complement our primary business, we offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services, in selected domestic and international markets. We have also made selective investments in oil and gas exploration, development and production activities. The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our limited oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments for segment reporting purposes. A discussion of our results of operations for the last three years is included below. This discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Part II Item 8 below. -13- RESULTS OF OPERATIONS The following tables set forth certain information with respect to our reportable segments and rig activity:
YEAR ENDED DECEMBER 31, INCREASE (DECREASE) ------------------------------------ ------------------------------------ 2004 2003 2002 2004 TO 2003 2003 TO 2002 ---------- ---------- ---------- --------------- --------------- (IN THOUSANDS, EXCEPT PERCENTAGES AND RIG ACTIVITY) Reportable segments: Operating revenues and Earnings from unconsolidated affiliates: Contract Drilling: (1) U.S. Lower 48 Land Drilling $ 748,999 $ 476,258 $ 374,659 $272,741 57% $101,599 27% U.S. Land Well-servicing 360,010 312,279 294,428 47,731 15% 17,851 6% U.S. Offshore 132,778 101,566 105,717 31,212 31% (4,151) (4%) Alaska 83,835 112,092 118,199 (28,257) (25%) (6,107) (5%) Canada 426,675 322,303 141,497 104,372 32% 180,806 128% International 444,289 396,884 320,160 47,405 12% 76,724 24% ---------- ---------- ---------- -------- -------- Subtotal Contract Drilling (2) 2,196,586 1,721,382 1,354,660 475,204 28% 366,722 27% Oil and Gas (3) 65,303 16,919 7,223 48,384 286% 9,696 134% Other Operating Segments (4) (5) 205,615 201,660 174,775 3,955 2% 26,885 15% Other reconciling items (6) (69,416) (49,775) (55,440) (19,641) (39%) 5,665 10% ---------- ---------- ---------- -------- -------- Total $2,398,088 $1,890,186 $1,481,218 $507,902 27% $408,968 28% ========== ========== ========== ======== ======== Adjusted income (loss) derived from operating activities: (7) Contract Drilling: U.S. Lower 48 Land Drilling $ 93,573 $ 16,800 $ 23,415 $ 76,773 457% $ (6,615) (28%) U.S. Land Well-servicing 57,712 47,082 38,631 10,630 23% 8,451 22% U.S. Offshore 20,611 1,649 (1,397) 18,962 N/M (8) 3,046 218% Alaska 16,052 37,847 31,387 (21,795) (58%) 6,460 21% Canada 91,421 59,856 17,413 31,565 53% 42,443 244% International 89,211 77,964 76,121 11,247 14% 1,843 2% ---------- ---------- ---------- -------- -------- Subtotal Contract Drilling 368,580 241,198 185,570 127,382 53% 55,628 30% Oil and Gas 13,736 5,850 (1,058) 7,886 135% 6,908 N/M (8) Other Operating Segments (5,333) 3,266 24,660 (8,599) (263%) (21,394) (87%) Other reconciling items (9) (47,331) (37,611) (39,124) (9,720) (26%) 1,513 4% ---------- ---------- ---------- -------- -------- Total $ 329,652 $ 212,703 $ 170,048 $116,949 55% $ 42,655 25% Interest expense (48,507) (70,740) (67,068) 22,233 31% (3,672) (5%) Investment income 50,064 33,813 36,961 16,251 48% (3,148) (9%) Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net 4,629 (1,153) 833 5,782 N/M (8) (1,986) (238%) ---------- ---------- ---------- -------- -------- Income before income taxes $ 335,838 $ 174,623 $ 140,774 $161,215 92% $ 33,849 24% ========== ========== ========== ======== ======== Rig activity: Rig years: (10) U.S. Lower 48 Land Drilling 199.0 143.1 103.0 55.9 39% 40.1 39% U.S. Offshore 14.4 14.1 14.5 .3 2% (.4) (3%) Alaska 6.9 7.9 9.3 (1.0) (13%) (1.4) (15%) Canada 46.5 42.1 22.9 4.4 10% 19.2 84% International (11) 67.7 61.1 55.1 6.6 11% 6.0 11% ---------- ---------- ---------- -------- -------- Total rig years 334.5 268.3 204.8 66.2 25% 63.5 31% ========== ========== ========== ======== ======== Rig hours: (12) U.S. Land Well-servicing 1,137,914 1,088,511 1,014,657 49,403 5% 73,854 7% Canada Well-servicing (13) 377,170 321,472 164,785 55,698 17% 156,687 95% ---------- ---------- ---------- -------- -------- Total rig hours 1,515,084 1,409,983 1,179,442 105,101 7% 230,541 20% ========== ========== ========== ======== ========
-14- (1) These segments include our drilling, workover and well-servicing operations, on land and offshore. (2) Includes Earnings from unconsolidated affiliates, accounted for by the equity method, of $1.6 million, $2.8 million and $3.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. (3) Represents our oil and gas exploration, development and production operations. (4) Includes our marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations. (5) Includes Earnings from unconsolidated affiliates, accounted for by the equity method, of $2.5 million, $7.4 million and $10.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. (6) Represents the elimination of inter-segment transactions. (7) Adjusted income (loss) derived from operating activities is computed by: subtracting direct costs, general and administrative expenses, and depreciation and amortization, and depletion expense from Operating revenues and then adding Earnings from unconsolidated affiliates. Such amounts should not be used as a substitute to those amounts reported under accounting principles generally accepted in the United States of America (GAAP). However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income (loss) derived from operating activities, because it believes that this financial measure is an accurate reflection of the ongoing profitability of our company. A reconciliation of this non-GAAP measure to income before income taxes, which is a GAAP measure, is provided within the table set forth immediately following the heading Results of Operations above. (8) The percentage is so large that it is not meaningful. (9) Represents the elimination of inter-segment transactions and unallocated corporate expenses. (10) Excludes well-servicing rigs, which are measured in rig hours. Includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates. Rig years represents a measure of the number of equivalent rigs operating during a given period. For example, one rig operating 182.5 days during a 365-day period represents 0.5 rig years. (11) International rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 4.0 years, 3.8 years and 3.7 years during the years ended December 31, 2004, 2003 and 2002, respectively. (12) Rig hours represents the number of hours that our well-servicing rig fleet operated during the year. (13) The Canada Well-servicing operation was acquired during April 2002 as part of our acquisition of Enserco Energy Service Company Inc. -15- 2004 COMPARED TO 2003 Operating revenues and Earnings from unconsolidated affiliates for 2004 totaled $2.4 billion, representing an increase of $507.9 million, or 27%, compared to 2003. Adjusted income derived from operating activities and net income for 2004 totaled $329.7 million and $302.5 million ($1.92 per diluted share), respectively, representing increases of 55% and 57%, respectively, compared to 2003. The increase in our operating results during 2004 resulted from higher revenues realized by essentially all of our business units as a result of higher activity levels and higher average dayrates during 2004 compared to 2003. This increase in activity reflects an increase in demand for our services in these markets during 2004, which resulted from continuing higher price levels for natural gas and oil during 2003 and 2004. Natural gas prices are the primary driver of our U.S. Lower 48 Land Drilling, Canadian and U.S. Offshore (Gulf of Mexico) operations, while oil prices are the primary driver of our Alaskan, International and U.S. Land Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg) averaged $5.90 per million cubic feet (mcf) during 2004, up from a $5.49 per mcf average during 2003. West Texas intermediate spot oil prices (per Bloomberg) averaged $41.51 per barrel during 2004, up from a $31.06 per barrel average during 2003. Our operating results for 2005 are expected to increase from levels realized during 2004 given our current expectation of the continuation of high commodity prices during 2005 and the related impact on drilling and well-servicing activity and dayrates. The expected increase in drilling activity and dayrates should have the largest impact on our U.S. Lower 48 Land Drilling and Canadian operations. Canadian drilling activity is subject to substantial levels of seasonality, as activity levels typically peak in the first quarter, decline substantially in the second quarter, and then generally increase over the last half of the year. We also expect an improvement in operating results for our U.S. Offshore operations during 2005 primarily as a result of higher dayrates and a continuing improvement in the utilization of our workover jack-up rigs. We expect results from our International operations during 2005 to increase compared to 2004 as a result of new rigs operating under contract in Saudi Arabia and our expectations of opportunities in various regions of the world, with the largest impact expected from our operations in North Africa, the Middle East and Mexico. Our U.S. Land Well-servicing operations are expected to improve given our expectations of commodity prices during 2005 discussed above. We expect results from our operations in Alaska to be reduced overall in 2005 compared to 2004, resulting from the lack of demand for drilling services by major operators in that market. CONTRACT DRILLING Our Contract Drilling operating segments contain one or more of the following operations: drilling, workover and well-servicing, on land and offshore. Operating revenues and Earnings from unconsolidated affiliates for these operating segments totaled $2.2 billion and adjusted income derived from operating activities totaled $368.6 million during 2004, representing increases of 28% and 53%, respectively, compared to 2003. Rig years (excluding well-servicing rigs) increased to 334.5 years during 2004 from 268.3 years during 2003, as a result of increased capital spending by our customers, which resulted from the improvement in commodity prices discussed above. U.S. Lower 48 Land Drilling Operating revenues totaled $749.0 million during 2004, representing an increase of 57% compared to 2003. Adjusted income derived from operating activities totaled $93.6 million during 2004 compared to $16.8 million during 2003. The increase in operating results during 2004 primarily resulted from increased drilling activity, which was driven by higher natural gas prices and is reflected in the increase in rig years to 199.0 years during 2004 from 143.1 years during 2003, and higher average dayrates compared to the prior year. U.S. Land Well-servicing Operating revenues and adjusted income derived from operating activities totaled $360.0 million and $57.7 million, respectively, during 2004, representing increases of 15% and 23%, respectively, compared to 2003. The increase in operating results during 2004 primarily resulted from an increase in average dayrates compared to the prior year and an increase in well-servicing activity, which was driven by higher oil prices and is reflected in the increase in well-servicing hours to 1,137,914 hours during 2004 compared to 1,088,511 hours during 2003. U.S. Offshore Operating revenues totaled $132.8 million during 2004, representing an increase of 31% compared to 2003. Adjusted income derived from operating activities totaled $20.6 million during 2004 compared to $1.6 million during 2003. The increase in operating results during 2004 primarily resulted from the addition of three new platform rigs for deepwater development projects, one of which commenced operations in the first quarter of 2004, and two of which commenced operations late in the second quarter of 2004. Our U.S. Offshore operations were also positively impacted by an increase in average dayrates for our platform and jack-up rigs during 2004 compared to 2003. Rig years for our U.S. -16- Offshore operations were relatively flat during 2004 compared to 2003, totaling 14.4 years for 2004 compared to 14.1 years during 2003. Alaskan Operating revenues and adjusted income derived from operating activities totaled $83.8 million and $16.1 million, respectively, during 2004, representing decreases of 25% and 58%, respectively, compared to 2003. These decreases primarily resulted from lower drilling activity, deferred revenue recognized on one of our rigs in 2003 that did not recur in 2004, and an incremental $5.7 million of Operating revenues recorded in the first quarter of 2003, representing business interruption insurance proceeds related to the damage incurred on one of our land drilling rigs. The decrease in drilling activity during 2004 primarily resulted from the completion of a significant long-term contract in late 2003 that has not yet been renewed or replaced and is reflected in the decrease in rig years to 6.9 years during 2004 from 7.9 years during 2003. Canadian Operating revenues and adjusted income derived from operating activities totaled $426.7 million and $91.4 million, respectively, during 2004, representing increases of 32% and 53%, respectively, compared to 2003. These increases resulted from an increase in drilling and well-servicing revenues, resulting from an overall increase in drilling and well-servicing activity (which was driven by increased natural gas prices), and an increase in average dayrates compared to the prior year. Rig years in Canada increased to 46.5 years during 2004 from 42.1 years during 2003. Well-servicing hours increased to 377,170 hours during 2004 from 321,472 hours during 2003. Our Canadian results were also positively impacted by the strengthening of the Canadian dollar versus the U.S. dollar during 2004. International Operating revenues and Earnings from unconsolidated affiliates and adjusted income derived from operating activities totaled $444.3 million and $89.2 million, respectively, during 2004, representing increases of 12% and 14%, respectively, compared to 2003. The increase in operating results during 2004 primarily resulted from an increase in operations in Mexico and Saudi Arabia and from the addition of operations in India and Indonesia, which began in the fourth quarter of 2003, partially offset by a decrease in operations in Trinidad, Yemen, Colombia and Algeria compared to the prior year. International rig years increased to 67.7 years during 2004 from 61.1 years during 2003. OIL AND GAS This operating segment represents our oil and gas exploration, development and production operations, which we conduct in multiple locations, including South Texas, North Louisiana, South Louisiana, Offshore Gulf of Mexico, and Colombia. Oil and Gas Operating revenues increased to $65.3 million during 2004 from $16.9 million during 2003. Adjusted income derived from operating activities increased to $13.7 million during 2004 from $5.9 million during 2003. Operating results increased during 2004 as a result of new investments in oil and gas properties resulting from the agreements executed with El Paso Corporation in the fourth quarter of 2003. The increase in adjusted income derived from operating activities for 2004 was partially offset by $2.4 million in expense (included in direct costs in our consolidated statements of income) recognized during the second quarter of 2004 as a result of a dry hole offshore in the Gulf of Mexico, which exceeded $1.4 million in expense recognized during the fourth quarter of 2003 as a result of a dry hole also in the Gulf of Mexico. In the fourth quarter of 2003 we entered into four separate agreements with wholly-owned subsidiaries of El Paso Corporation resulting in the significant expansion of our oil and gas operations. Under two of these agreements, we are committed to contribute a portion of the cost to develop wells with a combination of proved undeveloped, probable and possible reserves located primarily in South Texas, North Louisiana and Offshore Gulf of Mexico, in exchange for a net profits interest in such wells. El Paso serves as operator of all the wells covered in this development program. Under the other two agreements with El Paso, we have committed to share in the cost of drilling exploratory wells in South Texas and South Louisiana in exchange for a share in the prospect leases where the wells are drilled. Based on our current estimation of oil and gas production levels, we expect to receive returns from the wells under the developmental drilling program through the first quarter of 2006 and from the successful wells drilled to date under the exploratory drilling program through 2014. Additionally, in May 2004, we entered into agreements under which we will contribute a portion of the cost to drill exploration and developmental wells in Colombia in exchange for an interest in each of the prospects. The terms of the agreements call for an estimated three year exploratory drilling program and, for any successful prospects, up to an additional 22-24 year developmental drilling program. We also make investments in oil and gas properties with several of our customers. Based on our current estimation of future oil and gas production levels, we expect to receive returns from these investments through 2015. OTHER OPERATING SEGMENTS These operations include our marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations. Operating revenues and Earnings from unconsolidated affiliates for our Other Operating Segments totaled $205.6 -17- million during 2004, representing an increase of 2% compared to 2003. This increase primarily resulted from an increase in revenues for our drilling technology and top drive manufacturing, directional drilling, and rig instrumentation and software operations during 2004 compared to 2003. This increase in revenues was primarily driven by the strengthening in the drilling market in the U.S. and Canada during 2004 as discussed for our Contract Drilling segments above. This increase was partially offset by a decrease in revenues for our marine and supply services operations resulting from the consolidation of Sea Mar Management LLC beginning in 2004 (see discussion in Note 6 to our consolidated financial statements in Part II Item 8) and a decrease in average dayrates during 2004 compared to 2003, which resulted from the loss of some higher rate contracts during the first quarter of 2004 and from an increase in the impact of competition in the markets in which we operate during 2004. Adjusted loss derived from operating activities totaled $5.3 million during 2004 compared to adjusted income derived from operating activities totaling $3.3 million during 2003. This decrease primarily resulted from a decrease in results for our Alaskan construction and logistics operations compared to 2003, which resulted from certain projects in 2003 that did not recur in 2004 and the loss of a significant contract during the second quarter of 2003, and decreased margins from our marine transportation and supply services, which was driven by lower average dayrates compared to 2003. OTHER FINANCIAL INFORMATION General and administrative expenses totaled $195.4 million during 2004, representing an increase of $30.0 million, or 18%, compared to 2003. This increase primarily resulted from increased activity in a number of our operating segments including our U.S. Lower 48 Land Drilling, U.S. Land Well-servicing and Canadian operations, and from increased expenses at our corporate level. As a percentage of operating revenues, general and administrative expenses decreased (8.2% vs. 8.8%) during 2004 compared to 2003, as these expenses were spread over a larger revenue base. Depreciation and amortization expense totaled $254.9 million during 2004, representing an increase of $28.4 million, or 13%, compared to 2003. This increase primarily resulted from an increase in average rig years for our U.S. Lower 48 Land Drilling, Canadian land drilling and International operations compared to the prior year, and depreciation on capital expenditures made during 2003 and 2004. Depletion expense totaled $45.5 million during 2004 compared to $8.6 million during 2003. This increase resulted from depletion on oil and gas properties added through our agreements with El Paso Corporation in the fourth quarter of 2003. Interest expense totaled $48.5 million during 2004, representing a decrease of $22.2 million, or 31%, compared to 2003. This decrease resulted from the payment upon maturity of our 6.8% senior notes in April 2004 and the redemption of our $825 million zero coupon convertible senior debentures in June 2003. In June 2003 we issued $700 million in zero coupon senior exchangeable notes; the proceeds of which were used to redeem our $825 million senior debentures. The $700 million notes will not accrue interest unless we become obligated to pay contingent interest, while our $825 million senior debentures had an effective interest rate of 2.5%. The amount of contingent interest payable per note in respect to any six-month period will equal 0.185% of the principal amount of a note commencing on or after June 15, 2008 only if certain conditions relating to the trading price of the notes are met (see Note 8 to our consolidated financial statements in Part II Item 8 for a more detailed description). Investment income totaled $50.1 million during 2004, representing an increase of $16.3 million, or 48%, compared to 2003. This increase primarily resulted from an increase in gains realized on sales of marketable securities and an increase in gains realized upon redemption of non-marketable securities during 2004. This increase was partially offset by a decrease in interest income resulting from lower average cash and marketable securities balances in 2004 compared to 2003 and from lower average yields on our investments driven by an overall declining interest rate environment. Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net increased to $4.6 million during 2004 from ($1.2) million during 2003. These amounts for 2004 include mark-to-market gains on our range cap and floor derivative instrument of approximately $2.4 million. These amounts for 2003 include the recognition of approximately $1.2 million of expense related to the settlement of amounts due to the counterparty for our range cap and floor derivative instrument (offset by mark-to-market gains on that derivative instrument of $.1 million) and a loss of approximately $.9 million resulting from the redemption of our 8.625% senior subordinated notes at prices higher than their carrying value on April 1, 2003, partially offset by gains on sales of long-lived assets of approximately $2.5 million. Our effective income tax (benefit) rate was 10% during 2004 compared to (10%) for 2003. The change from an income tax benefit in 2003 to an income tax expense in 2004 resulted from a higher proportion of our taxable income being generated in the U.S. for 2004 compared to 2003. Income generated in the U.S. is generally taxed at a higher rate than in international jurisdictions in which we operate. Our effective tax rate for 2004 was also positively impacted by the release of certain tax reserves, which were determined to no longer be necessary, resulting in a reduction in deferred income tax expense (non-cash) totaling approximately $16.0 million ($.10 per diluted share). In October 2004 the U.S. Congress passed and the -18- President signed into law the American Jobs Creation Act of 2004. The Act did not impact the corporate reorganization completed by Nabors effective June 24, 2002, that made us a foreign entity. It is possible that future changes to tax laws (including tax treaties) could have an impact on our ability to realize the tax savings recorded to date as well as future tax savings as a result of our corporate reorganization, depending on any responsive action taken by Nabors. We expect our effective tax rate during 2005 to be in the 22% - 25% range because we expect a high proportion of our income to be generated in the U.S., which is generally taxed at a higher rate than in international jurisdictions in which we operate. 2003 COMPARED TO 2002 Operating revenues and Earnings from unconsolidated affiliates for 2003 totaled $1.9 billion, representing an increase of $409.0 million, or 28%, compared to 2002. Adjusted income derived from operating activities and net income for 2003 totaled $212.7 million and $192.2 million ($1.25 per diluted share), respectively, representing increases of 25% and 58%, respectively, compared to 2002. The increase in our Operating revenues and Earnings from unconsolidated affiliates during 2003 primarily resulted from higher revenues realized by our Canadian, U.S. Lower 48 Land Drilling and International operations. The improved revenues from our Canadian operations resulted from an increase in the level of activity for our land drilling and well-servicing operations driven by increased demand for our services in that market during 2003 and our acquisition of Enserco Energy Service Company Inc. in April 2002. The Enserco acquisition increased the number of drilling rigs owned and operated by Nabors in Canada by 30 drilling rigs while also adding over 200 well-servicing rigs. The improved revenues for our U.S. Lower 48 Land Drilling operations resulted from higher activity levels driven by a gradual increase in demand for drilling services in that market during 2003. The overall increase in demand in these markets was driven by higher average price levels for natural gas in 2003 compared to 2002. International revenues improved primarily as a result of six new long-term contracts for our operation in Mexico. The increase in adjusted income derived from operating activities during 2003 primarily resulted from the increase in revenues discussed above. However, the overall increase in adjusted income derived from operating activities for 2003 was partially offset by lower average dayrates in our U.S. Lower 48 Land Drilling operations during 2003 and lower margins realized by certain of our Other Operating Segments. The decrease in average dayrates for our U.S. Lower 48 Land Drilling operations resulted from dayrates declining during 2002 and remaining flat until the latter part of 2003 when dayrates began to rise. This decline in dayrates during 2002 resulted from the weakness in this market over the period beginning in the third quarter of 2001 and extending through the end of 2002. The decrease in margins for our Other Operating Segments is discussed in detail below. As discussed above, natural gas prices are the primary driver of our U.S. Lower 48 Land Drilling, Canadian and U.S. Offshore operations, while oil prices are the primary driver of our Alaskan, International and U.S. Land Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg) averaged $5.49 per mcf during 2003, up from a $3.37 per mcf average during 2002. West Texas intermediate spot oil prices (per Bloomberg) averaged $31.06 per barrel during 2003, up from a $26.17 per barrel average during 2002. CONTRACT DRILLING Operating revenues and Earnings from unconsolidated affiliates for our Contract Drilling operating segments totaled $1.7 billion and adjusted income derived from operating activities totaled $241.2 million in 2003, representing increases of 27% and 30%, respectively, compared to 2002. Rig years (excluding well-servicing rigs) increased to 268.3 years during 2003 from 204.8 years during 2002 as a result of increased capital spending by our customers, which resulted from the improvement in commodity prices. U.S. Lower 48 Land Drilling Operating revenues and adjusted income derived from operating activities totaled $476.3 million and $16.8 million, respectively, in 2003, representing an increase of 27% and a decrease of 28%, respectively, compared to 2002. The increase in Operating revenues resulted from the increase in drilling activity driven by higher natural gas prices, which is reflected in the increase in rig years to 143.1 years during 2003 compared to 103.0 years during 2002. Adjusted income derived from operating activities decreased during 2003, despite the increase in rig activity, as a result of lower average dayrates, rising labor costs and higher depreciation expense. U.S. Land Well-servicing Operating revenues and adjusted income derived from operating activities totaled $312.3 million and $47.1 million, respectively, in 2003, representing increases of 6% and 22%, respectively, compared to 2002. The improved results in 2003 resulted from an increase in well-servicing utilization driven by the increase in spending by our customers during 2003 and a marginal increase in average dayrates compared to 2002. The strengthening in this market resulted primarily from the improvement in commodity prices in 2003. U.S. Land Well-servicing hours increased to 1,088,511 hours during 2003 from 1,014,657 hours during 2002. -19- U.S. Offshore Operating revenues and adjusted income derived from operating activities totaled $101.6 million and $1.6 million, respectively, in 2003, representing a decrease of 4% and an increase of 218%, respectively, compared to 2002. The decrease in Operating revenues in 2003 primarily relates to the inclusion in our 2002 Operating revenues of $6.4 million of business interruption insurance proceeds related to our Dolphin 105 jack-up rig, which was lost in a hurricane during 2002, and from lower rig years in 2003 compared to 2002. Rig years for our U.S. Offshore operations totaled 14.1 years during 2003 compared to 14.5 years during 2002. The decrease in Operating revenues in 2003 was partially offset by higher average dayrates in 2003 compared to 2002 resulting from an overall tightening of rig supply in the U.S. Gulf of Mexico during 2003. The increase in adjusted income derived from operating activities during 2003 resulted primarily from increased working days for our 1,000 horsepower workover rigs that currently generate higher daily cash margins than the remainder of our rigs, which was only partially offset by lower rig years in 2003. Adjusted income derived from operating activities for 2003 was also positively impacted by lower costs due to increased monitoring of costs on working rigs and reductions in fixed overhead and costs for non-working rigs. Alaskan Operating revenues and adjusted income derived from operating activities totaled $112.1 million and $37.8 million, respectively, in 2003, representing a decrease of 5% and an increase of 21%, respectively, compared to 2002. The decrease in Operating revenues resulted from lower drilling activity reflected in the decrease in rig years to 7.9 years during 2003 from 9.3 years during 2002, which was primarily driven by two of our customers decreasing their level of winter exploration activity. This reduced activity level was partially offset by an incremental $5.7 million of Operating revenues, representing business interruption insurance proceeds recorded during 2003 related to the damage incurred on one of our land drilling rigs in 2001, which exceeded the $3.1 million in business interruption insurance proceeds recorded during 2002 related to another rig damaged in 2001. The increase in adjusted income derived from operating activities resulted from the higher level of business interruption insurance proceeds recognized in 2003 than in 2002 and from projects where we earned a standby with crew rate, which adds to revenues at a level lower than standard rates, but with minimal costs of operation. Canadian Operating revenues and adjusted income derived from operating activities totaled $322.3 million and $59.9 million, respectively, in 2003, representing increases of 128% and 244%, respectively, compared to 2002. These increases reflect an increase in drilling and well-servicing revenues, which resulted from an overall increase in Canadian drilling and well-servicing activity driven by increased commodity prices, and from our acquisition of Enserco in April 2002. Rig years in Canada increased to 42.1 years during 2003 from 22.9 years during 2002. Canadian Well-servicing hours totaled 321,472 hours during 2003 compared to 164,785 hours during the period from April 26, 2002, the date we acquired Enserco, through December 31, 2002. International Operating revenues and Earnings from unconsolidated affiliates, and adjusted income derived from operating activities totaled $396.9 million and $78.0 million, respectively, in 2003, representing increases of 24% and 2%, respectively, compared to 2002. The improved results in 2003 primarily resulted from six new long-term contracts for our operation in Mexico. International rig years increased to 61.1 years during the current year from 55.1 years during 2002 primarily as a result of these new contracts. OIL AND GAS Oil and Gas Operating revenues totaled $16.9 million during 2003, representing an increase of 134% compared to 2002. Adjusted income derived from operating activities totaled $5.9 million during 2003 compared to an adjusted loss derived from operating activities totaling $1.1 million during 2002. The increase in operating results during 2004 as a result of new investments in oil and gas properties resulting from the agreements executed with El Paso Corporation in the fourth quarter of 2003. OTHER OPERATING SEGMENTS Operating revenues and Earnings from unconsolidated affiliates for our Other Operating Segments totaled $201.7 million during 2003 representing an increase of 15% compared to 2002. This increase primarily resulted from the acquisition of Ryan Energy Technologies, Inc. during the fourth quarter of 2002. Adjusted income derived from operating activities for our Other Operating Segments totaled $3.3 million during 2003 representing a decrease of 87% compared to 2002. While Ryan's results have been additive to our revenues, this new business realized a loss during 2003. In addition, decreased margins from our marine transportation services, which resulted from lower average dayrates, and from our top drive manufacturing operations, which resulted from fewer top drive sales in 2003 compared to 2002, resulted in lower profitability for our Other Operating Segments compared to 2002. OTHER FINANCIAL INFORMATION General and administrative expenses increased by $23.5 million, or 17%, in 2003 compared to 2002 primarily as a result of increases related to our Canadian acquisitions in 2002 and increased International activity. As a percentage of operating revenues, general and administrative expenses decreased in 2003 compared to 2002 (8.8% vs. 9.7%) as these expenses were spread over a larger revenue base. -20- Depreciation and amortization expense increased by $38.9 million, or 21%, in 2003 compared to 2002 as a result of an increase in average rig years for our Canadian land drilling, U.S. Lower 48 Land Drilling and International operations, a full year of depreciation in 2003 on assets acquired in our Enserco (April 2002) and Ryan (October 2002) acquisitions, as well as other capital expenditures during 2002 and 2003. Depletion expense totaled $8.6 million during 2003 compared to $7.7 million during 2002. This increase resulted from depletion on oil and gas properties added through our agreements with El Paso Corporation in the fourth quarter of 2003. Interest expense increased by $3.7 million, or 5%, in 2003 compared to 2002 resulting from the issuance of our $225 million aggregate principal amount of 4.875% senior notes and our $275 million aggregate principal amount of 5.375% senior notes in August 2002, which was only partially offset by reduced interest costs realized in 2003 from the issuance of our $700 million zero coupon senior exchangeable notes in June 2003. Such notes will not accrue interest unless we become obligated to pay contingent interest. The proceeds from this debt issuance were used to redeem our $825 million zero coupon convertible senior debentures, which had an effective interest rate of 2.5%. We also redeemed our 8.625% senior subordinated notes due April 2008 on April 1, 2003. Investment income decreased by $3.1 million, or 9%, in 2003 compared to 2002, reflecting lower average yields on investments resulting from the overall declining interest rate environment, partially offset by higher average cash and marketable securities balances. Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net decreased to ($1.2) million during 2003 from $.8 million during 2002. These amounts for 2003 include the recognition of approximately $1.2 million of expense related to the settlement of amounts due to the counterparty for our range cap and floor derivative instrument (offset by mark-to-market gains on that derivative instrument of $.1 million) and a loss of approximately $.9 million resulting from the redemption of our 8.625% senior subordinated notes at prices higher than their carrying value on April 1, 2003, partially offset by gains on sales of long-lived assets of approximately $2.5 million. These amounts for 2002 include gains on sales of long-lived assets of approximately $8.3 million, partially offset by impairment charges of approximately $3.7 million related to our reclassification of four supply vessels to held-for-sale (see Note 2 to our consolidated financial statements included in Part II Item 8 below), mark-to-market losses recorded on our range cap and floor derivative instrument of approximately $2.0 million and the recognition of approximately $3.8 million in non-recurring corporate reorganization expense. Our effective income (benefit) tax rate was (10%) during 2003 compared to 14% during 2002. The tax benefit position for 2003 resulted primarily from tax savings realized as a result of our corporate reorganization effective June 24, 2002. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Our cash flows primarily depend on the level of spending by our customers, oil and gas companies, for exploration, development and production activities. Sustained increases or decreases in the price of natural gas or oil could have a material impact on these activities, and could also materially affect our cash flows. Certain sources and uses of cash, such as the level of discretionary capital expenditures, purchases and sales of marketable securities, issuances and repurchases of debt, and repurchases of our common shares are within our control and are adjusted as necessary based on market conditions. The following is a discussion of our cash flows for the years ended December 31, 2004 and 2003. OPERATING ACTIVITIES Net cash provided by operating activities totaled $563.2 million during 2004 compared to net cash provided by operating activities of $395.7 million during 2003. During 2004 and 2003 net income was increased for non-cash items such as depreciation and amortization, and depletion, and was reduced for changes in our working capital and other balance sheet accounts. INVESTING ACTIVITIES Net cash used for investing activities totaled $549.1 million during 2004 compared to net cash used for investing activities totaling $408.2 million during 2003. During 2004 and 2003 cash was used for capital expenditures and purchases, net of sales, of marketable and non-marketable securities. -21- FINANCING ACTIVITIES Net cash used for financing activities totaled $221.2 million during 2004 compared to net cash provided by financing activities of $171.5 million during 2003. During 2004 cash was used for the reduction of long-term debt (including the payment upon maturity of our 6.8% senior notes in April 2004) and was provided by our receipt of proceeds from the exercise of options to acquire our common shares by our employees. During 2003 cash was provided by the issuance of our $700 million zero coupon senior exchangeable notes during June 2003 and our receipt of proceeds from the exercise of options to acquire our common shares by our employees, and was used for the reduction of long-term debt. FUTURE CASH REQUIREMENTS As of December 31, 2004, we had long-term debt, including current maturities, of $2.0 billion and cash and cash equivalents and investments in marketable and non-marketable securities of $1.4 billion. Our $1.381 billion zero coupon convertible senior debentures can be put to us on February 5, 2006, February 5, 2011 and February 5, 2016, for a purchase price equal to the issue price plus accrued original issue discount to the date of repurchase. The amount of the purchase price would total $826.8 million, $936.2 million and $1.1 billion if the debentures were put to us on February 5, 2006, February 5, 2011 or February 5, 2016, respectively. Additionally, each of our $700 million zero coupon senior exchangeable notes and our $1.381 billion zero coupon convertible senior debentures provide that upon an exchange or conversion, as applicable, of these convertible debt instruments, we will be required to pay holders of these debt instruments, in lieu of common shares, cash up to the principal amount of the instruments and, at our option, consideration in the form of either cash or our common shares for any amount above the principal amount of the instruments required to be paid pursuant to the terms of the indentures. As our $1.381 billion zero coupon convertible senior debentures can be converted at any time resulting in our payment of cash, the outstanding principal amount of these debentures of $804.6 million is included in current liabilities in our balance sheet as of December 31, 2004. These debentures previously would have been classified in current liabilities beginning in the first quarter of 2005 as a result of the holders having the option to put the debentures to us on February 5, 2006. If the $1.381 billion debentures were converted, our cash obligation would be an amount equal to the lesser of 8.5 million multiplied by the sale price of our common shares on the trading day immediately prior to the related conversion date or the principal amount of the debentures on the date of conversion. If these debentures had been converted on December 31, 2004, we would have been required to pay cash totaling approximately $435 million to the holders of the debentures (based on the closing price for our common shares on December 30, 2004 of $51.18). As this amount is substantially lower than the $826.8 million that the holders of the debentures will receive if they put the debentures to us on the first put date of February 5, 2006 or if they sold the debentures in the open market, we do not currently expect the debentures to be converted and any payment to be required prior to February 5, 2006 (when the holders have the option to put the debentures back to us), unless the price for our shares were to exceed approximately $94. Our $700 million zero coupon senior exchangeable notes cannot be exchanged until the price for our shares exceeds approximately $84 or in various other circumstances as described in the note indenture (see discussion in Note 8 to our consolidated financial statements included in Part II Item 8). As of December 31, 2004, we had outstanding purchase commitments of approximately $114.2 million, primarily for rig-related enhancing and sustaining capital expenditures. Total capital expenditures for 2005 are currently expected to be approximately $550 million, including currently planned rig-related enhancing and sustaining capital expenditures. This amount could change significantly based on market conditions and new business opportunities. We have historically completed a number of acquisitions and will continue to evaluate opportunities to acquire assets or businesses to enhance our operations. Several of our previous acquisitions were funded through issuances of our common shares. Future acquisitions may be paid for using existing cash or issuance of debt or Nabors' shares. Such capital expenditures and acquisitions will depend on our view of market conditions and other factors. -22- Historical capital expenditures and acquisitions of businesses, which represent the portion of the purchase price of acquisitions allocated to fixed assets and goodwill based on their fair market value, are classified as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 2004 2003 2002 -------- -------- -------- (IN THOUSANDS) Sustaining $229,154 $159,932 $102,633 Enhancement 130,656 110,852 136,837 Acquisition of assets and businesses 65,550 13,578 439,632 New construction 63,766 15,060 14,008 Net profits interests in oil and gas properties 55,303 53,716 9,733 -------- -------- -------- $544,429 $353,138 $702,843 ======== ======== ========
See our discussion of guarantees issued by Nabors that could have a potential impact on our financial position, results of operations or cash flows in future periods included under Off-Balance Sheet Arrangements (Including Guarantees) below. The following table summarizes our contractual cash obligations as of December 31, 2004:
PAYMENTS DUE BY PERIOD -------------------------------------------------------------- TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS THEREAFTER ---------- -------- --------- --------- ---------- (IN THOUSANDS) Contractual cash obligations: Long-term debt: Principal $2,026,800 $ -- $826,800(1) $925,000(2) $275,000 Interest 163,439 25,750 51,501 47,387 38,801 Operating leases (3) 29,025 11,462 13,677 2,575 1,311 Purchase commitments (4) 114,156 114,156 -- -- -- Employment contracts (3) 8,559 2,440 4,450 1,669 -- Pension funding obligations (5) 1,027 1,027 -- -- -- ---------- -------- -------- -------- -------- Total contractual cash obligations $2,343,006 $154,835 $896,428 $976,631 $315,112 ========== ======== ======== ======== ========
(1) Represents our $1.381 billion zero coupon convertible senior debentures which can be put to us on February 5, 2006. The principal amount of these debentures of $804.6 million are classified in current liabilities as of December 31, 2004. However, we do not expect these debentures to be converted for cash within the next 12 months based on the current market value of our shares (see discussion above). (2) Includes our $700 million zero coupon senior exchangeable notes, which can be put to us on June 15, 2008, and $225 million of our senior notes due 2009. (3) See Note 13 to our accompanying consolidated financial statements. (4) Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of the transaction. (5) See Note 11 to the accompanying consolidated financial statements. During 2002 our Board of Directors authorized the continuation of a share repurchase program under which we may repurchase our common shares in the open market. Under this program we are authorized to purchase up to $400 million of our common shares. Through December 31, 2004, approximately $248 million of our common shares have been repurchased under this program. FINANCIAL CONDITION AND SOURCES OF LIQUIDITY Our primary sources of liquidity are cash and cash equivalents, marketable and non-marketable securities and cash generated from operations. As of December 31, 2004, we had cash and cash equivalents and investments in marketable and non-marketable securities of $1.4 billion (including $510.5 million of long-term marketable and non-marketable securities) and working capital of $381.7 million. This compares to cash and cash equivalents and investments in marketable and non- -23- marketable securities of $1.6 billion (including $612.4 million of long-term marketable securities) and working capital of $917.3 million as of December 31, 2003. Our funded debt to capital ratio was 0.41:1 as of December 31, 2004 and 0.48:1 as of December 31, 2003. Our net funded debt to capital ratio was 0.17:1 as of December 31, 2004 and 0.22:1 as of December 31, 2003. The funded debt to capital ratio is calculated by dividing funded debt by funded debt plus capital. Funded debt is defined as the sum of (1) short-term borrowings, (2) current portion of long-term debt and (3) long-term debt. Capital is defined as shareholders' equity. The net funded debt to capital ratio nets cash and cash equivalents and marketable and non-marketable securities against funded debt. This ratio is calculated by dividing net funded debt by net funded debt plus capital. Both of these ratios are a method for calculating the amount of leverage a company has in relation to its capital. Non-marketable securities consist of investments in overseas funds investing primarily in a variety of public and private U.S. and non-U.S. securities (including asset-backed securities and mortgage-backed securities, global structured asset securitizations, whole loan mortgages, and participations in whole loans and whole loan mortgages). These investments are classified as non-marketable, because they do not have published fair values, and are recorded at cost in our consolidated balance sheets (the current portion is classified as non-marketable securities under current assets and the long-term portion is included as a component of other long-term assets). Our interest coverage ratio was 14.1:1 as of December 31, 2004, compared to 6.8:1 as of December 31, 2003. The interest coverage ratio is computed by calculating the sum of income before income taxes, interest expense, depreciation and amortization, and depletion expense and then dividing by interest expense. This ratio is a method for calculating the amount of cash flows available to cover interest expense. We have three letter of credit facilities with various banks as of December 31, 2004. Availability and borrowings under our credit facilities as of December 31, 2004 are as follows: (IN THOUSANDS) Credit available $110,000 Letters of credit outstanding (77,876) -------- Remaining availability $ 32,124 ========
We have a shelf registration statement on file with the U.S. Securities and Exchange Commission to allow us to offer, from time to time, up to $700 million in debt securities, guarantees of debt securities, preferred shares, depository shares, common shares, share purchase contracts, share purchase units and warrants. We currently have not issued any securities registered under this registration statement. Our current cash and cash equivalents, investments in marketable and non-marketable securities and projected cash flow generated from current operations are expected to more than adequately finance our sustaining capital expenditures, our debt service requirements, and all other expected cash requirements for the next twelve months. See our discussion of the impact of changes in market conditions on our derivative financial instruments discussed under Item 7A. Quantitative and Qualitative Disclosures About Market Risk below. OFF-BALANCE SHEET ARRANGEMENTS (INCLUDING GUARANTEES) We are a party to certain transactions, agreements or other contractual arrangements defined as "off- balance sheet arrangements" that could have a material future effect on our financial position, results of operations, liquidity and capital resources. The most significant of these off-balance sheet arrangements involve agreements and obligations in which we provide financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers' compensation insurance program, other financial surety instruments such as bonds, and guarantees of residual value in certain of our operating lease agreements. We have also guaranteed payment of contingent consideration in conjunction with an acquisition in 2002, which is based on future operating results of that business. In addition, we have provided indemnifications to certain third parties which serve as guarantees. These guarantees include indemnification provided by Nabors to our stock transfer agent and our insurance carriers. We are not able to estimate the potential future maximum payments that might be due under our indemnification guarantees. -24- Management believes the likelihood that we would be required to perform or otherwise incur any material losses associated with any of these guarantees is remote. The following table summarizes the total maximum amount of financial and performance guarantees issued by Nabors:
MAXIMUM AMOUNT -------------------------------------------- 2005 2006 2007 THEREAFTER TOTAL ------- ---- ---- ---------- ------- (IN THOUSANDS) Financial standby letters of credit and other financial surety instruments $81,067 $ -- $-- $302 $81,369 Guarantee of residual value in lease agreements 684 65 -- -- 749 Contingent consideration in acquisition 2,000 500 -- -- 2,500 ------- ---- --- ---- ------- Total $83,751 $565 $-- $302 $84,618 ======= ==== === ==== =======
OTHER MATTERS RECENT LEGISLATION, COAST GUARD REGULATIONS AND ACTIONS Our Sea Mar division time charters supply vessels to offshore operators in U.S. waters. The vessels are owned by one of our financing company subsidiaries, but are operated and managed by a U.S. citizen-controlled company pursuant to long-term bareboat charters. As a result of recent legislation, beginning in August 2007 Sea Mar will no longer be able to use this arrangement to qualify vessels for employment in the U.S. coastwise trade. Accordingly, we will be required to restructure the arrangement, redeploy the vessels outside the United States, or sell the vessels by no later than such time. As of December 31, 2004, the net assets of Sea Mar totaled approximately $159.8 million. During 2004 Sea Mar had income before income taxes totaling $2.3 million. RECENT ACCOUNTING PRONOUNCEMENTS We currently account for stock-based compensation as prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and because we grant options at prices equal to the market price of our shares on the date of the grant we do not record compensation expense related to these grants. In December 2004 the Financial Accounting Standards Board (FASB) issued a revision to Statement of Financial Accounting Standards (SFAS) No. 123, "Share-Based Payment," which will eliminate our ability to account for stock-based compensation using APB 25 and instead would require us to account for stock option awards using a fair-value based method resulting in compensation expense for stock option awards. The statement will be effective for stock options granted, modified, or settled in cash in interim and annual periods beginning after June 15, 2005. Additionally, for stock options granted or modified after December 15, 1994 that have not vested as of the effective date of the statement, compensation cost will be measured and recorded based on the same estimates of fair value calculated as of the date of grant as currently disclosed within the table required by SFAS No. 148, "Accounting for Stock-Based Compensation - an Amendment to FAS 123," presented in Note 2 to our accompanying consolidated financial statements. The statement may have a material adverse effect on our results of operations during the periods of adoption and annual and interim periods thereafter. If this statement had been adopted in its current form as of January 1, 2004, we would have recorded additional compensation expense, net of related tax effects, of approximately $22.5 million during 2004 and our diluted earnings per share for 2004 would have been reduced by $.14 per share. In October 2004 the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) in EITF 04-8, which addresses the issue of when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings per share computations. Based on the concepts described in EITF 04-8, we will be required to treat our $700 million zero coupon senior exchangeable notes as converted for purposes of computing diluted earnings per share, regardless of whether any triggering contingency has been met or is likely to be met. The provisions in EITF 04-8 are effective for periods ending after December 15, 2004, including the year ended December 31, 2004. As a result of this accounting change, we are required to include additional common shares in the denominator of our diluted earnings per share calculation in all periods where the price for our shares exceeds $70.10. These additional shares represent the value in excess of the principal amount of the notes and would be calculated using the treasury stock method. We do not expect this accounting change to have a material effect on our financial position, results of operations or cash flows. -25- In January 2003 the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which addresses the consolidation of variable interest entities (VIEs) by business enterprises that are the primary beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. In December 2003 the FASB issued a revision to FIN 46, Interpretation No. 46R (FIN 46R), to clarify some of the provisions of FIN 46, and to exempt certain entities from its requirements. Application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. Our adoption of FIN 46R on March 31, 2004 did not have a material effect on our financial position, results of operations or cash flows as of and for the year ended December 31, 2004. RELATED PARTY TRANSACTIONS Pursuant to his employment agreement entered into in October 1996, we provided an unsecured, non-interest bearing loan of approximately $2.9 million to Nabors' Deputy Chairman, President and Chief Operating Officer. This loan is due on September 30, 2006. Pursuant to their employment agreements, Nabors and its Chairman and Chief Executive Officer, Deputy Chairman, President and Chief Operating Officer, and certain other key employees entered into split-dollar life insurance agreements pursuant to which we pay a portion of the premiums under life insurance policies with respect to these individuals and, in certain instances, members of their families. Under these agreements, we are reimbursed for such premiums upon the occurrence of specified events, including the death of an insured individual. Any recovery of premiums paid by Nabors could potentially be limited to the cash surrender value of these policies under certain circumstances. As such, the values of these policies are recorded at their respective cash surrender values in our consolidated balance sheets. We have made premium payments to date totaling $13.2 million related to these policies. The cash surrender value of these policies of approximately $11.8 million and $11.4 million is included in other long-term assets in our consolidated balance sheets as of December 31, 2004 and 2003, respectively. Under the Sarbanes-Oxley Act of 2002, the payment of premiums by Nabors under the agreements with our Chairman and Chief Executive Officer and with our Deputy Chairman, President and Chief Operating Officer may be deemed to be prohibited loans by us to these individuals. We have paid no premiums related to our agreements with these individuals since the adoption of the Sarbanes-Oxley Act and have postponed premium payments related to our agreements with these individuals. In the ordinary course of business, we enter into various rig leases, rig transportation and related oilfield services agreements with our Alaskan and Saudi Arabian unconsolidated affiliates at market prices. Revenues from business transactions with these affiliated entities totaled $63.2 million, $51.3 million and $46.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. Expenses from business transactions with these affiliated entities totaled $3.3 million, $3.3 million and $3.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. Additionally, we had accounts receivable from these affiliated entities of $20.7 million and $20.9 million as of December 31, 2004 and 2003, respectively. We had accounts payable to these affiliated entities of $1.8 million and $.5 million as of December 31, 2004 and 2003, respectively, and a note payable with one of these affiliated entities of $4.1 million and $4.3 million as of December 31, 2004 and 2003, respectively, which is included in other long-term liabilities. Additionally, we own certain marine vessels that are chartered under a bareboat charter arrangement to Sea Mar Management LLC, an entity in which we own a 25% interest. Under the requirements of FIN 46R this entity was consolidated by Nabors beginning in 2004. Revenues from business transactions with Sea Mar totaled $29.5 million and $18.0 million for the years ended December 31, 2003 and 2002, respectively. Expenses from business transactions with Sea Mar totaled $47.9 million and $28.1 million for the years ended December 31, 2003 and 2002, respectively. Accounts receivable from and accounts payable to Sea Mar as of December 31, 2003 totaled $3.0 million and $3.2 million, respectively. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized -26- during the reporting period. We analyze our estimates based on our historical experience and various other assumptions that we believe to be reasonable under the circumstances. However, actual results could differ from such estimates. The following is a discussion of our critical accounting estimates. Management considers an accounting estimate to be critical if: - it requires assumptions to be made that were uncertain at the time the estimate was made; and - changes in the estimate or different estimates that could have been selected could have a material impact on our consolidation financial position or results of operations. For a summary of all of our significant accounting policies, see Note 2 to the accompanying consolidated financial statements. DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT The drilling, workover and well-servicing industries are very capital intensive. Property, plant and equipment represented 56% of our total assets as of December 31, 2004, and depreciation constituted 12% of our total costs and other deductions for the year ended December 31, 2004. Depreciation for our primary operating assets, drilling and workover rigs, is calculated based on the units-of-production method over an approximate 4,900-day period, with the exception of our jack-up rigs which are depreciated over an 8,030-day period, after provision for salvage value. When our drilling and workover rigs are not operating, a depreciation charge is provided using the straight-line method over an assumed depreciable life of 20 years, with the exception of our jack-up rigs, where a 30-year depreciable life is used. Depreciation on our buildings, well-servicing rigs, oilfield hauling and mobile equipment, marine transportation and supply vessels, and other machinery and equipment is computed using the straight-line method over the estimated useful life of the asset after provision for salvage value (buildings - 10 to 30 years; well-servicing rigs - 3 to 15 years; marine transportation and supply vessels - 10 to 25 years; oilfield hauling and mobile equipment and other machinery and equipment - 3 to 10 years). These depreciation periods and the salvage values of our property, plant and equipment were determined through an analysis of the useful lives of our assets and based on our experience with the salvage values of these assets. Periodically, we review our depreciation periods and salvage values for reasonableness given current conditions. Depreciation of property, plant and equipment is therefore based upon estimates of the useful lives and salvage value of those assets. Estimation of these items requires significant management judgment. Accordingly, management believes that accounting estimates related to depreciation expense recorded on property, plant and equipment are critical. There have been no factors related to the performance of our portfolio of assets, changes in technology or other factors that indicate that these lives do not continue to be appropriate. Accordingly, for the years ended December 31, 2004, 2003 and 2002, no significant changes have been made to the depreciation rates applied to property, plant and equipment, the underlying assumptions related to estimates of depreciation, or the methodology applied. However, certain events could occur that would materially affect our estimates and assumptions related to depreciation. Unforeseen changes in operations or technology could substantially alter management's assumptions regarding our ability to realize the return on our investment in operating assets and therefore affect the useful lives and salvage values of our assets. IMPAIRMENT OF LONG-LIVED ASSETS As discussed above, the drilling, workover and well-servicing industries are very capital intensive, which is evident in the fact that our property, plant and equipment represented 56% of our total assets as of December 31, 2004. Other long-lived assets subject to impairment consist primarily of goodwill, which represented 6% of our total assets as of December 31, 2004. We review our long-lived assets for impairment when events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. In addition, we review goodwill and intangible assets with indefinite lives for impairment annually, as required by SFAS No. 142, "Goodwill and Other Intangible Assets." An impairment loss is recorded in the period in which it is determined that the carrying amount of the long-lived asset is not recoverable. Such determination requires us to make judgments regarding long-term forecasts of future revenues and costs related to the assets subject to review in order to determine the future cash flows associated with the asset or, in the case of goodwill, our reporting units. These long-term forecasts are uncertain in that they require assumptions about demand for our products and services, future market conditions, technological advances in the industry, and changes in regulations governing the industry. Significant and unanticipated changes to the assumptions could require a provision for impairment in a future period. As the determination of whether impairment charges should be recorded on our long-lived assets is subject to significant management judgment and an impairment of these assets could result in a material charge on our consolidated statements of income, management believes that accounting estimates related to impairment of long-lived assets is critical. -27- Assumptions made in the determination of future cash flows are made with the involvement of management personnel at the operational level where the most specific knowledge of market conditions and other operating factors exists. For the years ended December 31, 2004, 2003 and 2002, no significant changes have been made to the methodology utilized to determine future cash flows. Given the nature of the evaluation of future cash flows and the application to specific assets and specific times, it is not possible to reasonably quantify the impact of changes in these assumptions. INCOME TAXES Deferred taxes represent a substantial liability for Nabors. For financial reporting purposes, management determines our current tax liability as well as those taxes incurred as a result of current operations yet deferred until future periods. In accordance with the liability method of accounting for income taxes as specified in SFAS No. 109, "Accounting for Income Taxes," the provision for income taxes is the sum of income taxes both currently payable and deferred. Currently payable taxes represent the liability related to our income tax return for the current year while the net deferred tax expense or benefit represents the change in the balance of deferred tax assets or liabilities reported on our consolidated balance sheets. The changes in deferred tax assets or liabilities are determined based upon changes in differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for tax purposes as measured by the enacted tax rates that management estimates will be in effect when these differences reverse. In addition to estimating the future tax rates applicable to the reversal of tax differences, management must also make certain assumptions regarding whether tax differences are permanent or temporary, management must estimate the timing of their reversal, and whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the need for valuation allowances, management has considered and made judgments and estimates regarding estimated future taxable income and ongoing prudent and feasible tax planning strategies. These judgments and estimates are made for each tax jurisdiction in which we operate as the calculation of deferred taxes is completed at that level. Further, under U.S. federal tax law, the amount and availability of loss carryforwards (and certain other tax attributes) are subject to a variety of interpretations and restrictive tests applicable to Nabors and our subsidiaries. The utilization of such carryforwards could be limited or effectively lost upon certain changes in ownership. Accordingly, although we believe substantial loss carryforwards are available to us, no assurance can be given concerning the realization of such loss carryforwards, or whether or not such loss carryforwards will be available in the future. These loss carryforwards are also considered in our calculation of taxes for each jurisdiction in which we operate. Additionally, we record reserves for uncertain tax positions which are subject to a significant level of management judgment related to the ultimate resolution of those tax positions. Accordingly, management believes that the estimate related to the provision for income taxes is critical to our results of operations. For the years ended December 31, 2004, 2003 and 2002, management made no material changes in its assumptions regarding the determination of the provision for income taxes. However, certain events could occur that would materially affect management's estimates and assumptions regarding the deferred portion of our income tax provision, including estimates of future tax rates applicable to the reversal of tax differences, the classification of timing differences as temporary or permanent, reserves recorded for uncertain tax positions, and any valuation allowance recorded as a reduction to our deferred tax assets. Management's assumptions related to the preparation of our income tax provision have historically proved to be reasonable in light of the ultimate amount tax liability due in all taxing jurisdictions. For the year ended December 31, 2004, our provision for income taxes was $33.4 million, consisting of $20.9 million of current tax expense and $12.5 million of deferred tax expense. Changes in management's estimates and assumptions regarding the tax rate applied to deferred tax assets and liabilities, the ability to realize the value of deferred tax assets, or the timing of the reversal of tax basis differences could potentially impact the provision for income taxes. Changes in these assumptions could potentially change the effective tax rate. A 1% change in the effective tax rate from 10% to 11% would increase the current year income tax provision by approximately $3.4 million. INSURANCE RESERVES Our operations are subject to many hazards inherent in the drilling, workover and well-servicing industries, including blowouts, cratering, explosions, fires, loss of well control, loss of hole, damaged or lost drilling equipment and damage or loss from inclement weather or natural disasters. Any of these hazards could result in personal injury or death, damage to or destruction of equipment and facilities, suspension of operations, environmental damage and damage to the property of others. Generally, drilling contracts provide for the division of responsibilities between a drilling company and its customer, and we seek to obtain indemnification from our customers by contract for certain of these risks. To the extent that we are unable to transfer such risks to customers by contract or indemnification agreements, we seek protection through insurance. However, there is no assurance that such insurance or indemnification agreements will adequately protect us against liability from all of the consequences of the hazards described above. Moreover, our insurance coverage generally provides that we assume a portion of the risk in the form of an insurance coverage deductible. -28- Based on the risks discussed above, it is necessary for us to estimate the level of our liability related to insurance and record reserves for these amounts in our consolidated financial statements. Reserves related to insurance are based on the facts and circumstances specific to the insurance claims and our past experience with similar claims. The actual outcome of insured claims could differ significantly from estimated amounts. We maintain actuarially-determined accruals in our consolidated balance sheets to cover self-insurance retentions for workers' compensation, employers' liability, general liability and automobile liability claims. These accruals are based on certain assumptions developed utilizing historical data to project future losses. Loss estimates in the calculation of these accruals are adjusted based upon actual claim settlements and reported claims. These loss estimates and accruals recorded in our financial statements for claims have historically been reasonable in light of the actual amount of claims paid. As the determination of our liability for insurance claims is subject to significant management judgment and in certain instances is based on actuarially estimated and calculated amounts, and such liabilities could be material in nature, management believes that accounting estimates related to insurance reserves are critical. For the years ended December 31, 2004, 2003 and 2002, no significant changes have been made to the methodology utilized to estimate insurance reserves. For purposes of earnings sensitivity analysis, if the December 31, 2004 reserves for insurance were adjusted (increase or decreased) by 10%, total costs and other deductions would have changed by $9.8 million, or .5%. FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED We have completed a number of large acquisitions in recent years as discussed in Note 3 to our accompanying consolidated financial statements. In conjunction with our accounting for these acquisitions, it was necessary for us to estimate the values of the assets acquired and liabilities assumed in the various business combinations, which involved the use of various assumptions. These estimates may be affected by such factors as changing market conditions, technological advances in the industry or changes in regulations governing the industry. The most significant assumptions, and the ones requiring the most judgment, involve the estimated fair values of property, plant and equipment, and the resulting amount of goodwill, if any. Unforeseen changes in operations or technology could substantially alter management's assumptions and could result in lower estimates of values of acquired assets or of future cash flows. This could result in impairment charges being recorded in our consolidated statements of income. As the determination of the fair value of assets acquired and liabilities assumed is subject to significant management judgment and a change in purchase price allocations could result in a material difference in amounts recorded in our consolidated financial statements, management believes that accounting estimates related to the valuation of assets acquired and liabilities assumed are critical. The determination of the fair value of assets and liabilities are based on the market for the assets and the settlement value of the liabilities. These estimates are made by management based on our experience with similar assets and liabilities. For the years ended December 31, 2004, 2003 and 2002, no significant changes have been made to the methodology utilized to value assets acquired or liabilities assumed. As we have not recorded any significant impairment charges on property, plant and equipment or goodwill in either of the years ended December 31, 2004, 2003 and 2002, our estimates of the fair values of assets acquired and liabilities assumed have proved to be reliable. Given the nature of the evaluation of the fair value of assets acquired and liabilities assumed and the application to specific assets and liabilities, it is not possible to reasonably quantify the impact of changes in these assumptions. -29- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We may be exposed to certain market risks arising from the use of financial instruments in the ordinary course of business. This risk arises primarily as a result of potential changes in the fair market value of financial instruments that would result from adverse fluctuations in foreign currency exchange rates, credit risk, interest rates, and marketable and non-marketable security prices as discussed below. FOREIGN CURRENCY RISK We operate in a number of international areas and are involved in transactions denominated in currencies other than U.S. dollars, which exposes us to foreign exchange rate risk. The most significant exposures arise in connection with our operations in Canada, which usually are substantially unhedged. At various times, we utilize local currency borrowings (foreign currency-denominated debt), the payment structure of customer contracts and foreign exchange contracts to selectively hedge our exposure to exchange rate fluctuations in connection with monetary assets, liabilities, cash flows and commitments denominated in certain foreign currencies. A foreign exchange contract is a foreign currency transaction, defined as an agreement to exchange different currencies at a given future date and at a specified rate. A hypothetical 10% decrease in the value of all our foreign currencies relative to the U.S. dollar as of December 31, 2004 would result in a $15.5 million decrease in the fair value of our net monetary assets denominated in currencies other than U.S. dollars. CREDIT RISK Our financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investments and marketable and non-marketable securities, accounts receivable, and our interest rate swap and range cap and floor transactions. Cash equivalents such as deposits and temporary cash investments are held by major banks or investment firms. Our investments in marketable and non-marketable securities are managed within established guidelines which limit the amounts that may be invested with any one issuer and which provide guidance as to issuer credit quality. We believe that the credit risk in such instruments is minimal. In addition, our trade receivables are with a variety of U.S., international and foreign-country national oil and gas companies. Management considers this credit risk to be limited due to the financial resources of these companies. We perform ongoing credit evaluations of our customers and we generally do not require material collateral. We maintain reserves for potential credit losses, and such losses have been within management's expectations. INTEREST RATE, AND MARKETABLE AND NON-MARKETABLE SECURITY PRICE RISK Our financial instruments that are potentially sensitive to changes in interest rates include our $1.381 billion zero coupon convertible senior debentures, our $700 million zero coupon senior exchangeable notes, our 4.875% and 5.375% senior notes, our interest rate swap and range cap and floor transactions, our investments in debt securities (including corporate, asset-backed, U.S. Government, Government agencies, foreign government, mortgage-backed debt and mortgage-CMO debt securities) and our investment in overseas funds investing primarily in a variety of public and private U.S. and non-U.S. securities (including asset-backed securities and mortgage-backed securities, global structured asset securitizations, whole loan mortgages, and participations in whole loans and whole loan mortgages), which are classified as non-marketable securities. We may utilize derivative financial instruments that are intended to manage our exposure to interest rate risks. The use of derivative financial instruments could expose us to further credit risk and market risk. Credit risk in this context is the failure of a counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty would owe us, which can create credit risk for us. When the fair value of a derivative contract is negative, we would owe the counterparty, and therefore, we would not be exposed to credit risk. We attempt to minimize credit risk in derivative instruments by entering into transactions with major financial institutions that have a significant asset base. Market risk related to derivatives is the adverse effect to the value of a financial instrument that results from changes in interest rates. We try to manage market risk associated with interest-rate contracts by establishing and monitoring parameters that limit the type and degree of market risk that we undertake. Our $700 million zero coupon senior exchangeable notes include a contingent interest provision, discussed under Liquidity and Capital Resources above, which qualifies as an embedded derivative under SFAS 133, as amended by SFAS 149. This embedded derivative is required to be separated from the notes and valued at its fair value at the inception of the note indenture. Any subsequent change in fair value of this embedded derivative would be recorded in our consolidated statements of income. The fair value of the contingent interest provision at inception of the note indenture was nominal. In addition, there was no significant change in the fair value of this embedded derivative through December 31, 2004, resulting in no impact on our consolidated statements of income for the year ended December 31, 2004. On October 21, 2002, we entered into an interest rate swap transaction with a third-party financial institution to hedge our exposure to changes in the fair value of $200 million of our fixed rate 5.375% senior notes due 2012, which has -30- been designated as a fair value hedge under SFAS 133, as amended by SFAS 149. Additionally, on October 21, 2002, we purchased a LIBOR range cap and sold a LIBOR floor, in the form of a cashless collar, with the same third-party financial institution with the intention of mitigating and managing our exposure to changes in the three-month U.S. dollar LIBOR rate. This transaction does not qualify for hedge accounting treatment under SFAS 133, as amended by SFAS 149, and any change in the cumulative fair value of this transaction will be reflected as a gain or loss in our consolidated statements of income. During the years ended December 31, 2004, 2003 and 2002, we recorded interest savings related to our interest rate swap agreement accounted for as a fair value hedge of $6.5 million, $6.8 million and $1.2 million, respectively, which served to reduce interest expense. The fair value of our interest rate swap agreement is recorded as a derivative asset, included in other long-term assets, and totaled approximately $4.6 million and $4.2 million as of December 31, 2004 and 2003, respectively. The carrying value of our 5.375% senior notes has been increased by the same amount as of December 31, 2004 and 2003. The fair value of our range cap and floor transaction is recorded as a derivative asset, included in other long-term assets, and totaled approximately $.3 million as of December 31, 2004, and is recorded as a derivative liability, included in other long-term liabilities, and totaled approximately $3.7 million and $3.8 million as of December 31, 2003 and 2002, respectively. In June 2004 we unwound $100 million of the $200 million range cap and floor derivative instrument. We recorded gains of approximately $2.4 million and losses of approximately $1.1 million and $3.8 million for the years ended December 31, 2004, 2003 and 2002, respectively, related to this derivative instrument; such amounts are included in losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net in our consolidated statements of income. A hypothetical 10% adverse shift in quoted interest rates as of December 31, 2004 would decrease the fair values of our interest rate swap, and range cap and floor, by approximately $5.6 million and $.5 million, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of our fixed rate long-term debt is estimated based on quoted market prices or prices quoted from third-party financial institutions. The carrying and fair values of our long-term debt, including the current portion, are as follows:
DECEMBER 31, ------------------------------------------------------------------------------- 2004 2003 ------------------------------------- ------------------------------------- EFFECTIVE EFFECTIVE INTEREST CARRYING INTEREST CARRYING RATE VALUE FAIR VALUE RATE VALUE FAIR VALUE --------- ---------- ---------- --------- ---------- ---------- (IN THOUSANDS, EXCEPT INTEREST RATES) 4.875% senior notes due August 2009 5.00% $ 223,764 $ 232,058 4.88% $ 223,499 $ 234,585 5.375% senior notes due August 2012 3.09%(1) 277,922(2) 292,454(2) 2.91%(1) 277,248(2) 290,813(2) $700 million zero coupon senior exchangeable notes due June 2023 0% 700,000 668,581 0% 700,000 643,651 $1.381 billion zero coupon convertible senior debentures due February 2021 2.5%(3) 804,550 797,233 2.5%(3) 784,807 780,880 6.8% senior notes due April 2004 (4) N/A -- -- 6.8% 295,267 299,681 Other long-term debt 0% -- -- 8.25% 4,117 4,117 ---------- ---------- ---------- ---------- $2,006,236 $1,990,326 $2,284,938 $2,253,727 ========== ========== ========== ==========
(1) Includes the effect of interest savings realized from the interest rate swap executed on October 21, 2002. (2) Includes $4.6 million and $4.2 million related to the fair value of the interest rate swap as of December 31, 2004 and 2003, respectively. -31- (3) Represents the rate at which accretion of the original discount at issuance of these debentures is charged to interest expense. (4) Our 6.8% senior notes due April 2004 were redeemed upon maturity in April 2004. The fair values of our cash equivalents, trade receivables and trade payables approximate their carrying values due to the short-term nature of these instruments. Our cash and cash equivalents and investments in marketable debt and equity securities are included in the table below. The table provided below does not include our investments in non-marketable securities, which are carried at cost.
DECEMBER 31, ------------------------------------------------------------------------------- 2004 2003 -------------------------------------- -------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE LIFE LIFE FAIR VALUE INTEREST RATES (YEARS) FAIR VALUE INTEREST RATES (YEARS) ---------- -------------- -------- ---------- -------------- -------- (IN THOUSANDS, EXCEPT INTEREST RATES) Cash and cash equivalents $ 384,709 .88%-2.56% .1 $ 579,737 .71%-1.87% .1 Available-for-sale marketable equity securities 40,723 N/A N/A 48,843 N/A N/A Marketable debt securities: Commercial paper and CDs 6,970 2.30% .2 50,743 1.40% .1 Corporate debt securities 384,569 2.12%-8.85% .5 319,327 1.26%-8.85% 1.2 U.S. Government debt securities -- -- -- 7,103 4.75%-5.87% .4 Government agencies debt securities 97,515 2.13%-3.88% .3 285,358 1.25%-5.63% 1.0 Mortgage-backed debt securities -- -- -- 119 7.50% -- Mortgage-CMO debt securities 26,326 2.67%-5.00% .6 29,275 4.50%-5.00% -- Asset-backed debt securities 311,701 1.41%-6.53% 1.0 211,585 1.35%-6.79% .9 ---------- ---------- $1,252,513 $1,532,090 ========== ==========
Our investments in marketable debt securities listed in the above table and a portion of our investment in non-marketable securities are sensitive to changes in interest rates. Additionally, our investment portfolio of marketable debt and equity securities, which are carried at fair value, expose us to price risk. A hypothetical 10% decrease in the market prices for all marketable securities as of December 31, 2004 would decrease the fair value of our available-for-sale securities by $86.8 million. -32- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX
PAGE NO. -------- Management's Report on Internal Control over Financial Reporting......................................................... 34 Report of Independent Registered Public Accounting Firm.............. 35 Consolidated Balance Sheets as of December 31, 2004 and 2003......... 36 Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002.................................. 37 Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002.................................. 38 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2004, 2003 and 2002.................. 39 Notes to Consolidated Financial Statements........................... 42
-33- MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the framework in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company's system of internal control over financial reporting was effective as of December 31, 2004. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included below which expresses an unqualified opinion on management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004. -34- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM NABORS INDUSTRIES LTD. AND SUBSIDIARIES To the Shareholders and Board of Directors of Nabors Industries Ltd.: We have completed an integrated audit of Nabors Industries Ltd.'s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in shareholders' equity present fairly, in all material respects, the financial position of Nabors Industries Ltd. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Internal control over financial reporting Also, in our opinion, management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PRICEWATERHOUSECOOPERS LLP Houston, Texas March 7, 2005 -35- CONSOLIDATED BALANCE SHEETS NABORS INDUSTRIES LTD. AND SUBSIDIARIES
December 31, ----------------------- 2004 2003 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Assets Current assets: Cash and cash equivalents $ 384,709 $ 579,737 Marketable securities 428,342 339,936 Accounts receivable, net 540,103 410,487 Inventory 28,653 23,289 Deferred income taxes 39,599 36,442 Non-marketable securities 87,500 47,000 Other current assets 72,068 78,756 ---------- ---------- Total current assets 1,580,974 1,515,647 Marketable securities 439,462 612,417 Property, plant and equipment, net 3,275,495 2,990,792 Goodwill, net 327,225 315,627 Other long-term assets 239,453 168,209 ---------- ---------- Total assets $5,862,609 $5,602,692 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 804,550 $ 299,385 Trade accounts payable 211,600 128,840 Accrued liabilities 171,234 160,745 Income taxes payable 11,932 9,403 ---------- ---------- Total current liabilities 1,199,316 598,373 Long-term debt 1,201,686 1,985,553 Other long-term liabilities 146,337 155,667 Deferred income taxes 385,877 372,824 ---------- ---------- Total liabilities 2,933,216 3,112,417 ---------- ---------- Commitments and contingencies (Note 13) Shareholders' equity: Common shares, par value $.001 per share: Authorized common shares 400,000; issued 149,861 and 146,656, respectively 150 147 Capital in excess of par value 1,358,374 1,270,362 Accumulated other comprehensive income 148,229 99,583 Retained earnings 1,422,640 1,120,183 ---------- ---------- Total shareholders' equity 2,929,393 2,490,275 ---------- ---------- Total liabilities and shareholders' equity $5,862,609 $5,602,692 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. -36- CONSOLIDATED STATEMENTS OF INCOME NABORS INDUSTRIES LTD. AND SUBSIDIARIES
Year Ended December 31, ------------------------------------ 2004 2003 2002 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues and other income: Operating revenues $2,394,031 $1,880,003 $1,466,443 Earnings from unconsolidated affiliates 4,057 10,183 14,775 Investment income 50,064 33,813 36,961 ---------- ---------- ---------- Total revenues and other income 2,448,152 1,923,999 1,518,179 ---------- ---------- ---------- Costs and other deductions: Direct costs 1,572,649 1,276,953 973,910 General and administrative expenses 195,388 165,403 141,895 Depreciation and amortization 254,939 226,528 187,665 Depletion 45,460 8,599 7,700 Interest expense 48,507 70,740 67,068 Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net (4,629) 1,153 (833) ---------- ---------- ---------- Total costs and other deductions 2,112,314 1,749,376 1,377,405 ---------- ---------- ---------- Income before income taxes 335,838 174,623 140,774 ---------- ---------- ---------- Income tax expense (benefit): Current 20,867 8,494 10,185 Deferred 12,514 (26,099) 9,100 ---------- ---------- ---------- Total income tax expense (benefit) 33,381 (17,605) 19,285 ---------- ---------- ---------- Net income $ 302,457 $ 192,228 $ 121,489 ========== ========== ========== Earnings per share: Basic $ 2.03 $ 1.31 $ .85 Diluted $ 1.92 $ 1.25 $ .81 Weighted average number of common shares outstanding: Basic 148,936 146,495 143,655 Diluted 164,030 156,897 149,997
The accompanying notes are an integral part of these consolidated financial statements. -37- CONSOLIDATED STATEMENTS OF CASH FLOWS NABORS INDUSTRIES LTD. AND SUBSIDIARIES
Year Ended December 31, ----------------------------------- 2004 2003 2002 --------- ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Cash flows from operating activities: Net income $ 302,457 $ 192,228 $ 121,489 Adjustments to net income: Depreciation and amortization 254,939 226,528 187,665 Depletion 45,460 8,599 7,700 Deferred income tax expense (benefit) 12,514 (26,099) 9,100 Deferred financing costs amortization 5,058 5,464 5,122 Pension liability amortization 856 -- -- Discount amortization on long-term debt 20,244 25,521 30,790 Amortization of loss on cash flow hedges 151 150 50 Losses (gains) on long-term assets, net 874 (2,476) (4,570) Gains on marketable and non-marketable securities, net (20,638) (6,145) (2,877) (Gains) losses on derivative instruments (2,363) 1,140 1,983 Sales of marketable securities, trading -- 4,484 -- Foreign currency transaction gains (755) (830) (486) Loss on early extinguishment of debt -- 908 202 Equity in earnings of unconsolidated affiliates, net of dividends (2,057) (919) (4,900) Increase (decrease), net of effects from acquisitions, from changes in: Accounts receivable (129,684) (30,660) 90,401 Inventory (4,905) (5,695) 1,712 Other current assets 13,847 (61) (15,855) Other long-term assets 8,946 (9,435) (29,717) Trade accounts payable and accrued liabilities 84,646 22,586 (26,443) Income taxes payable (7,503) 1,454 11,725 Other long-term liabilities (18,889) (11,004) 17,785 --------- ----------- --------- Net cash provided by operating activities 563,198 395,738 400,876 --------- ----------- --------- Cash flows from investing activities: Purchases of marketable securities, available-for-sale (746,403) (1,429,545) (745,383) Sales and maturities of marketable securities, available-for-sale 838,816 1,393,638 542,133 Purchases of non-marketable securities (173,533) (47,002) (15,000) Sales of non-marketable securities 69,793 17,506 -- Cash paid for acquisitions of businesses, net -- -- (135,652) Capital expenditures (544,429) (353,138) (326,536) Cash paid for other current assets -- -- (8,725) Proceeds from sales of assets and insurance claims 6,879 10,476 34,877 Investments in affiliate (200) (175) -- --------- ----------- --------- Net cash used for investing activities (549,077) (408,240) (654,286) --------- ----------- --------- Cash flows from financing activities: Increase (decrease) in cash overdrafts 9,865 (778) (3,658) Decrease in restricted cash 109 1,925 210 Decrease in short-term borrowings, net -- -- (844) Proceeds from long-term debt -- 700,000 495,904 Reduction in long-term debt (302,411) (544,479) (30,831) Debt issuance costs -- (11,525) (2,945) Proceeds from issuance of common shares 71,248 26,341 12,850 Repurchase of common shares -- -- (2,486) Payments related to cash flow hedges -- -- (1,494) --------- ----------- --------- Net cash (used for) provided by financing activities (221,189) 171,484 466,706 --------- ----------- --------- Effect of exchange rate changes on cash and cash equivalents 12,040 6,704 2,312 --------- ----------- --------- Net (decrease) increase in cash and cash equivalents (195,028) 165,686 215,608 Cash and cash equivalents, beginning of period 579,737 414,051 198,443 --------- ----------- --------- Cash and cash equivalents, end of period $ 384,709 $ 579,737 $ 414,051 ========= =========== =========
The accompanying notes are an integral part of these consolidated financial statements. -38- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY NABORS INDUSTRIES LTD. AND SUBSIDIARIES
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) -------------------------------------------------- COMMON UNREALIZED SHARES GAINS MINIMUM UNREALIZED ------------------ CAPITAL IN (LOSSES) ON PENSION LOSS ON CUMULATIVE PAR EXCESS OF MARKETABLE LIABILITY CASH FLOW TRANSLATION SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT ------- -------- ---------- ---------- ---------- ---------- ----------- (IN THOUSANDS) Balances, December 31, 2001 147,711 $ 14,771 $1,091,536 $12,410 $ -- $ -- $(9,150) ------- -------- ---------- ------- ------- ------- ------- Comprehensive income (loss): Net income Translation adjustment 3,910 Unrealized losses on marketable securities, net of income tax benefit of $3,118 (5,309) Less: reclassification adjustment for gains included in net income, net of income taxes of $855 (1,455) Minimum pension liability adjustment, net of income taxes $1,295 (2,205) Unrealized loss on and amortization of loss on cash flow hedges, net of income taxes of $848 (1,444) ------- -------- ---------- ------- ------- ------- ------- Total comprehensive income (loss) -- -- -- (6,764) (2,205) (1,444) 3,910 ------- -------- ---------- ------- ------- ------- ------- Issuance of common shares for stock options exercised 806 64 10,210 Issuance of common shares in connection with the Bayard warrants exercised 18 2 (2) Issuance of common shares in connection with the Enserco acquisition 2,638 264 162,497 Issuance of common shares in connection with the Ryan acquisition 220 11,636 Nabors Exchangeco shares exchanged 485 19 (19) Tax effect of stock option deductions 842 Repurchase of common shares (91) (799) Put option on common shares 2,576 Retirement of treasury stock (6,822) (682) (59,172) Change in par value (14,293) 14,293 ------- ------- ---------- ------- ------- ------- ------- Subtotal (2,746) (14,626) 142,062 -- -- -- -- ------- -------- ---------- ------- ------- ------- ------- Balances, December 31, 2002 144,965 $ 145 $1,233,598 $ 5,646 $(2,205) $(1,444) $(5,240) ======= ======== ========== ======= ======= ======= ======= TOTAL RETAINED TREASURY SHAREHOLDERS' EARNINGS STOCK EQUITY ---------- ---------- ------------- (IN THOUSANDS) Balances, December 31, 2001 $1,001,079 $(252,780) $ 1,857,866 ---------- --------- ----------- Comprehensive income (loss): Net income 121,489 121,489 Translation adjustment 3,910 Unrealized losses on marketable securities, net of income tax benefit of $3,118 (5,309) Less: reclassification adjustment for gains included in net income, net of income taxes of $855 (1,455) Minimum pension liability adjustment, net of income taxes $1,295 (2,205) Unrealized loss on and amortization of loss on cash flow hedges, net of income taxes of $848 (1,444) ---------- --------- ----------- Total comprehensive income (loss) 121,489 -- 114,986 ---------- --------- ----------- Issuance of common shares for stock options exercised 10,274 Issuance of common shares in connection with the Bayard warrants exercised -- Issuance of common shares in connection with the Enserco acquisition 162,761 Issuance of common shares in connection with the Ryan acquisition 11,636 Nabors Exchangeco shares exchanged -- Tax effect of stock option deductions 842 Repurchase of common shares (1,687) (2,486) Put option on common shares 2,576 Retirement of treasury stock (192,926) 252,780 -- Change in par value -- ---------- --------- ----------- Subtotal (194,613) 252,780 185,603 ---------- --------- ----------- Balances, December 31, 2002 $ 927,955 $ -- $ 2,158,455 ========== ========= ===========
The accompanying notes are an integral part of these consolidated financial statements. -39-
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) -------------------------------------------------- COMMON UNREALIZED SHARES GAINS MINIMUM UNREALIZED ---------------- CAPITAL IN (LOSSES)ON PENSION LOSS ON CUMULATIVE PAR EXCESS OF MARKETABLE LIABILITY CASH FLOW TRANSLATION SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT ------- ------ ---------- ---------- ---------- ---------- ----------- (IN THOUSANDS) Balances, December 31, 2002 144,965 $145 $1,233,598 $ 5,646 $(2,205) $(1,444) $ (5,240) ------- ---- ---------- ------- ------- ------- -------- Comprehensive income (loss): Net income Translation adjustment 103,963 Unrealized gains on marketable securities, net of income taxes of $867 1,476 Less: reclassification adjustment for gains included in net income, net of income taxes of $1,264 (2,153) Minimum pension liability adjustment, net of income taxes of $358 (610) Amortization of loss on cash flow hedges 150 ------- ---- ---------- ------- ------- ------- -------- Total comprehensive income (loss) -- -- -- (677) (610) 150 103,963 ------- ---- ---------- ------- ------- ------- -------- Issuance of common shares for stock options exercised 1,234 2 20,339 Issuance of common shares in connection with the New Prospect warrants exercised 200 6,000 Issuance of common shares in connection with the Enserco warrants exercised 49 Nabors Exchangeco shares exchanged 208 Tax effect of stock option deductions 10,425 ------- ---- ---------- ------- ------- -------- -------- Subtotal 1,691 2 36,764 -- -- -- -- ------- ---- ---------- ------- ------- -------- -------- Balances, December 31, 2003 146,656 $147 $1,270,362 $ 4,969 $(2,815) $ (1,294) $ 98,723 ======= ==== ========== ======= ======= ======== ======== TOTAL RETAINED TREASURY SHAREHOLDERS' EARNINGS STOCK EQUITY ---------- ---------- ------------- (IN THOUSANDS) Balances, December 31, 2002 $ 927,955 $-- $2,158,455 ---------- --- ---------- Comprehensive income (loss): Net income 192,228 192,228 Translation adjustment 103,963 Unrealized gains on marketable securities, net of income taxes of $867 1,476 Less: reclassification adjustment for gains included in net income, net of income taxes of $1,264 (2,153) Minimum pension liability adjustment, net of income taxes of $358 (610) Amortization of loss on cash flow hedges 150 ---------- --- ---------- Total comprehensive income (loss) 192,228 -- 295,054 ---------- --- ---------- Issuance of common shares for stock options exercised 20,341 Issuance of common shares in connection with the New Prospect warrants exercised 6,000 Issuance of common shares in connection with the Enserco warrants exercised -- Nabors Exchangeco shares exchanged -- Tax effect of stock option deductions 10,425 ---------- --- ---------- Subtotal -- -- 36,766 ---------- --- ---------- Balances, December 31, 2003 $1,120,183 $-- $2,490,275 ========== === ==========
The accompanying notes are an integral part of these consolidated financial statements. -40-
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) -------------------------------------------------- COMMON UNREALIZED SHARES GAINS MINIMUM UNREALIZED ---------------- CAPITAL IN (LOSSES)ON PENSION LOSS ON CUMULATIVE PAR EXCESS OF MARKETABLE LIABILITY CASH FLOW TRANSLATION SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT ------- ------ ---------- ---------- ---------- ---------- ----------- (IN THOUSANDS) Balances, December 31, 2003 146,656 $147 $1,270,362 $ 4,969 $(2,815) $(1,294) $ 98,723 ------- ---- ---------- ------- ------- ------- -------- Comprehensive income (loss): Net income Translation adjustment 52,797 Unrealized gains on marketable securities, net of income tax benefit of $1,138 8,395 Less: reclassification adjustment for gains included in net income, net of income taxes of $850 (13,093) Pension liability amortization, net of income taxes of $233 396 Amortization of loss on cash flow hedges 151 ------- ---- ---------- ------- ------- ------- -------- Total comprehensive income (loss) -- -- -- (4,698) 396 151 52,797 ------- ---- ---------- ------- ------- ------- -------- Issuance of common shares for stock options exercised 3,045 3 71,245 Nabors Exchangeco shares exchanged 160 Tax effect of stock option deductions 16,767 ------- ---- ---------- ------- ------- ------- -------- Subtotal 3,205 3 88,012 ------- ---- ---------- ------- ------- ------- -------- Balances, December 31, 2004 149,861 $150 $1,358,374 $ 271 $(2,419) $(1,143) $151,520 ======= ==== ========== ======= ======= ======= ======== TOTAL RETAINED TREASURY SHAREHOLDERS' EARNINGS STOCK EQUITY ---------- -------- ------------- (IN THOUSANDS) Balances, December 31, 2003 $1,120,183 $ -- $2,490,275 ---------- ---- ---------- Comprehensive income (loss): Net income 302,457 302,457 Translation adjustment 52,797 Unrealized gains on marketable securities, net of income tax benefit of $1,138 8,395 Less: reclassification adjustment for gains included in net income, net of income taxes of $850 (13,093) Pension liability amortization, net of income taxes of $233 396 Amortization of loss on cash flow hedges 151 ---------- ---- ---------- Total comprehensive income (loss) 302,457 -- 351,103 ---------- ---- ---------- Issuance of common shares for stock options exercised 71,248 Nabors Exchangeco shares exchanged -- Tax effect of stock option deductions 16,767 ---------- ---- ---------- Subtotal 88,015 ---------- ---- ---------- Balances, December 31, 2004 $1,422,640 $ -- $2,929,393 ========== ==== ==========
The accompanying notes are an integral part of these consolidated financial statements. -41- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NABORS INDUSTRIES LTD. AND SUBSIDIARIES 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Nabors is the largest land drilling contractor in the world. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South and Central America, the Middle East, the Far East and Africa. Nabors also is one of the largest land well-servicing and workover contractors in the United States and Canada and is a leading provider of offshore platform workover and drilling rigs in the United States and multiple international markets. To further supplement and complement our primary business, we offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services, in selected domestic and international markets. We have also made selective investments in oil and gas exploration, development and production activities. The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our limited oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments for segment reporting purposes. The accompanying consolidated financial statements and related footnotes are presented in accordance with accounting principles generally accepted in the United States of America (GAAP). Certain reclassifications have been made to prior periods to conform to the current period presentation, with no effect on our consolidated financial position, results of operations or cash flows. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Our consolidated financial statements include the accounts of Nabors, all majority-owned subsidiaries, and all non-majority owned subsidiaries required to be consolidated under Financial Accounting Standards Board (FASB) Interpretation No. 46R, which are not material to our financial position, results of operations or cash flows. All significant intercompany accounts and transactions are eliminated in consolidation. Investments in entities where we have the ability to exert significant influence, but where we do not control their operating and financial policies, are accounted for using the equity method. Our share of the net income of these entities is recorded as Earnings from unconsolidated affiliates in our consolidated statements of income, and our investment in these entities is carried as a single amount in our consolidated balance sheets. Investments in net assets of unconsolidated affiliates accounted for using the equity method totaled $67.1 million and $58.1 million as of December 31, 2004 and 2003, respectively, and are included in other long-term assets in our consolidated balance sheets. CASH AND CASH EQUIVALENTS Cash and cash equivalents include demand deposits and various other short-term investments with original maturities of three months or less. MARKETABLE AND NON-MARKETABLE SECURITIES Marketable securities consist of equity securities, certificates of deposit, corporate debt securities, U.S. Government debt securities, Government agencies debt securities, foreign government debt securities, mortgage-backed debt securities and asset-backed debt securities. Securities classified as available-for-sale or trading are stated at fair value. Unrealized holding gains and temporary losses for available-for-sale securities are excluded from earnings and, until realized, are reported net of taxes in a separate component of shareholders' equity. Other than temporary losses are included in earnings. Unrealized and realized gains and losses on securities classified as trading are reported in earnings currently. -42- In computing realized gains and losses on the sale of equity securities, the specific identification method is used. In accordance with this method, the cost of the equity securities sold is determined using the specific cost of the security when originally purchased. We are also invested in overseas funds investing primarily in a variety of public and private U.S. and non-U.S. securities (including asset-backed securities and mortgage-backed securities, global structured asset securitizations, whole loan mortgages, and participations in whole loans and whole loan mortgages). These investments are classified as non-marketable, because they do not have published fair values, and are recorded at cost in our consolidated balance sheets as a component of other current assets. Gains or losses are realized, as other income, when distributions are made from the funds. INVENTORY Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method and includes the cost of materials, labor and manufacturing overhead. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including renewals and betterments, are stated at cost, while maintenance and repairs are expensed currently. Interest costs applicable to the construction of qualifying assets are capitalized as a component of the cost of such assets. We provide for the depreciation of our drilling and workover rigs using the units-of-production method over an approximate 4,900-day period, with the exception of our jack-up rigs which are depreciated over an 8,030-day period, after provision for salvage value. When our drilling and workover rigs are not operating, a depreciation charge is provided using the straight-line method over an assumed depreciable life of 20 years, with the exception of our jack-up rigs, where a 30-year depreciable life is used. Depreciation on our buildings, well-servicing rigs, oilfield hauling and mobile equipment, marine transportation and supply vessels, and other machinery and equipment is computed using the straight-line method over the estimated useful life of the asset after provision for salvage value (buildings - 10 to 30 years; well-servicing rigs - 3 to 15 years; marine transportation and supply vessels - 10 to 25 years; oilfield hauling and mobile equipment and other machinery and equipment - 3 to 10 years). Amortization of capitalized leases is included in depreciation and amortization expense. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in our results of operations. We review our assets for impairment when events or changes in circumstances indicate that the net book value of property, plant and equipment may not be recovered over its remaining service life. Provisions for asset impairment are charged to income when the sum of estimated future cash flows, on an undiscounted basis, is less than the asset's net book value. Impairment charges are recorded using discounted cash flows which requires the estimation of dayrates and utilization, and such estimates can change based on market conditions, technological advances in the industry or changes in regulations governing the industry. There were no impairment charges related to assets held for use recorded by Nabors in 2004, 2003 or 2002. In 2002 we reclassified four supply vessels to held-for-sale as we intended to sell these vessels in 2003. Accordingly, we reduced the carrying values of these assets to levels approximating their respective fair values, resulting in a charge to losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net of $3.7 million in 2002. Three of these supply vessels were sold in 2003 for amounts approximating their current carrying values, resulting in a gain of $.2 million included in losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net in our consolidated statement of income for the year ended December 31, 2003. The fourth supply vessel was sold in January 2004 for an amount that approximated its carrying value. OIL AND GAS PROPERTIES We follow the successful efforts method of accounting for our oil and gas activities. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Proved oil and gas properties are reviewed when circumstances suggest the need for such a review and, if required, the proved properties are written down to their estimated fair value. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in that period. Estimated fair value included the estimated present value of all reasonably expected future production, prices, and costs. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Interest costs related to financing major oil and gas projects in progress are capitalized until the projects are -43- evaluated or until the projects are substantially complete and ready for their intended use if the projects are evaluated as successful. Other exploratory costs are expensed as incurred. Our provision for depletion is based on the capitalized costs as determined above and is determined on a property-by-property basis using the units-of-production method, with costs being amortized over proved developed reserves. GOODWILL Goodwill represents the cost in excess of fair value of the net assets of companies acquired. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS 142 supersedes Accounting Principles Board (APB) Opinion No. 17, which stated that goodwill acquired as a result of a purchase method business combination and all other intangible assets were subject to amortization. APB 17 also mandated a maximum period of 40 years for that amortization. SFAS 142 presumes that all goodwill and intangible assets that have indefinite useful lives will not be subject to amortization, but rather will be tested at least annually for impairment. In addition, the standard provides specific guidance on how to determine and measure goodwill impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without the constraint of a 40-year maximum amortization period. During the second quarter of 2002 we performed our initial goodwill impairment assessment as required by SFAS 142. As part of that assessment, we determined that our 11 business units, as of January 1, 2002, represented our reporting units as defined by SFAS 142. We determined the aggregate carrying values and fair values of all such reporting units, which were measured as of the January 1, 2002 adoption date. We calculated the fair value of each reporting unit based on discounted cash flows and determined there was no goodwill impairment. In instances where assets acquired and liabilities assumed in a business combination are assigned solely to one of our business units, the amount of goodwill resulting from that acquisition is assigned in full to that business unit. In instances where assets and liabilities are split between more than one business unit, we assign goodwill to our business units based on the respective fair values of the fixed assets assigned to each business unit. In the second quarters of 2003 and 2004 we performed our annual assessments of goodwill impairment and determined there was no goodwill impairment in either year. The change in the carrying amount of goodwill for our various Contract Drilling segments and our Other Operating Segments for the years ended December 31, 2004 and 2003 is as follows:
ACQUISITIONS BALANCE AND PURCHASE CUMULATIVE AS OF BALANCE AS OF PRICE TRANSLATION RECLASSIFICATIONS DECEMBER JANUARY 1, 2003 ADJUSTMENTS ADJUSTMENT AND OTHER 31, 2003 --------------- ------------ ----------- ----------------- -------- (IN THOUSANDS) Contract Drilling: U.S. Lower 48 Land Drilling $ 28,700 $ -- $ -- $ 1,276 $ 29,976 U.S. Land Well-servicing 43,741 -- -- -- 43,741 U.S. Offshore 29,583 -- -- (11,580) 18,003 Alaska 19,995 -- -- -- 19,995 Canada 112,791 1,378 24,398 -- 138,567 International 4,745 -- -- 11,580 16,325 -------- ------ ------- -------- -------- Subtotal Contract Drilling 239,555 1,378 24,398 1,276 266,607 Other Operating Segments 46,807 1,601 612 -- 49,020 -------- ------ ------- -------- -------- Total $286,362 $2,979 $25,010 $ 1,276 $315,627 ======== ====== ======= ======== ========
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ACQUISITIONS BALANCE AND PURCHASE CUMULATIVE AS OF BALANCE AS OF PRICE TRANSLATION RECLASSIFICATIONS DECEMBER DECEMBER 31,2003 ADJUSTMENTS ADJUSTMENT AND OTHER 31, 2004 ---------------- ------------ ----------- ----------------- -------- (IN THOUSANDS) Contract Drilling: U.S. Lower 48 Land Drilling $ 29,976 $-- $ -- $ -- $ 29,976 U.S. Land Well-servicing 43,741 -- -- -- 43,741 U.S. Offshore 18,003 -- -- -- 18,003 Alaska 19,995 -- -- -- 19,995 Canada 138,567 -- 10,930 -- 149,497 International 16,325 -- -- 2,658 18,983 -------- --- ------- ------- -------- Subtotal Contract Drilling 266,607 -- 10,930 2,658 280,195 Other Operating Segments 49,020 -- 226 (2,216) 47,030 -------- --- ------- ------- -------- Total $315,627 $-- $11,156 $ 442 $327,225 ======== === ======= ======= ========
Our Oil and Gas segment does not have any goodwill. Goodwill totaling approximately $6.5 million is expected to be deductible for tax purposes. DERIVATIVE FINANCIAL INSTRUMENTS We record derivative financial instruments (including certain derivative instruments embedded in other contracts) in our consolidated balance sheets at fair value as either assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception of a derivative. Accounting for derivatives qualifying as fair value hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of income. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is measured quarterly based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. Any change in fair value of derivative financial instruments that are speculative in nature and do not qualify for hedge accounting treatment is also recognized immediately in earnings. LITIGATION AND INSURANCE RESERVES We estimate our reserves related to litigation and insurance based on the facts and circumstances specific to the litigation and insurance claims and our past experience with similar claims. We maintain actuarially-determined accruals in our consolidated balance sheets to cover self-insurance retentions (Note 13). REVENUE RECOGNITION We recognize revenues and costs on daywork contracts daily as the work progresses. For certain contracts, we receive lump-sum payments for the mobilization of rigs and other drilling equipment. Deferred fees related to mobilization periods are recognized over the term of the related drilling contract. Costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. We recognize revenue for top drives and instrumentation systems we manufacture when the earnings process is complete. This generally occurs when products have been shipped, title and risk of loss have been transferred, collectibility is probable, and pricing is fixed and determinable. We recognize, as operating revenue, proceeds from business interruption insurance claims in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements in excess of the carrying value of damaged assets are recognized in losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net in the period that the applicable proof of loss documentation is received. -45- We recognize reimbursements received for out-of-pocket expenses incurred as revenues and account for out-of-pocket expenses as direct costs. We recognize revenue on our interests in oil and gas properties as production occurs and title passes. INCOME TAXES We are a Bermuda-exempt company and are not subject to income taxes in Bermuda. Consequently, income taxes have been provided based on the tax laws and rates in effect in the countries in which our operations are conducted and income is earned. The income taxes in these jurisdictions vary substantially. Our effective tax rate for financial statement purposes will continue to fluctuate from year to year as our operations are conducted in different taxing jurisdictions. For U.S. and other foreign jurisdiction income tax purposes, we have net operating and other loss carryforwards that we are required to assess annually for potential valuation allowances. We consider the sufficiency of existing temporary differences and expected future earnings levels in determining the amount, if any, of valuation allowance required against such carryforwards. We do not provide for U.S. or foreign income or withholding taxes on unremitted earnings of all U.S. and certain foreign entities, as these earnings are considered permanently reinvested. Unremitted earnings, representing tax basis accumulated earnings and profits, totaled approximately $289.9 million, $453.2 million and $377.2 million as of December 31, 2004, 2003 and 2002, respectively. It is not practicable to estimate the amount of deferred income taxes associated with these unremitted earnings. The level of unremitted earnings as of December 31, 2004 was impacted by a reorganization of our international subsidiaries completed in the fourth quarter of 2004. In circumstances where our drilling rigs and other assets are operating in certain foreign taxing jurisdictions, and it is expected that we will redeploy such assets before they give rise to future tax consequences, we do not recognize any deferred tax liabilities on the earnings from these assets. Nabors realizes an income tax benefit associated with certain stock options issued under its stock option plans. This benefit, which is not reflected in our consolidated income statements, results in a reduction in income taxes payable and an increase in capital in excess of par value. FOREIGN CURRENCY TRANSLATION For certain of our foreign subsidiaries, such as those in Canada and Argentina, the local currency is the functional currency, and therefore translation gains or losses associated with foreign-denominated monetary accounts are accumulated in a separate section of shareholders' equity. For our other international subsidiaries, the U.S. dollar is the functional currency, and therefore local currency transaction gains and losses, arising from remeasurement of payables and receivables denominated in local currency, are included in our consolidated statements of income. STOCK-BASED COMPENSATION We account for stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense for stock options is measured as the excess, if any, of the quoted market price of Nabors common shares at the date of grant over the amount an employee must pay to acquire the common shares. We grant options at prices equal to the market price of our shares on the date of grant and therefore do not record compensation expense related to these grants. SFAS No. 148, "Accounting for Stock-Based Compensation - an Amendment to FAS 123," requires companies that continue to account for stock-based compensation in accordance with APB 25 to disclose certain information using a tabular presentation. The table presented below illustrates the effect on our net income and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to our stock-based employee compensation. Under the provisions of SFAS 123, compensation cost for stock-based compensation is determined based on fair values as of the dates of grant estimated using an option pricing model such as the Black-Scholes option-pricing model (which we use in our calculations), and compensation cost is amortized over the applicable option vesting period. -46-
YEAR ENDED DECEMBER 31, ------------------------------ 2004 2003 2002 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income, as reported $302,457 $192,228 $121,489 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (22,530) (13,565) (31,047) -------- -------- -------- Pro forma net income - basic 279,927 178,663 90,442 -------- -------- -------- Add: Interest expense on assumed conversion of our zero coupon senior convertible/exchangeable debentures/notes, net of tax (see Note 14) 12,438 3,639 -- -------- -------- -------- Adjusted pro forma net income-diluted $292,365 $182,302 $ 90,442 ======== ======== ======== Earnings per share: Basic - as reported $ 2.03 $ 1.31 $ .85 Basic - pro forma $ 1.88 $ 1.22 $ .63 Diluted - as reported $ 1.92 $ 1.25 $ .81 Diluted - pro forma $ 1.78 $ 1.16 $ .60
The pro forma amounts above were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions for grants during 2004, 2003 and 2002, respectively: risk-free interest rates of 2.49%, 2.23% and 3.79%; volatility of 31.00%, 47.58% and 48.19%; dividend yield of 0.0% for all periods; and expected life of 4.0 years for 2004 and 3.5 years for 2003 and 2002. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. Actual results could differ from such estimates. Areas where critical accounting estimates are made by management include: - depreciation and amortization of property, plant and equipment - impairment of long-lived assets - income taxes - insurance reserves - fair value of assets acquired and liabilities assumed RECENT ACCOUNTING PRONOUNCEMENTS As discussed under Stock-Based Compensation above, we currently account for stock-based compensation as prescribed by APB 25, and because we grant options at prices equal to the market price of our shares on the date of the grant we do not record compensation expense related to these grants. On December 16, 2004, the FASB issued a revision to SFAS No. 123, "Share-Based Payment," which will eliminate our ability to account for stock-based compensation using APB 25 and instead would require us to account for stock option awards using a fair-value based method resulting in compensation expense for stock option awards. The statement will be effective for stock options granted, modified, or settled in cash in interim and annual periods beginning after June 15, 2005. Additionally, for stock options granted or modified after December 15, 1994 that have not vested as of the effective date of the statement, compensation cost will be measured and recorded based on the same estimates of fair value calculated as of the date of grant as currently disclosed within the table required by SFAS No. 148, "Accounting for Stock-Based Compensation - an Amendment to FAS 123," presented above. The statement may have a material adverse effect on our results of operations during the periods of adoption and annual and interim periods thereafter. If this statement had been adopted in its current form as of January 1, 2004, we would have recorded additional compensation expense, net of related tax effects, of approximately $22.5 million during 2004 and our diluted earnings per share for 2004 would have been reduced by $.14 per share. In October 2004 the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) in EITF 04-8, which addresses the issue of when the dilutive effect of contingently convertible debt instruments should be -47- included in diluted earnings per share computations. Based on the concepts described in EITF 04-8, we will be required to treat our $700 million zero coupon senior exchangeable notes as converted for purposes of computing diluted earnings per share, regardless of whether any triggering contingency has been met or is likely to be met. The provisions in EITF 04-8 are effective for periods ending after December 15, 2004, including the year ended December 31, 2004. As a result of this accounting change, we are required to include additional common shares in the denominator of our diluted earnings per share calculation in all periods where the price for our shares exceeds $70.10. These additional shares represent the value in excess of the principal amount of the notes and would be calculated using the treasury stock method. We do not expect this accounting change to have a material effect on our financial position, results of operations or cash flows. In January 2003 the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which addresses the consolidation of variable interest entities (VIEs) by business enterprises that are the primary beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise that has the majority of the risks or rewards associated with the VIE. In December 2003 the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of the provisions of FIN 46, and to exempt certain entities from its requirements. Application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. Our adoption of FIN 46R on March 31, 2004 did not have a material effect on our financial position, results of operations or cash flows as of and for the year ended December 31, 2004. 3. ACQUISITIONS On August 12, 2002, Nabors entered into an arrangement agreement to acquire Ryan Energy Technologies, Inc., a corporation incorporated under the laws of Alberta, Canada. Nabors' acquisition of Ryan was completed on October 9, 2002, and became effective pursuant to a plan of arrangement approved by the securityholders of Ryan and the Court of Queen's Bench of Alberta. Pursuant to the arrangement, Nabors Exchangeco (Canada) Inc., an indirect wholly-owned Canadian subsidiary of Nabors, acquired all of the issued and outstanding common shares of Ryan in exchange for approximately Cdn. $22.6 million (U.S. $14.2 million) in cash and 380,264 exchangeable shares of Nabors Exchangeco, of which 219,493 exchangeable shares were immediately exchanged for common shares of Nabors in accordance with the instructions of the holders of those shares. The Nabors Exchangeco shares are exchangeable for Nabors common shares, at each holder's option, on a one-for-one basis and are listed on the Toronto Stock Exchange. Additionally, these exchangeable shares have essentially identical rights as Nabors common shares, including but not limited to voting rights and the right to receive dividends, if any, and will be automatically exchanged upon the occurrence of certain events. The value of the Nabors Exchangeco shares issued totaled Cdn. $18.5 million (U.S. $11.6 million). In addition, we assumed Ryan debt totaling Cdn. $14.5 million (U.S. $9.1 million). Ryan's results of operations were consolidated into ours commencing on October 9, 2002. The Ryan purchase price was allocated based on estimates of the fair market value of assets acquired and liabilities assumed as of the acquisition date and resulted in goodwill of approximately Cdn $7.2 million (U.S. $4.8 million). Ryan manufactures and sells directional drilling and rig instrumentation systems and provides directional drilling, rig instrumentation and data collection services to oil and gas exploration and service companies in the United States, Canada and Venezuela. On March 18, 2002, we acquired, for cash, 20.5% of the issued and outstanding shares of Enserco Energy Service Company Inc., a Canadian publicly-held corporation, for Cdn. $15.50 per share for a total price of Cdn. $83.2 million (U.S. $52.6 million). On April 26, 2002, Nabors Exchangeco acquired all of the remaining issued and outstanding common shares of Enserco in exchange for approximately Cdn. $100.1 million (U.S. $64.1 million) in cash and 3,549,082 exchangeable shares of Nabors Exchangeco, of which 2,638,526 exchangeable shares were immediately exchanged for Nabors Industries, Inc. (Nabors Delaware) common stock in accordance with the instructions of the holders of those shares (which common stock was converted into our common shares pursuant to our corporate reorganization on June 24, 2002). The value of the Nabors Exchangeco shares issued totaled Cdn. $254.2 million (U.S. $162.8 million). In addition, we assumed Enserco debt totaling Cdn. $33.4 million (U.S. $21.4 million). Enserco's results of operations were consolidated into ours commencing on April 26, 2002. The Enserco purchase price was allocated based on estimates of the fair market value of assets acquired and liabilities assumed as of the acquisition date and resulted in goodwill of approximately Cdn. $164.7 million (U.S. $105.2 million). Enserco provided land drilling, well-servicing and workover services in Canada and operated a fleet of 193 well-servicing rigs and 30 drilling rigs as of our acquisition date. -48- 4. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES Our cash and cash equivalents, short-term and long-term marketable securities consist of the following:
DECEMBER 31, ---------------------------------------------------------------------------- 2004 2003 ------------------------------------ ------------------------------------- GROSS GROSS GROSS GROSS UNREALIZED UNREALIZED UNREALIZED UNREALIZED FAIR HOLDING HOLDING FAIR HOLDING HOLDING VALUE GAINS LOSSES VALUE GAINS LOSSES ---------- ---------- ---------- ---------- ----------- ---------- (IN THOUSANDS) Cash and cash equivalents $ 384,709 $ -- $ -- $ 579,737 $ -- $ -- Available-for-sale 40,723 4,508 (1,247) 48,843 9,379 (2,016) marketable equity securities Marketable debt securities: Commercial paper and CDs 6,970 1 -- 50,743 -- -- Corporate debt securities 384,569 -- (1,094) 319,327 2,392 -- U.S. Government debt securities -- -- -- 7,103 -- -- Government agencies debt securities 97,515 -- (151) 285,358 -- (677) Mortgage-backed debt securities -- -- -- 119 -- -- Mortgage-CMO debt securities 26,326 -- (62) 29,275 31 -- Asset-backed debt securities 311,701 -- (761) 211,585 767 -- ---------- ------ ------- ---------- -------- ------- Total marketable debt securities 827,081 1 (2,068) 903,510 3,190 (677) ---------- ------ ------- ---------- -------- ------- $1,252,513 $4,509 $(3,315) $1,532,090 $ 12,569 $(2,693) ========== ====== ======= ========== ======== =======
The estimated fair values of our corporate, U.S. Government, Government agencies, mortgage-backed, mortgage-CMO and asset-backed debt securities at December 31, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to repay obligations without prepayment penalties and we may elect to sell the securities prior to the maturity date.
ESTIMATED FAIR VALUE 2004 ---------- (IN THOUSANDS) Marketable debt securities: Due in one year or less $387,619 Due after one year through five years 439,462 -------- $827,081 ========
-49- Certain information regarding our marketable debt and equity securities is presented below:
YEAR ENDED DECEMBER 31, -------------------------------- 2004 2003 2002 -------- ---------- -------- (IN THOUSANDS) Available-for-sale: Proceeds from sales and maturities $838,816 $1,393,638 $542,133 Realized gains, net of realized losses 13,943 3,417 2,310
5. PROPERTY, PLANT AND EQUIPMENT The major components of our property, plant and equipment are as follows:
DECEMBER 31, ------------------------- 2004 2003 ----------- ----------- (IN THOUSANDS) Land $ 15,821 $ 12,037 Buildings 31,394 26,703 Drilling, workover and well-servicing rigs, and related equipment 4,128,169 3,637,296 Marine transportation and supply vessels 161,567 159,530 Oilfield hauling and mobile equipment 166,663 143,279 Other machinery and equipment 31,608 33,358 Net profits interests in oil and gas properties 140,110 84,807 ----------- ----------- 4,675,332 4,097,010 Less: accumulated depreciation and amortization (1,329,951) (1,081,826) accumulated depletion on oil and gas properties (69,886) (24,392) ----------- ----------- $ 3,275,495 $ 2,990,792 =========== ===========
Repair and maintenance expense included in direct costs in our consolidated statements of income totaled $253.0 million, $195.7 million and $138.5 million for the years ended December 31, 2004, 2003 and 2002, respectively. Interest costs of $1.9 million, $.9 million and $1.1 million were capitalized during the years ended December 31, 2004, 2003 and 2002, respectively. 6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES Our principal operations accounted for using the equity method include a construction operation (40% ownership) and a logistics operation (50% ownership) in Alaska, and drilling and workover operations located in Saudi Arabia (50% ownership). These unconsolidated affiliates are integral to our operations in those locations. See Note 12 for a discussion of transactions with these related parties. Combined condensed financial data for investments in unconsolidated affiliates accounted for using the equity method of accounting is summarized as follows:
DECEMBER 31, ------------------- 2004 2003 -------- -------- (IN THOUSANDS) Current assets $ 89,097 $ 78,020 Long-term assets 143,051 135,073 Current liabilities 48,977 48,312 Long-term liabilities 40,201 40,201
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YEAR ENDED DECEMBER 31, ------------------------------ 2004 2003 2002 -------- -------- -------- (IN THOUSANDS) Gross revenues $256,303 $312,008 $334,000 Gross margin 33,911 41,809 52,861 Net income 14,184 21,689 29,400 Nabors' Earnings from unconsolidated affiliates 4,057 10,183 14,775
The financial data presented above as of and for the year ended December 31, 2004 does not include Sea Mar Management LLC, as this entity was consolidated beginning in 2004 under the requirements of FIN 46R. Cumulative undistributed earnings of our unconsolidated affiliates included in our retained earnings as of December 31, 2004 and 2003 totaled approximately $44.0 million and $42.0 million, respectively. 7. FINANCIAL INSTRUMENTS AND RISK CONCENTRATION We may be exposed to certain market risks arising from the use of financial instruments in the ordinary course of business. This risk arises primarily as a result of potential changes in the fair market value of financial instruments that would result from adverse fluctuations in foreign currency exchange rates, credit risk, interest rates, and marketable and non-marketable security prices as discussed below. FOREIGN CURRENCY RISK We operate in a number of international areas and are involved in transactions denominated in currencies other than U.S. dollars, which exposes us to foreign exchange rate risk. The most significant exposures arise in connection with our operations in Canada, which usually are substantially unhedged. At various times, we utilize local currency borrowings (foreign currency-denominated debt), the payment structure of customer contracts and foreign exchange contracts to selectively hedge our exposure to exchange rate fluctuations in connection with monetary assets, liabilities, cash flows and commitments denominated in certain foreign currencies. A foreign exchange contract is a foreign currency transaction, defined as an agreement to exchange different currencies at a given future date and at a specified rate. CREDIT RISK Our financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investments in marketable and non-marketable securities, accounts receivable, and our interest rate swap and range cap and floor transactions. Cash equivalents such as deposits and temporary cash investments are held by major banks or investment firms. Our investments in marketable and non-marketable securities are managed within established guidelines which limit the amounts that may be invested with any one issuer and which provide guidance as to issuer credit quality. We believe that the credit risk in such instruments is minimal. In addition, our trade receivables are with a variety of U.S., international and foreign-country national oil and gas companies. Management considers this credit risk to be limited due to the financial resources of these companies. We perform ongoing credit evaluations of our customers and we generally do not require material collateral. We maintain reserves for potential credit losses, and such losses have been within management's expectations. INTEREST RATE AND MARKETABLE AND NON-MARKETABLE SECURITY PRICE RISK Our financial instruments that are potentially sensitive to changes in interest rates include our $1.381 billion zero coupon convertible senior debentures, our $700 million zero coupon senior exchangeable notes, our 4.875% and 5.375% senior notes, our interest rate swap and range cap and floor transactions, our investments in debt securities (including corporate, asset-backed, U.S. Government, Government agencies, foreign government, mortgage-backed debt and mortgage-CMO debt securities) and our investments in overseas funds investing primarily in a variety of public and private U.S. and non-U.S. securities (including asset-backed securities and mortgage-backed securities, global structured asset securitizations, whole loan mortgages, and participations in whole loans and whole loan mortgages), which are classified as non-marketable securities. We may utilize derivative financial instruments that are intended to manage our exposure to interest rate risks. The use of derivative financial instruments could expose us to further credit risk and market risk. Credit risk in this -51- context is the failure of a counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty would owe us, which can create credit risk for us. When the fair value of a derivative contract is negative, we would owe the counterparty, and therefore, we would not be exposed to credit risk. We attempt to minimize credit risk in derivative instruments by entering into transactions with major financial institutions that have a significant asset base. Market risk related to derivatives is the adverse effect to the value of a financial instrument that results from changes in interest rates. We try to manage market risk associated with interest-rate contracts by establishing and monitoring parameters that limit the type and degree of market risk that we undertake. Our $700 million zero coupon senior exchangeable notes include a contingent interest provision, discussed in Note 8 below, which qualifies as an embedded derivative under SFAS 133, as amended by SFAS 149. This embedded derivative is required to be separated from the notes and valued at its fair value at the inception of the note indenture. Any subsequent change in fair value of this embedded derivative would be recorded in our consolidated statements of income. The fair value of the contingent interest provision at inception of the note indenture was nominal. In addition, there was no significant change in the fair value of this embedded derivative through December 31, 2004, resulting in no impact on our consolidated statements of income for the year ended December 31, 2004. On October 21, 2002, we entered into an interest rate swap transaction with a third-party financial institution to hedge our exposure to changes in the fair value of $200 million of our fixed rate 5.375% senior notes due 2012, which has been designated as a fair value hedge under SFAS 133, as amended by SFAS 149. Additionally, on October 21, 2002, we purchased a LIBOR range cap and sold a LIBOR floor, in the form of a cashless collar, with the same third-party financial institution with the intention of mitigating and managing our exposure to changes in the three-month U.S. dollar LIBOR rate. This transaction does not qualify for hedge accounting treatment under SFAS 133, as amended by SFAS 149, and any change in the cumulative fair value of this transaction will be reflected as a gain or loss in our consolidated statements of income. During the years ended December 31, 2004, 2003 and 2002, we recorded interest savings related to our interest rate swap agreement accounted for as a fair value hedge of $6.5 million, $6.8 million and $1.2 million, respectively, which served to reduce interest expense. The fair value of our interest rate swap agreement is recorded as a derivative asset, included in other long-term assets, and totaled approximately $4.6 million and $4.2 million as of December 31, 2004 and 2003, respectively. The carrying value of our 5.375% senior notes has been increased by the same amount as of December 31, 2004 and 2003. The fair value of our range cap and floor transaction is recorded as a derivative asset, included in other long-term assets, and totaled approximately $.3 million as of December 31, 2004, and is recorded as a derivative liability, included in other long-term liabilities, and totaled approximately $3.7 million and $3.8 million as of December 31, 2003 and 2002, respectively. In June 2004 we unwound $100 million of the $200 million range cap and floor derivative instrument. We recorded gains of approximately $2.4 million and losses of approximately $1.1 million and $3.8 million for the years ended December 31, 2004, 2003 and 2002, respectively, related to this derivative instrument; such amounts are included in losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net in our consolidated statements of income. On July 25, 2002, we entered into an interest rate hedge transaction with a third-party financial institution to manage and mitigate interest rate risk exposure relative to our August 2002 debt financing. Under the agreement, we agreed to receive (pay) cash from (to) the counterparty based on the difference between 4.43% and the ten-year Treasury rate on August 23, 2002, assuming a $100.0 million notional amount with semi-annual interest payments over a ten-year maturity. We accounted for this transaction as a cash flow hedge. During August 2002 we paid approximately $1.5 million related to the termination of this agreement. This payment was recorded as a reduction to accumulated other comprehensive income in our consolidated balance sheet and is being amortized into earnings as additional interest expense, using the effective interest method, over the term of the 5.375% senior notes due 2012 as discussed in Note 8 below. On March 26, 2002, in anticipation of closing the Enserco acquisition discussed in Note 3, we entered into two foreign exchange contracts with a total notional value of Cdn. $115.9 million and maturity dates of April 29, 2002. Additionally, on April 9, 2002, we entered into a third foreign exchange contract with a notional value of Cdn. $50.0 million maturing April 29, 2002. The notional amounts of these contracts were used to fund the cash portion of the Enserco acquisition purchase price. The notional amounts of these contracts represented the amount of foreign currency purchased at maturity and did not represent our exposure under these contracts. Although such contracts served as an economic hedge against our foreign currency risk related to the cash portion of the acquisition cost, these contracts did not qualify for hedge accounting treatment under SFAS 133, as amended by SFAS 149. We recognized a gain on these -52- foreign exchange contracts of approximately U.S. $1.8 million included in losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net in our consolidated statement of income for the year ended December 31, 2002. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of our fixed rate long-term debt is estimated based on quoted market prices or prices quoted from third-party financial institutions. The carrying and fair values of our long-term debt, including the current portion, are as follows:
DECEMBER 31, --------------------------------------------------------- 2004 2003 --------------------------- --------------------------- CARRYING CARRYING VALUE FAIR VALUE VALUE FAIR VALUE ------------ ------------ ------------ ------------ (IN THOUSANDS) 4.875% senior notes due August 2009 $ 223,764 $ 232,058 $ 223,499 $ 234,585 5.375% senior notes due August 2012 277,922(1) 292,454(1) 277,248(1) 290,813(1) $700 million zero coupon senior exchangeable notes due June 2023 700,000 668,581 700,000 643,651 $1.381 billion zero coupon convertible senior debentures due February 2021 804,550 797,233 784,807 780,880 6.8% senior notes due April 2004 -- -- 295,267 299,681 Other long-term debt -- -- 4,117 4,117 ---------- ---------- ---------- ---------- $2,006,236 $1,990,326 $2,284,938 $2,253,727 ========== ========== ========== ==========
(1) The amounts presented for the years ended December 31, 2004 and 2003 include $4.6 million and $4.2 million, respectively, related to the fair value of the interest rate swap executed on October 21, 2002. The fair values of our cash equivalents, trade receivables and trade payables approximate their carrying values due to the short-term nature of these instruments. We maintain an investment portfolio of marketable and non-marketable debt and equity securities that exposes us to price risk (Note 4). The marketable securities are carried at fair market value and include $867.8 million and $952.4 million in securities classified as available-for-sale as of December 31, 2004 and 2003, respectively. We had no securities classified as trading as of December 31, 2004. 8. DEBT Long-term debt consists of the following:
DECEMBER 31, ----------------------- 2004 2003 ---------- ---------- (IN THOUSANDS) 4.875% senior notes due August 2009 (1) $ 223,764 $ 223,499 5.375% senior notes due August 2012 (1) (2) 277,922 277,248 $700 million zero coupon senior exchangeable notes due June 2023 700,000 700,000 $1.381 billion zero coupon convertible senior debentures due February 2021 (1) 804,550 784,807 6.8% senior notes due April 2004 -- 295,267 Other long-term debt -- 4,117 ---------- ---------- 2,006,236 2,284,938 Less: current portion 804,550 299,385 ---------- ---------- $1,201,686 $1,985,553 ========== ==========
-53- (1) The carrying amount of our 4.875% and 5.375% senior notes, and our $1.381 billion zero coupon convertible senior debentures as of December 31, 2004, included in the table above, are net of unamortized discounts of approximately $1.2 million, $1.7 million and $395.7 million, respectively. (2) The amounts presented for the years ended December 31, 2004 and 2003 include $4.6 million and $4.2 million, respectively, related to the fair value of the interest rate swap executed on October 21, 2002 (Note 7). As of December 31, 2004, the maturities of our long-term debt for each of the five years after 2004 and thereafter are as follows:
ASSUMING ZERO COUPON CONVERTIBLE DEBENTURES ARE -------------------------------- PAID AT PAID AT FIRST MATURITY PUT DATE ---------- ------------- (IN THOUSANDS) 2005 $ -- $ -- 2006 -- 826,800(1) 2007 -- -- 2008 -- 700,000(2) 2009 225,000 225,000 Thereafter 2,175,200(3) 275,000 ---------- ---------- $2,400,200 $2,026,800 ========== ==========
(1) Represents our $1.381 billion zero coupon convertible senior debentures due 2021 which can be put to us on February 5, 2006. The principal amount of these debentures of $804.6 million is classified in current liabilities as of December 31, 2004. However, we do not expect these debentures to be converted for cash within the next 12 months based on the current market value of our common shares. (2) Represents our $700 million zero coupon senior exchangeable notes due 2023 which can be put to us on June 15, 2008. (3) Includes $1.2 billion of our zero coupon convertible senior debentures due 2021, $700 million of our zero coupon senior exchangeable notes due 2023, and $275 million of our senior notes due 2012. 4.875% SENIOR NOTES DUE AUGUST 2009 AND 5.375% SENIOR NOTES DUE AUGUST 2012 On August 22, 2002, Nabors Holdings 1, ULC, one of our indirect, wholly-owned subsidiaries, issued $225 million aggregate principal amount of 4.875% senior notes due 2009 that are fully and unconditionally guaranteed by Nabors and Nabors Delaware. Concurrently with this offering by Nabors Holdings, Nabors Delaware issued $275 million aggregate principal amount of 5.375% senior notes due 2012, which are fully and unconditionally guaranteed by Nabors. Both issues of senior notes were resold by a placement agent to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. Interest on each issue of senior notes is payable semi-annually on February 15 and August 15 of each year, beginning on February 15, 2003. Both issues are unsecured and are effectively junior in right of payment to any of their respective issuers' future secured debt. The senior notes will rank equally in right of payment with any of their respective issuers' future unsubordinated debt and will be senior in right of payment to any of such issuers' subordinated debt. The guarantees of Nabors Delaware and Nabors with respect to the senior notes issued by Nabors Holdings, and the guarantee of Nabors with respect to the senior notes issued by Nabors Delaware, are similarly unsecured and have a similar ranking to the series of senior notes so guaranteed. Subject to certain qualifications and limitations, the indentures governing the senior notes issued by Nabors Holdings and Nabors Delaware limit the ability of Nabors and its subsidiaries to incur liens and to enter into sale and lease-back transactions. In addition, such indentures limit the ability of Nabors, Nabors Delaware and Nabors Holdings to enter into mergers, consolidations or transfers of all or substantially all of such entity's assets unless the successor company assumes the obligations of such entity under the applicable indenture. -54- $700 MILLION ZERO COUPON SENIOR EXCHANGEABLE NOTES DUE JUNE 2023 On June 10, 2003, Nabors Delaware, our wholly-owned subsidiary, completed a private placement of $700 million aggregate principal amount of zero coupon senior exchangeable notes due 2023 that are fully and unconditionally guaranteed by us. The notes were reoffered by the initial purchaser of the notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended, and outside the United States in accordance with Regulation S under the Securities Act. Nabors and Nabors Delaware filed a registration statement on Form S-3 pursuant to the Securities Act with respect to the notes on August 8, 2003. The notes do not bear interest, do not accrete and have a zero yield to maturity, unless Nabors Delaware becomes obligated to pay contingent interest as defined in the related note indenture. We used a portion of the net proceeds from the issuance of the notes to redeem the remaining outstanding principal amount of Nabors Delaware's $825 million zero coupon convertible senior debentures due 2020 on June 20, 2003 and our associated guarantees (see discussion below under the caption "Other Debt Transactions"). The remainder of the proceeds of the notes were invested in cash and marketable securities. The notes are unsecured and are effectively junior in right of payment to any of Nabors Delaware's future secured debt. The notes will rank equally with any of Nabors Delaware's other existing and future unsecured and unsubordinated debt and will be senior in right of payment to any of Nabors Delaware's subordinated debt. The guarantee of Nabors will be similarly unsecured and have a similar ranking to the notes so guaranteed. Holders of the notes have the right to require Nabors Delaware to repurchase the notes at a purchase price equal to 100% of the principal amount of the notes plus contingent interest and additional amounts, if any, on June 15, 2008, June 15, 2013 and June 15, 2018 or upon a fundamental change as described in the related note indenture. Nabors Delaware will be obligated to pay contingent interest during any six-month period from June 15 to December 14 or from December 15 to June 14 commencing on or after June 15, 2008 for which the average trading price of the notes for each day of the applicable five trading day reference period equals or exceeds 120% of the principal amount of the notes as of the day immediately preceding the first day of the applicable six-month interest period. The amount of contingent interest payable per note in respect to any six-month period will equal 0.185% of the principal amount of a note. The five day trading reference period means the five trading days ending on the second trading day immediately preceding the relevant six-month interest period. The notes are exchangeable at the option of the holders into the equivalent value of 14.2653 common shares of Nabors per $1,000 principal amount of notes (subject to adjustment for certain events) if any of the following circumstances occur: (1) if in any calendar quarter beginning after the quarter ending September 30, 2003, the closing sale price per share of Nabors' common shares for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous calendar quarter is greater than or equal to 120%, or with respect to all calendar quarters beginning on or after July 1, 2008, 110%, of the applicable exchange price per share of the Nabors' common shares on such last trading day (the initial exchange price per share is $70.10 and is subject to adjustment for certain events detailed in the note indenture; 120% of this initial price per share is $84.12 and 110% of this initial price per share is $77.11), (2) subject to certain exceptions, during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of notes for each day of such ten trading day period was less than 95% of the product of the closing sale price of Nabors' common shares and the exchange rate of such note, (3) if Nabors Delaware calls the notes for redemption, or (4) upon the occurrence of specified corporate transactions described in the note indenture. See the discussion below related to the method of settlement required upon exchange of these notes. The $700 million notes can be put to us on June 15, 2008, June 15, 2013 and June 15, 2018, for a purchase price equal to 100% of the principal amount of the notes plus contingent interest and additional amounts, if any. In October 2004 we executed a supplemental indenture relating to our $700 million zero coupon senior exchangeable notes providing that upon an exchange of these notes, we will in all circumstances, except when we are in default under the indenture, elect to pay holders of these debt instruments, in lieu of common shares, cash up to the principal amount of the instruments and, at our option, consideration in the form of either cash or our common shares for any amount above the principal amount of the instruments required to be paid pursuant to the terms of the indenture. Additionally, the supplemental indenture provides that if the instruments are put to us at various dates commencing June 15, 2008, we will in all circumstances elect to pay holders of these debt instruments cash upon such repurchase. -55- In November 2004, we commenced an offer to exchange Series B of our $700 million zero coupon senior exchangeable notes due 2023 for our existing $700 million zero coupon senior exchangeable notes. This exchange of shares removed the obligation under these notes where we would be required to issue shares upon conversion when we are in default under the indenture related to the notes. Series B of our $700 million zero coupon senior exchangeable notes have substantially similar terms to our existing $700 million zero coupon senior exchangeable notes as supplemented, except that, in addition to the elimination of the default language discussed above, the Series B exchanged notes contain additional anti-dilution protection for cash dividends and tender or exchange offers for our common shares at above-market prices, and provide for payment of a make-whole premium in certain circumstances upon exchange in connection with certain fundamental changes involving Nabors. The exchange offer expired on December 10, 2004 and as a result of the exchange offer and subsequent exchanges, as of December 31, 2004, an aggregate principal amount of $697.8 million of Series B of our $700 million zero coupon senior exchangeable notes had been issued to those holders of the original series of $700 million zero coupon senior exchangeable notes, leaving $2.2 million of the original series of notes outstanding as of December 31, 2004. $1.381 BILLION ZERO COUPON CONVERTIBLE SENIOR DEBENTURES DUE FEBRUARY 2021 Our $1.381 billion zero coupon convertible senior debentures due 2021 can be put to us on February 5, 2006, February 5, 2011 and February 5, 2016, for a purchase price equal to the issue price plus accrued original issue discount to the date of repurchase. The original issue price of these debentures was $608.41 per $1,000 principal amount at maturity. The yield to maturity is 2.5% compounded semi-annually with no periodic cash payments of interest. At the holder's option, the $1.381 billion debentures can be converted, at any time prior to maturity or their earlier redemption, into the equivalent value of 7.0745 common shares per $1,000 principal amount at maturity. The conversion rate is subject to adjustment under formulae set forth in the indenture in certain events, including: (1) the issuance of Nabors common shares as a dividend or distribution of common shares; (2) certain subdivisions and combinations of the common shares; (3) the issuance to all holders of common shares of certain rights or warrants to purchase common shares; (4) the distribution of common shares, other than Nabors common shares to Nabors' shareholders, or evidences of Nabors' indebtedness or of assets; and (5) distribution consisting of cash, excluding any quarterly cash dividend on the common shares to the extent that the aggregate cash dividend per common share in any quarter does not exceed certain amounts. See the discussion below related to the method of settlement required upon conversion of these debentures. We cannot redeem the $1.381 billion debentures before February 5, 2006, after which time we may redeem all or a portion of the debentures for cash at any time at their accreted value. In October 2004 we executed a supplemental indenture (similar to the supplemental indenture for our $700 million zero coupon senior exchangeable notes discussed above) relating to our $1.381 billion zero coupon convertible senior debentures providing that upon a conversion of these convertible debt instruments, we will in all circumstances, except when we are in default under the indenture, elect to pay holders of these debt instruments, in lieu of common shares, cash up to the principal amount of the instruments and, at our option, consideration in the form of either cash or our common shares for any amount above the principal amount of the instruments required to be paid pursuant to the terms of the indenture. Additionally, the supplemental indenture provides that if the instruments are put to us at various dates commencing February 5, 2006, we will in all circumstances elect to pay holders of these debt instruments cash upon such repurchase. As our $1.381 billion zero coupon convertible senior debentures can be converted at any time resulting in our payment of cash, the outstanding principal amount of these debentures of $804.6 million is included in current liabilities in our balance sheet as of December 31, 2004. These debentures previously would have been classified in current liabilities beginning in the first quarter of 2005 as a result of the holders having the option to put the debentures to us on February 5, 2006. If the $1.381 billion debentures were converted, our cash obligation would be an amount equal to the lesser of 8.5 million multiplied by the sale price of our common shares on the trading day immediately prior to the related conversion date or the principal amount of the debentures on the date of conversion. If these debentures had been converted on December 31, 2004, we would have been required to pay cash totaling approximately $435.0 million to the holders of the debentures (based on the closing price for our common shares on December 30, 2004 of $51.18). 6.8% SENIOR NOTES DUE APRIL 2004 On April 15, 2004, we made a payment of $305.3 million upon maturity of our 6.8% senior notes, representing principal of $295.3 million and accrued interest of $10.0 million. These senior notes were included in our consolidated balance sheet as current portion of long-term debt as of December 31, 2003. -56- OTHER DEBT TRANSACTIONS On June 20, 2003, we redeemed the remaining outstanding principal amount of Nabors Delaware's $825 million zero coupon convertible senior debentures due 2020 and our associated guarantees. The redemption price was $655.50 per $1,000 principal amount of the debentures for an aggregate redemption price paid of approximately $494.9 million. The redemption of the debentures did not result in any gain or loss as the debentures were redeemed at prices equal to their carrying value on June 20, 2003. On April 1, 2003, we redeemed our 8.625% senior subordinated notes due April 2008 and all associated guarantees at a redemption price of $1,043.13 per $1,000 principal amount of the notes together with accrued and unpaid interest to the date of redemption. The aggregate redemption price was $45.2 million and resulted in the recognition of a pretax loss of approximately $.9 million, resulting from the redemption of the notes at prices higher than their carrying value on April 1, 2003. This loss was recorded in losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net in our consolidated statements of income during 2003. During 2002 we purchased $.6 million face value of our 8.625% senior subordinated notes due April 2008 in the open market at a price of 108%. In addition, we purchased $4.7 million face value of our 6.8% senior notes due April 2004 in the open market at a price of 104%. Upon settlement of these transactions, we paid $5.7 million and recognized a pretax loss of approximately $.2 million, resulting from the repurchases of these notes at prices higher than their carrying value. Additionally, we repaid Cdn. $12.9 million (U.S. $8.3 million) and Cdn. $22.3 million (U.S. $14.3 million) of the debt assumed in the Ryan and Enserco acquisitions, respectively. We also made a $2.5 million scheduled principal payment relating to certain of our medium-term notes. SHORT-TERM BORROWINGS We have three letter of credit facilities with various banks as of December 31, 2004. We did not have any short-term borrowings outstanding at December 31, 2004 and 2003. Availability and borrowings under our credit facilities are as follows:
DECEMBER 31, ------------------- 2004 2003 -------- -------- (IN THOUSANDS) Credit available $110,000 $ 96,825 Letters of credit outstanding (77,876) (56,288) -------- -------- Remaining availability $ 32,124 $ 40,537 ======== ========
-57- 9. INCOME TAXES Income (loss) before income taxes was comprised of the following:
YEAR ENDED DECEMBER 31, -------------------------------- 2004 2003 2002 -------- --------- --------- (IN THOUSANDS) United States $ 25,709 $(160,130) $ (19,622) Foreign 310,129 334,753 160,396 -------- --------- --------- Income before income taxes $335,838 $ 174,623 $ 140,774 ======== ========= =========
Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted and income is earned. We are a Bermuda-exempt company. Bermuda does not impose corporate income taxes. Our U.S. subsidiaries are subject to a U.S. federal tax rate of 35%. Income tax expense (benefit) consisted of the following:
YEAR ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 -------- -------- ------- (IN THOUSANDS) Current: U.S. federal $ 4,955 $ 9,085 $ 4,458 Foreign 15,868 (680) 5,113 State 44 89 614 -------- -------- ------- 20,867 8,494 10,185 -------- -------- ------- Deferred: U.S. federal (20,300) (53,121) 4,669 Foreign 32,471 29,051 2,274 State 343 (2,029) 2,157 -------- -------- ------- 12,514 (26,099) 9,100 -------- -------- ------- Income tax expense (benefit) $ 33,381 $(17,605) $19,285 ======== ======== =======
Nabors is not subject to tax in Bermuda. A reconciliation of the differences between taxes on income before income taxes computed at the appropriate statutory rate and our reported provision for income taxes follows:
YEAR ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ------- -------- ------- (IN THOUSANDS) Income tax provision at statutory rate (Bermuda rate of 0%) $ -- $ -- $ -- Taxes (benefit) on U.S. and foreign earnings (losses) at greater than the Bermuda rate 32,528 (17,281) 10,944 Increase in valuation allowance 2,805 5,163 6,540 Effect of change in tax rate (Canada) (2,204) (4,226) -- State income taxes (benefit) 252 (1,261) 1,801 ------- -------- ------- Income tax (benefit) expense $33,381 $(17,605) $19,285 ======= ======== ======= Effective tax (benefit) rate 10% (10)% 14% ======= ======== =======
In 2002, 2003 and 2004 we provided a valuation allowance against net operating loss (NOL) carryforwards in various foreign tax jurisdictions based on our consideration of existing temporary differences and expected future earnings levels in those jurisdictions. Our effective tax rate for 2004 was positively impacted by the release of certain tax reserves, which were determined to no longer be necessary, resulting in a reduction in deferred income tax expense (non-cash) totaling approximately $16.0 million ($.10 per diluted share). -58- The significant components of our deferred tax assets and liabilities were as follows:
DECEMBER 31, --------------------- 2004 2003 --------- --------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards $ 326,176 $ 239,291 Tax credit carryforwards 5,969 5,796 Accrued expenses not currently deductible for tax and other 30,233 36,194 Less: Valuation allowance (14,508) (11,703) --------- --------- Deferred tax assets, net of valuation allowance 347,870 269,578 --------- --------- Deferred tax liabilities: Depreciation and depletion for tax in excess of book expense (668,731) (594,589) Tax deductible items not expensed for book purposes (24,143) (8,457) Unrealized gain on marketable securities (917) (2,914) --------- --------- Total deferred tax liabilities (693,791) (605,960) --------- --------- Net deferred tax liabilities (345,921) (336,382) Less: net current asset portion 39,599 36,442 net long-term asset portion 357 -- --------- --------- Net long-term deferred tax liability $(385,877) $(372,824) ========= =========
For U.S. federal income tax purposes, we have NOL carryforwards of approximately $841.9 million that, if not utilized, will expire at various times from 2009 to 2024. The NOL carryforwards for alternative minimum tax purposes are approximately $728.3 million. There are alternative minimum tax credit carryforwards of $5.4 million available to offset future regular tax liabilities. Additionally, we have foreign NOL carryforwards of approximately $51.7 million that, if not utilized, will expire at various times from 2005 to 2014. The NOL carryforwards subject to expiration expire as follows:
(IN THOUSANDS) U.S. Year ended December 31, TOTAL FEDERAL FOREIGN - ----------------------- -------- -------- ------- 2005 $ 3,463 $ -- $ 3,463 2006 11,540 -- 11,540 2007 7,394 -- 7,394 2008 12,149 -- 12,149 2009 10,231 779 9,452 2010 1,641 482 1,159 2011 12,596 11,598 998 2013 5,115 -- 5,115 2014 458 -- 458 2017 38,751 38,751 -- 2018 23,119 23,119 -- 2019 737 737 -- 2020 737 737 -- 2021 738 738 -- 2022 225,842 225,842 -- 2023 371,600 371,600 -- 2024 167,476 167,476 -- -------- -------- ------- Total $893,587 $841,859 $51,728 ======== ======== =======
-59- In addition, for state income tax purposes, we have net operating loss carryforwards of approximately $486.6 million that, if not utilized, will expire at various times from 2005 to 2024 and foreign NOL carryforwards that are not subject to expiration totaling $52.4 million. Under U.S. federal tax law, the amount and availability of loss carryforwards (and certain other tax attributes) are subject to a variety of interpretations and restrictive tests applicable to Nabors and our subsidiaries. The utilization of such carryforwards could be limited or effectively lost upon certain changes in ownership. Accordingly, although we believe substantial loss carryforwards are available to us, no assurance can be given concerning such loss carryforwards, or whether or not such loss carryforwards will be available in the future. 10. COMMON SHARES AND STOCK OPTIONS COMMON SHARES During 2004, 2003 and 2002, our employees exercised options to acquire 3,045,000, 1,234,000 and 806,000 of our common shares, respectively. During 2003 warrants issued in conjunction with our acquisitions of Enserco (April 2002) and New Prospect Drilling Company (May 1998) were exercised resulting in the issuance of 49,000 and 200,000 of our common shares, respectively. In conjunction with our acquisition of Ryan in October 2002 and our acquisition of Enserco in April 2002, we issued 380,264 and 3,549,082 exchangeable shares of Nabors Exchangeco, respectively, of which 219,493 and 2,638,526 exchangeable shares were immediately exchanged for our common shares, respectively. Subsequent to these acquisitions, during 2002, 2003 and 2004, respectively, an additional 484,756, 208,315 and 159,869 exchangeable shares were exchanged for our common shares leaving a total of 218,387 exchangeable shares outstanding as of December 31, 2004. The exchangeable shares of Nabors Exchangeco are exchangeable for Nabors common shares on a one-for-one basis. The exchangeable shares are included in capital in excess of par value. During 2002 warrants issued in conjunction with our acquisition of Bayard Drilling Technologies, Inc. (April 1999) were exercised, resulting in the issuance of 18,000 of our common shares. As a result of our corporate reorganization on June 24, 2002, the authorized share capital of Nabors consists of 400 million common shares, par value $.001 per share, and 25 million preferred shares, par value $.001 per share. Common shares issued were 149,860,747 and 146,656,432 at $.001 par value as of December 31, 2004 and 2003, respectively, compared to 144,368,390 at $.10 par value immediately preceding the reorganization. The decrease in par value of common stock from $.10 to $.001 was recorded as an increase to capital in excess of par value and a decrease in common shares in our Consolidated Financial Statements. In conjunction with the reorganization, 6.8 million shares of outstanding treasury stock were retired, as Bermuda law does not recognize the concept of treasury stock. The effect of this retirement reduced common shares by $.7 million, capital in excess of par value by $59.2 million and retained earnings by $192.9 million. On July 23, 2002, we entered into a private transaction with a counterparty in which we sold 1.0 million European-style put options for $2.6 million with a maturity date of October 23, 2002. Under the arrangement, if the price of our common shares was less than $26.5698 on the maturity date, the counterparty could have exercised the put option resulting in, at our option (1) our purchase of 1.0 million of our common shares at a price of $26.5698 per share or (2) our payment, in cash or Nabors common shares, of an amount equal to the difference between $26.5698 and our share price on October 23, 2002 multiplied by 1.0 million. These put options expired on October 23, 2002 and we retained the $2.6 million in proceeds, which was recorded as an increase in capital in excess of par value in our consolidated balance sheet. On July 17, 2002, the Board of Directors of Nabors authorized the continuation of the share repurchase program that had begun under Nabors Delaware, and provided that the amount of Nabors common shares authorized for purchase by Nabors going forward be increased to $400 million. Under the Nabors Delaware program, Nabors Delaware had acquired an aggregate of approximately $248.0 million of Nabors Delaware common stock, or 6.2 million shares, during 2001. During 2002 Nabors also acquired, through a subsidiary, 91,000 of its common shares in the open market for $27.30 per share for an aggregate price of $2.5 million. Immediately thereafter these shares were transferred to Nabors. -60- Pursuant to Bermuda law, any shares, when purchased, will be treated as cancelled. Therefore, a repurchase of shares will not have the effect of reducing the amount of Nabors' authorized share capital. STOCK OPTION PLANS As of December 31, 2004, we have several stock option plans under which options to purchase Nabors common shares may be granted to key officers, directors and managerial employees of Nabors and its subsidiaries. Options granted under the plans are at prices equal to the fair market value of the shares on the date of the grant. Options granted under the plans generally are exercisable in varying cumulative periodic installments after one year. In the case of certain key executives, options granted under the plans are subject to accelerated vesting related to targeted common share prices, or may vest immediately on the grant date. Options granted under the plans cannot be exercised more than ten years from the date of grant. Options to purchase 7.4 million and 8.1 million Nabors common shares remained available for grant as of December 31, 2004 and 2003, respectively. A summary of stock option transactions is as follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE ------ -------- (IN THOUSANDS, EXCEPT EXERCISE PRICE) Options outstanding as of December 31, 2001 19,257 $27.21 Granted 5,495 27.35 Exercised (806) 12.68 Forfeited (277) 33.81 ------ ------ Options outstanding as of December 31, 2002 23,669 $27.66 Granted 2,969 38.68 Exercised (1,234) 16.48 Forfeited (450) 41.45 ------ ------ Options outstanding as of December 31, 2003 24,954 $29.27 Granted 3,430 45.92 Exercised (3,045) 23.40 Forfeited (313) 41.05 ------ ------ Options outstanding as of December 31, 2004 25,026 $32.12 ====== ======
Of the options outstanding, 19.0 million, 20.7 million and 20.6 million were exercisable at weighted average exercise prices of $29.05, $27.65 and $27.13, as of December 31, 2004, 2003 and 2002, respectively. The weighted average fair value of options granted during the years ended December 31, 2004, 2003 and 2002 was $12.93, $14.29 and $10.69, respectively. A summary of stock options outstanding as of December 31, 2004 is as follows:
OPTIONS OUTSTANDING ------------------------------------ WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE NUMBER CONTRACTUAL EXERCISE OUTSTANDING LIFE PRICE ----------- ----------- -------- (IN THOUSANDS, EXCEPT CONTRACTUAL LIFE AND EXERCISE PRICE) Range of exercise prices: $ 7.00 - $10.50 8 1.5 $ 7.33 11.50 - 17.25 5,863 2.8 12.49 18.94 - 28.41 6,727 6.2 26.17 28.44 - 42.66 3,006 7.9 38.38 42.94 - 64.41 9,422 5.8 46.62 ------ --- ------ 25,026 5.5 $32.12 ====== === ======
-61- A summary of stock options exercisable as of December 31, 2004 is as follows:
OPTIONS EXERCISABLE ---------------------- WEIGHTED AVERAGE NUMBER EXERCISE EXERCISABLE PRICE ----------- -------- (IN THOUSANDS, EXCEPT EXERCISE PRICE) Range of exercise prices: $ 7.00 - $10.50 8 $ 7.33 11.50 - 17.25 5,863 12.49 18.94 - 28.41 6,141 26.09 28.44 - 42.66 1,011 38.31 42.94 - 64.41 5,981 46.80 ------ ------ 19,004 $29.05 ====== ======
11. PENSION, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PENSION PLANS In conjunction with our acquisition of Pool Energy Services Co. in November 1999, we acquired the assets and liabilities of a defined benefit pension plan, the Pool Company Retirement Income Plan. Benefits under the plan are frozen and participants were fully vested in their accrued retirement benefit on December 31, 1998. Summarized information on the Pool pension plan is as follows:
PENSION BENEFITS ----------------- 2004 2003 ------- ------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $15,401 $13,631 Interest cost 909 891 Actuarial (loss) gain (49) 1,417 Benefit payments (511) (538) ------- ------- Benefit obligation at end of year 15,750 15,401 ======= ======= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year 9,686 8,835 Actual return on plan assets 633 1,389 Employer contribution 1,304 -- Benefit payments (511) (538) ------- ------- Fair value of plan assets at end of year 11,112 9,686 ======= ======= FUNDED STATUS: Funded status at end of year (4,638) (5,715) Unrecognized net actuarial loss 3,713 3,942 ------- ------- Net liability recognized $ (925) $(1,773) ======= ======= AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS: Accrued benefit liability 4,638 5,715 Accumulated other comprehensive income 2,419 2,815 COMPONENTS OF NET PERIODIC BENEFIT COST: Interest cost $ 909 $ 891 Expected return on plan assets (647) (563) Recognized net actuarial loss 195 198 ------- ------- Net periodic benefit cost $ 457 $ 526 ======= ======= ADDITIONAL INFORMATION: Increase in minimum pension liability included in other comprehensive income $ 227 $ 610 ------- ------- WEIGHTED AVERAGE ASSUMPTIONS: Weighted average discount rate 6.00% 6.00% Expected long-term rate of return on plan assets 6.50% 6.50% ------- -------
-62- We analyze the historical performance of investments in equity and debt securities, together with current market factors such as inflation and interest rates to help us make assumptions necessary to estimate a long-term rate of return on plan assets. Once this estimate is made, we review the portfolio of plan assets and make adjustments thereto that we believe are necessary to reflect a diversified blend of investments in equity and debt securities that is capable of achieving the estimated long-term rate of return without assuming an unreasonable level of investment risk. The measurement date used to determine pension measurements for the plan is December 31. Our weighted-average asset allocations as of December 31, 2004 and 2003, by asset category are as follows:
PENSION BENEFITS ---------------- 2004 2003 ---- ---- (IN THOUSANDS) Equity securities 57% 56% Debt securities 42% 43% Other 1% 1% --- --- Total 100% 100% === ===
We invest plan assets based on a total return on investment approach, pursuant to which the plan assets include a diversified blend of investments in equity and debt securities toward a goal of maximizing the long-term rate of return without assuming an unreasonable level of investment risk. We determine the level of risk based on an analysis of plan liabilities, the extent to which the value of the plan assets satisfies the plan liabilities and our financial condition. Our investment policy includes target allocations approximating 55% investment in equity securities and 45% investment in debt securities. The equity portion of the plan assets represents growth and value stocks of small, medium and large companies. We measure and monitor the investment risk of the plan assets both on a quarterly basis and annually when we assess plan liabilities. We expect to contribute approximately $1.0 million to the Pool pension plan in 2005. This is based on the sum of (1) the minimum contribution for the 2004 plan year that will be made in 2005 and (2) the estimated minimum required quarterly contributions for the 2005 plan year. We made contributions to the Pool pension plan in 2004 totaling $1.3 million. There were no contributions made to the Pool pension plan in 2003. As of December 31, 2004, we expect that benefits to be paid in each of the next five fiscal years after 2004 and in the aggregate for the five fiscal years thereafter will be as follows: (IN THOUSANDS) 2005 $ 405 2006 442 2007 503 2008 559 2009 609 2010 - 2014 4,052
Certain of Nabors' employees are covered by defined contribution plans. Our contributions to the plans are based on employee contributions and totaled $14.8 million and $13.1 million for the years ended December 31, 2004 and 2003, respectively. Nabors does not provide postemployment benefits to its employees. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Prior to the date of our acquisition, Pool provided certain postretirement healthcare and life insurance benefits to eligible retirees who had attained specific age and years of service requirements. Nabors terminated this plan at the date of acquisition (November 24, 1999). A liability of approximately $.5 million is recorded in our consolidated -63- balance sheets as of December 31, 2004 and 2003 to cover the estimated costs of beneficiaries covered by the plan at the date of acquisition. 12. RELATED PARTY TRANSACTIONS Pursuant to his employment agreement entered into in October 1996, we provided an unsecured, non-interest bearing loan of approximately $2.9 million to Nabors' Deputy Chairman, President and Chief Operating Officer. This loan is due on September 30, 2006. Pursuant to their employment agreements, Nabors and its Chairman and Chief Executive Officer, Deputy Chairman, President and Chief Operating Officer, and certain other key employees entered into split-dollar life insurance agreements pursuant to which we pay a portion of the premiums under life insurance policies with respect to these individuals and, in certain instances, members of their families. Under these agreements, we are reimbursed for such premiums upon the occurrence of specified events, including the death of an insured individual. Any recovery of premiums paid by Nabors could potentially be limited to the cash surrender value of these policies under certain circumstances. As such, the values of these policies are recorded at their respective cash surrender values in our consolidated balance sheets. We have made premium payments to date totaling $13.2 million related to these policies. The cash surrender value of these policies of approximately $11.8 million and $11.4 million is included in other long-term assets in our consolidated balance sheets as of December 31, 2004 and 2003, respectively. In the ordinary course of business, we enter into various rig leases, rig transportation and related oilfield services agreements with our Alaskan and Saudi Arabian unconsolidated affiliates at market prices. Revenues from business transactions with these affiliated entities totaled $63.2 million, $51.3 million and $46.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. Expenses from business transactions with these affiliated entities totaled $3.3 million, $3.3 million and $3.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. Additionally, we had accounts receivable from these affiliated entities of $20.7 million and $20.9 million as of December 31, 2004 and 2003, respectively. We had accounts payable to these affiliated entities of $1.8 million and $.5 million as of December 31, 2004 and 2003, respectively, and a note payable with one of these affiliated entities of $4.1 million and $4.3 million as of December 31, 2004 and 2003, respectively, which is included in other long-term liabilities. Additionally, we own certain marine vessels that are chartered under a bareboat charter arrangement to Sea Mar Management LLC, an entity in which we own a 25% interest. Under the requirements of FIN 46R this entity was consolidated by Nabors beginning in 2004. Revenues from business transactions with Sea Mar totaled $29.5 million and $18.0 million for the years ended December 31, 2003 and 2002, respectively. Expenses from business transactions with Sea Mar totaled $47.9 million and $28.1 million for the years ended December 31, 2003 and 2002, respectively. Accounts receivable from and accounts payable to Sea Mar as of December 31, 2003 totaled $3.0 million and $3.2 million, respectively. 13. COMMITMENTS AND CONTINGENCIES OPERATING LEASES Nabors and its subsidiaries occupy various facilities and lease certain equipment under various lease agreements. The minimum rental commitments under non-cancelable operating leases, with lease terms in excess of one year subsequent to December 31, 2004, are as follows: (IN THOUSANDS) 2005 $11,462 2006 7,575 2007 6,102 2008 1,345 2009 1,230 Thereafter 1,311 ------- $29,025 =======
The above amounts do not include property taxes, insurance or normal maintenance that the lessees are required to pay. Rental expense relating to operating leases with terms greater than 30 days amounted to $19.2 million, $22.4 million and $21.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. -64- EMPLOYMENT CONTRACTS We have entered into employment contracts with certain of our employees. Our minimum salary and bonus obligations under these contracts as of December 31, 2004 are as follows: (IN THOUSANDS) 2005 $2,440 2006 2,225 2007 2,225 2008 1,669 2009 and thereafter -- ------ $8,559 ======
CONTINGENCIES SELF-INSURANCE ACCRUALS We are self-insured for certain losses relating to workers' compensation, employers' liability, general liability, automobile liability and property damage. Effective April 1, 2004, with our insurance renewal, certain changes have been made to our insurance coverage. Effective for the period from April 1, 2004 to March 31, 2005, our exposure (that is, our deductible) per occurrence is $1.0 million for workers' compensation, employers' liability and marine employers' liability (Jones Act). In addition, we assume an excess, aggregate deductible for domestic workers' compensation claims. Through this additional deductible, we assume the first $2.4 million in losses above the deductible for domestic workers' compensation claims. This additional deductible is exhausted when the excess loss above the $1.0 million reaches $2.4 million in the annual aggregate. We continue to assume a $5.0 million deductible for general liability losses. Our self-insurance for automobile liability loss is $0.5 million per occurrence. We maintain actuarially-determined accruals in our consolidated balance sheets to cover the self-insurance retentions. We are self-insured for certain other losses relating to rig, equipment, property, business interruption and political, war and terrorism risks. Effective April 1, 2004, our per occurrence self-insurance retentions are $10.0 million for rig physical damage and business interruption for 29 specific high-value rigs. The remainder of our Alaska and offshore fleet is subject to a $5.0 million self-insurance retention. All other land rigs are subject to a $1.0 million deductible. Political risk insurance is procured for select operations in South America, Africa, the Middle East and Asia. Losses are subject to a $0.25 million deductible, except for Colombia, which is subject to a $1.5 million deductible. There is no assurance that such coverage will adequately protect Nabors against liability from all potential consequences. As of December 31, 2004 and 2003, our self-insurance accruals totaled $98.1 million and $106.2 million, respectively, and our related insurance recoveries/receivables were $14.3 million and $31.8 million, respectively. LITIGATION Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of their business. In the opinion of management, our ultimate liability with respect to these pending lawsuits is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows. GUARANTEES We enter into various agreements and obligations providing financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers' compensation insurance program, other financial surety instruments such as bonds, and guarantees of residual value in certain of our operating lease agreements. We have also guaranteed payment of contingent consideration in conjunction with an acquisition in 2002, which is based on future operating results of that business. In addition, we have provided indemnifications to certain third parties which serve as guarantees. These guarantees include indemnification provided by Nabors to our stock transfer agent and our insurance carriers. We are not able to estimate the potential future maximum payments that might be due under our indemnification guarantees. Management believes the likelihood that we would be required to perform or otherwise incur any material losses associated with any of these guarantees is remote. The following table summarizes the total maximum amount of financial and performance guarantees issued by Nabors: -65-
MAXIMUM AMOUNT -------------------------------------------- 2005 2006 2007 THEREAFTER TOTAL ------- ---- ---- ---------- ------- (IN THOUSANDS) Financial standby letters of credit and other financial surety instruments $81,067 $ -- $-- $302 $81,369 Guarantee of residual value in lease agreements 684 65 -- -- 749 Contingent consideration in acquisition 2,000 500 -- -- 2,500 ------- ---- --- ---- ------- Total $83,751 $565 $-- $302 $84,618 ======= ==== === ==== =======
14. EARNINGS PER SHARE A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 2004 2003 2002 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income (numerator): Net income - basic $302,457 $192,228 $121,489 Add interest expense on assumed conversion of our zero coupon senior convertible/exchangeable debentures/notes, net of tax: $825 million due 2020 (1) -- 3,639 -- $1.381 billion due 2021 (2) 12,438 -- -- $700 million due 2023 (3) -- -- -- -------- -------- -------- Adjusted net income - diluted $314,895 $195,867 $121,489 ======== ======== ======== Earnings per share: Basic $ 2.03 $ 1.31 $ .85 Diluted $ 1.92 $ 1.25 $ .81 Shares (denominator): Weighted average number of shares outstanding - basic (4) 148,936 146,495 143,655 Net effect of dilutive stock options and warrants based on the treasury stock method 6,603 6,604 6,342 Assumed conversion of our zero coupon senior convertible/exchangeable debentures/notes: $825 million due 2020 (1) -- 3,798 -- $1.381 billion due 2021 (2) 8,491 -- -- $700 million due 2023 (3) -- -- -- -------- -------- -------- Weighted average number of shares outstanding - diluted 164,030 156,897 149,997 ======== ======== ========
(1) Diluted earnings per share for the year ended December 31, 2003 reflects the assumed conversion of our $825 million zero coupon convertible senior debentures, as the conversion in that year would have been dilutive. For the year ended December 31, 2002, the weighted average number of shares outstanding-diluted excludes 8.1 million potentially dilutive shares issuable upon the conversion of our $825 million zero coupon convertible senior debentures because the inclusion of such shares would have been anti-dilutive, given the level of net income for that year. Net income for the year ended December 31, 2002 also excludes the related add-back of interest expense, net -66- of tax, of $7.6 million for these debentures. These shares would have been dilutive and therefore included in the calculation of the weighted average number of shares outstanding-diluted had diluted earnings per share been at or above $.93 for the year ended December 31, 2002. We redeemed for cash the remaining outstanding principal amount of our $825 million zero coupon convertible senior debentures on June 20, 2003 and therefore these debentures did not impact the calculation of diluted earnings per share for the year ended December 31, 2004. (2) For the years ended December 31, 2003 and 2002, the weighted average number of shares outstanding-diluted excludes 8.5 million potentially dilutive shares issuable upon the conversion of our $1.381 billion zero coupon convertible senior debentures because the inclusion of such shares would have been anti-dilutive, given the level of net income for those years. Net income for the years ended December 31, 2003 and 2002, excludes the related add-back of interest expense, net of tax, of $12.1 million and $11.8 million, respectively, for these debentures. These shares would have been dilutive and therefore included in the calculation of the weighted average number of shares outstanding-diluted had diluted earnings per share been at or above $1.43 and $1.39 for the years ended December 31, 2003 and 2002, respectively. (3) Diluted earnings per share for the years ended December 31, 2004 and 2003, respectively, excludes approximately 10.0 million and 5.6 million potentially dilutive shares initially issuable upon the exchange of our $700 million zero coupon senior exchangeable notes due 2023. Such shares did not impact our calculation of diluted earnings per share for these years as we are required to pay cash up to the principal amount of any notes exchanged. We would only issue an incremental number of shares upon exchange of these notes, and such shares would only be included in the calculation of the weighted-average number of shares outstanding in our diluted earnings per share calculation, if the price of our shares exceeded $70.10. These notes were issued in June 2003 and therefore did not impact the calculation of diluted earnings per share for the year ended December 31, 2002. (4) Includes the following weighted average number of common shares of Nabors and weighted average number of exchangeable shares of Nabors Exchangeco, respectively: 148.7 million and .3 million shares for the year ended December 31, 2004; 146.0 million and .5 million shares for the year ended December 31, 2003; and 143.2 million and .4 million shares for the year ended December 31, 2002. The exchangeable shares of Nabors Exchangeco are exchangeable for Nabors common shares on a one-for-one basis, and have essentially identical rights as Nabors Industries Ltd. common shares, including but not limited to voting rights and the right to receive dividends, if any. For all periods presented, the computation of diluted earnings per share excludes outstanding stock options and warrants with exercise prices greater than the average market price of Nabors' common shares, because the inclusion of such options and warrants would be anti-dilutive. The number of options and warrants that were excluded from diluted earnings per share that would potentially dilute earnings per share in the future were 6,951,237 shares in 2004, 8,354,070 shares in 2003, and 8,264,768 shares in 2002. In any period during which the average market price of Nabors' common shares exceeds the exercise prices of these stock options and warrants, such stock options and warrants will be included in our diluted earnings per share computation using the treasury stock method of accounting. 15. SUPPLEMENTAL BALANCE SHEET, INCOME STATEMENT AND CASH FLOW INFORMATION Accounts receivable is net of an allowance for doubtful accounts of $11.0 million as of December 31, 2004 and 2003. Accrued liabilities include the following:
DECEMBER 31, ------------------- (IN THOUSANDS) 2004 2003 -------- -------- Accrued compensation $ 67,648 $ 55,137 Deferred revenue 25,304 26,611 Workers' compensation liabilities 28,994 30,180 Interest payable 10,442 15,888 Other accrued liabilities 38,846 32,929 -------- -------- $171,234 $160,745 ======== ========
-67- Investment income includes the following:
YEAR ENDED DECEMBER 31, --------------------------- 2004 2003 2002 ------- ------- ------- (IN THOUSANDS) Interest income $22,572 $27,238 $33,600 Gains on marketable and non-marketable securities, net 20,638 6,145 2,877 Dividend and other investment income 6,854 430 484 ------- ------- ------- $50,064 $33,813 $36,961 ======= ======= =======
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net includes the following:
YEAR ENDED DECEMBER 31, --------------------------- 2004 2003 2002 ------- ------- ------- (IN THOUSANDS) Losses (gains) on sales of long- lived assets $ 874 $(2,476) $(8,308) Impairment charges -- -- 3,738 Foreign currency transaction gains (755) (830) (486) Corporate reorganization expense -- -- 3,769 (Gains) losses on derivative instruments (2,363) 1,140 1,983 Loss on extinguishment of debt -- 908 202 Other (2,385) 2,411 (1,731) ------- ------- ------- $(4,629) $ 1,153 $ (833) ======= ======= =======
Supplemental cash flow information for the years ended December 31, 2004, 2003 and 2002 is as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ------- ------- --------- (IN THOUSANDS) Cash paid for income taxes $29,306 $16,542 $ 22,831 Cash paid for interest, net of capitalized interest 27,899 41,033 22,653 Acquisitions of businesses: Fair value of assets acquired -- -- 305,399 Goodwill -- -- 110,636 Liabilities assumed or created -- -- (105,986) Common stock of acquired company previously owned -- -- (282) Equity consideration issued -- -- (174,115) ------- ------- --------- Cash paid for acquisitions of businesses -- -- 135,652 Cash acquired in acquisitions of businesses -- -- -- ------- ------- --------- Cash paid for acquisitions of businesses, net $ -- $ -- $ 135,652 ======= ======= =========
-68- 16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 2004 QUARTER ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating revenues and Earnings from unconsolidated affiliates (1) $596,803 $531,868 $585,360 $684,057 Net income 71,717 46,348 75,626 108,766 Earnings per share: (2) Basic $ .48 $ .31 $ .51 $ .73 Diluted $ .46 $ .30 $ .48 $ .68
YEAR ENDED DECEMBER 31, 2003 QUARTER ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating revenues and Earnings from unconsolidated affiliates (3) $455,740 $433,911 $475,979 $524,556 Net income 48,057 29,019 50,281 64,871 Earnings per share: (2) Basic $ .33 $ .20 $ .34 $ .44 Diluted $ .31 $ .19 $ .33 $ .42
(1) Includes Earnings (losses) from unconsolidated affiliates, accounted for by the equity method, of $3.8 million, $1.2 million, $(.3) million and $(.6) million, respectively. (2) Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total computed for the year. (3) Includes Earnings from unconsolidated affiliates, accounted for by the equity method, of $5.9 million, $1.4 million, $2.5 million and $.4 million, respectively. 17. SEGMENT INFORMATION As of December 31, 2004, we operate our business out of 13 operating segments. Our six Contract Drilling operating segments are engaged in drilling, workover and well-servicing operations, on land and offshore, and represent reportable segments. These operating segments consist of our Alaska, U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, U.S. Offshore, Canada and International business units. Our oil and gas operating segment, Ramshorn Investments, Inc., is engaged in the exploration for, development of and production of oil and gas and is included in our Oil and Gas reportable segment. Our Other Operating Segments, consisting of Canrig Drilling Technology Ltd., Epoch Well Services, Inc., Peak Oilfield Service Company, Peak USA Energy Services, Ltd., Ryan Energy Technologies, and Sea Mar, a division of Pool Well Services Co., are engaged in the manufacturing of top drives, manufacturing of drilling instrumentation systems, construction and logistics services, trucking and logistics services, manufacturing and marketing of directional drilling and rig instrumentation systems, directional drilling, rig instrumentation and data collection services, and marine transportation and supply services, respectively. These Other Operating Segments do not meet the criteria included in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for disclosure, individually or in the aggregate, as reportable segments. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (Note 2). Inter-segment sales are recorded at cost or cost plus a profit margin. We evaluate the performance of our segments based on adjusted income derived from operating activities. -69- The following table sets forth financial information with respect to our reportable segments:
YEAR ENDED DECEMBER 31, ------------------------------------- 2004 2003 2002 ----------- ---------- ---------- (IN THOUSANDS) Operating revenues and Earnings from unconsolidated affiliates: Contract Drilling: U.S. Lower 48 Land Drilling $ 748,999 $ 476,258 $ 374,659 U.S. Land Well-servicing 360,010 312,279 294,428 U.S. Offshore 132,778 101,566 105,717 Alaska 83,835 112,092 118,199 Canada 426,675 322,303 141,497 International 444,289 396,884 320,160 ---------- ---------- ---------- Subtotal Contract Drilling (1) 2,196,586 1,721,382 1,354,660 Oil and Gas 65,303 16,919 7,223 Other Operating Segments (2) 205,615 201,660 174,775 Other reconciling items (3) (69,416) (49,775) (55,440) ---------- ---------- ---------- Total $2,398,088 $1,890,186 $1,481,218 ========== ========== ========== Depreciation and amortization, and depletion: Contract Drilling: U.S. Lower 48 Land Drilling $ 77,498 $ 69,190 $ 61,022 U.S. Land Well-servicing 21,940 22,163 19,600 U.S. Offshore 21,650 19,794 20,491 Alaska 11,954 11,969 12,000 Canada 36,802 29,840 20,713 International 62,776 53,374 37,521 ---------- ---------- ---------- Subtotal Contract Drilling 232,620 206,330 171,347 Oil and Gas 45,460 8,599 7,700 Other Operating Segments 22,945 21,597 18,044 Other reconciling items (3) (626) (1,399) (1,726) ---------- ---------- ---------- Total depreciation and amortization, and depletion $ 300,399 $ 235,127 $ 195,365 ========== ========== ========== Adjusted income (loss) derived from operating activities: (4) Contract Drilling: U.S. Lower 48 Land Drilling $ 93,573 $ 16,800 $ 23,415 U.S. Land Well-servicing 57,712 47,082 38,631 U.S. Offshore 20,611 1,649 (1,397) Alaska 16,052 37,847 31,387 Canada 91,421 59,856 17,413 International 89,211 77,964 76,121 ---------- ---------- ---------- Subtotal Contract Drilling 368,580 241,198 185,570 Oil and Gas 13,736 5,850 (1,058) Other Operating Segments (2) (5,333) 3,266 24,660 ---------- ---------- ---------- Total segment adjusted income derived from operating activities 376,983 250,314 209,172 Other reconciling items (5) (47,331) (37,611) (39,124) Interest expense (48,507) (70,740) (67,068) Investment income 50,064 33,813 36,961 Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net 4,629 (1,153) 833 ---------- ---------- ---------- Income before income taxes $ 335,838 $ 174,623 $ 140,774 ========== ========== ==========
-70-
YEAR ENDED DECEMBER 31, ------------------------------ 2004 2003 2002 -------- -------- -------- (IN THOUSANDS) Capital expenditures and acquisitions of businesses: Contract Drilling: U.S Lower 48 Land Drilling $155,612 $ 71,252 $ 7,488 U.S. Land Well-servicing 35,335 25,052 35,901 U.S. Offshore 46,622 48,365 32,585 Alaska 4,293 3,940 21,018 Canada 76,635 29,690 370,500 International 161,115 116,667 194,739 -------- -------- -------- Subtotal Contract Drilling 479,612 294,966 662,231 Oil and Gas 55,303 53,716 9,733 Other Operating Segments 13,824 4,226 32,076 Other reconciling items (5) (4,310) 230 (1,197) -------- -------- -------- Total capital expenditures $544,429 $353,138 $702,843 ======== ======== ========
DECEMBER 31, ------------------------------------ 2004 2003 2002 ---------- ---------- ---------- (IN THOUSANDS) Total assets: Contract Drilling: (6) U.S. Lower 48 Land Drilling $1,119,280 $ 987,903 $ 972,495 U.S. Land Well-servicing 274,734 246,312 237,594 U.S. Offshore 409,687 386,196 368,267 Alaska 204,614 218,222 215,706 Canada 945,226 767,400 565,458 International 1,121,749 1,001,058 883,255 ---------- ---------- ---------- Subtotal Contract Drilling 4,075,290 3,607,091 3,242,775 Oil and Gas 93,169 67,898 23,517 Other Operating Segments (7) 321,979 337,622 343,365 Other reconciling items (5) 1,372,171 1,590,081 1,454,215 ---------- ---------- ---------- Total assets $5,862,609 $5,602,692 $5,063,872 ========== ========== ==========
(1) Includes Earnings from unconsolidated affiliates, accounted for by the equity method, of $1.6 million, $2.8 million and $3.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. (2) Includes Earnings from unconsolidated affiliates, accounted for by the equity method, of $2.5 million, $7.4 million and $10.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. (3) Represents the elimination of inter-segment transactions. (4) Adjusted income (loss) derived from operating activities is computed by: subtracting direct costs, general and administrative expenses, and depreciation and amortization, and depletion expense from Operating revenues and then adding Earnings from unconsolidated affiliates. Such amounts should not be used as a substitute to those amounts reported under GAAP. However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income (loss) derived from operating activities, because it believes that this financial measure is an accurate reflection of the ongoing profitability of our company. A reconciliation of this non-GAAP measure to income before income taxes, which is a GAAP measure, is provided within the table above. (5) Represents the elimination of inter-segment transactions and unallocated corporate expenses, assets and capital expenditures. (6) Includes $35.2 million, $26.5 million and $25.3 million of investments in unconsolidated affiliates accounted for by the equity method as of December 31, 2004, 2003 and 2002, respectively. (7) Includes $31.9 million, $31.6 million and $33.3 million of investments in unconsolidated affiliates accounted for by the equity method as of December 31, 2004, 2003 and 2002, respectively. -71- The following table sets forth financial information with respect to Nabors' operations by geographic area:
YEAR ENDED DECEMBER 31, ------------------------------------ 2004 2003 2002 ---------- ---------- ---------- (IN THOUSANDS) Operating revenues and Earnings from unconsolidated affiliates: United States $1,505,082 $1,152,272 $1,012,503 Foreign 893,006 737,914 468,715 ---------- ---------- ---------- $2,398,088 $1,890,186 $1,481,218 ========== ========== ========== Property, plant and equipment, net: United States $1,854,674 $1,823,281 $1,759,199 Foreign 1,420,821 1,167,511 1,041,868 ---------- ---------- ---------- $3,275,495 $2,990,792 $2,801,067 ========== ========== ========== Goodwill, net: United States $ 155,656 $ 157,873 $ 165,609 Foreign 171,569 157,754 120,753 ---------- ---------- ---------- $ 327,225 $ 315,627 $ 286,362 ========== ========== ==========
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION Nabors has fully and unconditionally guaranteed all of the issued public debt securities of Nabors Delaware, and Nabors and Nabors Delaware have fully and unconditionally guaranteed the $225 million 4.875% senior notes due 2009 issued by Nabors Holdings 1, ULC, our indirect subsidiary. The following condensed consolidating financial information is included so that separate financial statements of Nabors Delaware and Nabors Holdings are not required to be filed with the U.S. Securities and Exchange Commission. The condensed consolidating financial statements present investments in both consolidated and unconsolidated affiliates using the equity method of accounting. The following condensed consolidating financial information presents: condensed consolidating balance sheets as of December 31, 2004 and 2003, statements of income and cash flows for each of the three years in the period ended December 31, 2004 of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer of public debt securities guaranteed by Nabors and guarantor of the $225 million 4.875% senior notes issued by Nabors Holdings, (c) Nabors Holdings, issuer of the $225 million 4.875% senior notes, (d) the non-guarantor subsidiaries, (e) consolidating adjustments necessary to consolidate Nabors and its subsidiaries and (f) Nabors on a consolidated basis. -72- CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2004 --------------------------------------------------------------------------------- NABORS OTHER NABORS DELAWARE NABORS SUBSIDIARIES (PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL ---------- ----------- -------- ------------ ------------- ------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 67,584 $ -- $ 18 $ 317,107 $ -- $ 384,709 Marketable securities 376,393 -- -- 51,949 -- 428,342 Accounts receivable, net -- -- -- 540,103 -- 540,103 Inventory -- -- -- 28,653 -- 28,653 Deferred income taxes -- -- -- 39,599 -- 39,599 Non-marketable securities 45,000 -- -- 42,500 -- 87,500 Other current assets 3,952 4,031 376 63,709 -- 72,068 ---------- ---------- -------- ---------- ----------- ---------- Total current assets 492,929 4,031 394 1,083,620 -- 1,580,974 Marketable securities 388,380 -- -- 51,082 -- 439,462 Property, plant and equipment, net -- -- -- 3,275,495 -- 3,275,495 Goodwill, net -- -- -- 327,225 -- 327,225 Intercompany receivables 488,101 806,293 -- 522 (1,294,916) -- Investments in affiliates 1,561,019 2,138,488 254,974 1,181,632 (5,069,024) 67,089 Other long-term assets -- 19,080 1,009 152,275 -- 172,364 ---------- ---------- -------- ---------- ----------- ---------- Total assets $2,930,429 $2,967,892 $256,377 $6,071,851 $(6,363,940) $5,862,609 ========== ========== ======== ========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long- term debt $ -- $ 804,550 $ -- $ -- $ -- $ 804,550 Trade accounts payable -- 23 -- 211,577 -- 211,600 Accrued liabilities 524 6,354 4,152 160,204 -- 171,234 Income taxes payable 480 -- -- 11,452 -- 11,932 ---------- ---------- -------- ---------- ----------- ---------- Total current liabilities 1,004 810,927 4,152 383,233 -- 1,199,316 Long-term debt -- 977,922 223,764 -- -- 1,201,686 Other long-term liabilities -- -- -- 146,337 -- 146,337 Deferred income taxes 32 56,952 -- 328,893 -- 385,877 Intercompany payable -- -- 2,522 1,292,394 (1,294,916) -- ---------- ---------- -------- ---------- ----------- ---------- Total liabilities 1,036 1,845,801 230,438 2,150,857 (1,294,916) 2,933,216 ---------- ---------- -------- ---------- ----------- ---------- Shareholders' equity 2,929,393 1,122,091 25,939 3,920,994 (5,069,024) 2,929,393 ---------- ---------- -------- ---------- ----------- ---------- Total liabilities and shareholders' equity $2,930,429 $2,967,892 $256,377 $6,071,851 $(6,363,940) $5,862,609 ========== ========== ======== ========== =========== ==========
-73-
DECEMBER 31, 2003 -------------------------------------------------------------------------------- NABORS OTHER NABORS DELAWARE NABORS SUBSIDIARIES (PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL ---------- ---------- -------- ------------ ------------- ------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 403,693 $ 1 $ 17 $ 176,026 $ -- $ 579,737 Marketable securities 285,353 -- -- 54,583 -- 339,936 Accounts receivable, net -- -- -- 410,487 -- 410,487 Inventory -- -- -- 23,289 -- 23,289 Deferred income taxes -- -- -- 36,442 -- 36,442 Non-marketable securities -- -- -- 47,000 -- 47,000 Other current assets 6,806 4,229 -- 67,721 -- 78,756 ---------- ---------- -------- ---------- ----------- ---------- Total current assets 695,852 4,230 17 815,548 -- 1,515,647 Marketable securities 571,327 -- -- 41,090 -- 612,417 Property, plant and equipment, net -- -- -- 2,990,792 -- 2,990,792 Goodwill, net -- -- -- 315,627 -- 315,627 Intercompany receivables 1,057,260 1,085,944 202 -- (2,143,406) -- Investments in affiliates 170,089 2,065,230 236,829 1,095,882 (3,509,930) 58,100 Other long-term assets -- 20,359 966 88,784 -- 110,109 ---------- ---------- -------- ---------- ----------- ---------- Total assets $2,494,528 $3,175,763 $238,014 $5,347,723 $(5,653,336) $5,602,692 ========== ========== ======== ========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ -- $ 295,267 $ -- $ 4,118 $ -- $ 299,385 Trade accounts payable 1 23 -- 128,816 -- 128,840 Accrued liabilities 960 10,766 3,901 145,118 -- 160,745 Income taxes payable 1,164 (190) (111) 8,540 -- 9,403 ---------- ---------- -------- ---------- ----------- ---------- Total current liabilities 2,125 305,866 3,790 286,592 -- 598,373 Long-term debt -- 1,762,054 223,499 -- -- 1,985,553 Other long-term liabilities -- 3,738 -- 151,929 -- 155,667 Deferred income taxes 79 61,623 82 311,040 -- 372,824 Intercompany payable 2,049 -- -- 2,141,357 (2,143,406) -- ---------- ---------- -------- ---------- ----------- ---------- Total liabilities 4,253 2,133,281 227,371 2,890,918 (2,143,406) 3,112,417 ---------- ---------- -------- ---------- ----------- ---------- Shareholders' equity 2,490,275 1,042,482 10,643 2,456,805 (3,509,930) 2,490,275 ---------- ---------- -------- ---------- ----------- ---------- Total liabilities and shareholders' equity $2,494,528 $3,175,763 $238,014 $5,347,723 $(5,653,336) $5,602,692 ========== ========== ======== ========== =========== ==========
-74- CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2004 -------------------------------------------------------------------------------- NABORS OTHER NABORS DELAWARE NABORS SUBSIDIARIES (PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL ---------- ---------- -------- ------------ ------------- ------------ (IN THOUSANDS) Revenues and other income: Operating revenues $ -- $ -- $ -- $2,394,031 $ -- $2,394,031 Earnings from unconsolidated affiliates -- -- -- 4,057 -- 4,057 Earnings from consolidated affiliates 187,927 169,550 18,147 176,755 (552,379) -- Investment income 25,277 1 -- 24,786 -- 50,064 Intercompany interest income 100,419 71,976 -- 522 (172,917) -- -------- -------- ------- ---------- --------- ---------- Total revenues and other income 313,623 241,527 18,147 2,600,151 (725,296) 2,448,152 -------- -------- ------- ---------- --------- ---------- Costs and other deductions: Direct costs -- -- -- 1,572,649 -- 1,572,649 General and administrative expenses 5,888 932 16 191,612 (3,060) 195,388 Depreciation and amortization -- 450 -- 254,489 -- 254,939 Depletion -- -- -- 45,460 -- 45,460 Interest expense -- 39,048 11,470 (2,011) -- 48,507 Intercompany interest expense -- 522 -- 172,395 (172,917) -- Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net (806) (2,344) -- (4,539) 3,060 (4,629) -------- -------- ------- ---------- --------- ---------- Total costs and other deductions 5,082 38,608 11,486 2,230,055 (172,917) 2,112,314 -------- -------- ------- ---------- --------- ---------- Income before income taxes 308,541 202,919 6,661 370,096 (552,379) 335,838 -------- -------- ------- ---------- --------- ---------- Income tax expense 6,084 12,346 2,332 12,619 -- 33,381 -------- -------- ------- ---------- --------- ---------- Net income $302,457 $190,573 $ 4,329 $ 357,477 $(552,379) $ 302,457 ======== ======== ======= ========== ========= ==========
-75-
YEAR ENDED DECEMBER 31, 2003 -------------------------------------------------------------------------------- NABORS OTHER NABORS DELAWARE NABORS SUBSIDIARIES (PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL ---------- ---------- -------- ------------ ------------- ------------ (IN THOUSANDS) Revenues and other income: Operating revenues $ -- $ -- $ -- $1,880,003 $ -- $1,880,003 Earnings from unconsolidated affiliates -- -- -- 10,183 -- 10,183 Earnings from consolidated affiliates 6,314 133,011 15,345 119,736 (274,406) -- Investment income 1,808 34 11 31,960 -- 33,813 Intercompany interest income 207,615 59,276 -- -- (266,891) -- -------- -------- ------- ---------- --------- ---------- Total revenues and other Income 215,737 192,321 15,356 2,041,882 (541,297) 1,923,999 -------- -------- ------- ---------- --------- ---------- Costs and other deductions: Direct costs -- -- -- 1,276,953 -- 1,276,953 General and administrative expenses 3,298 (48) 8 162,145 -- 165,403 Depreciation and amortization -- -- -- 226,528 -- 226,528 Depletion -- -- -- 8,599 -- 8,599 Interest expense -- 58,785 11,448 507 -- 70,740 Intercompany interest expense -- -- -- 266,891 (266,891) -- Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net 3,923 1,140 (15) (3,895) -- 1,153 -------- -------- ------- ---------- --------- ---------- Total costs and other deductions 7,221 59,877 11,441 1,937,728 (266,891) 1,749,376 -------- -------- ------- ---------- --------- ---------- Income before income taxes 208,516 132,444 3,915 104,154 (274,406) 174,623 -------- -------- ------- ---------- --------- ---------- Income tax expense (benefit) 16,288 (210) 1,488 (35,171) -- (17,605) -------- -------- ------- ---------- --------- ---------- Net income $192,228 $132,654 $ 2,427 $ 139,325 $(274,406) $ 192,228 ======== ======== ======= ========== ========= ==========
-76-
YEAR ENDED DECEMBER 31, 2002 -------------------------------------------------------------------------------- NABORS OTHER NABORS DELAWARE NABORS SUBSIDIARIES (PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL ---------- ---------- -------- ------------ ------------- ------------ (IN THOUSANDS) Revenues and other income: Operating revenues $ -- $ -- $ -- $1,466,443 $ -- $1,466,443 Earnings from unconsolidated affiliates -- -- -- 14,775 -- 14,775 Earnings from consolidated affiliates 18,159 89,947 -- 79,525 (187,631) -- Investment income 48 49 -- 36,864 -- 36,961 Intercompany interest income 101,436 54,326 -- -- (155,762) -- -------- -------- ------- ---------- --------- ---------- Total revenues and other income 119,643 144,322 -- 1,597,607 (343,393) 1,518,179 -------- -------- ------- ---------- --------- ---------- Costs and other deductions: Direct costs -- -- -- 973,910 -- 973,910 General and administrative expenses 579 483 2 140,831 -- 141,895 Depreciation and amortization -- -- -- 187,665 -- 187,665 Depletion -- -- -- 7,700 -- 7,700 Interest expense -- 60,206 4,102 2,760 -- 67,068 Intercompany interest expense -- -- -- 155,762 (155,762) -- Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net (3,469) 6,191 -- (3,555) -- (833) -------- -------- ------- ---------- --------- ---------- Total costs and other deductions (2,890) 66,880 4,104 1,465,073 (155,762) 1,377,405 -------- -------- ------- ---------- --------- ---------- Income (loss) before income taxes 122,533 77,442 (4,104) 132,534 (187,631) 140,774 -------- -------- ------- ---------- --------- ---------- Income tax expense (benefit) 1,044 (4,627) (1,560) 24,428 -- 19,285 -------- -------- ------- ---------- --------- ---------- Net income (loss) $121,489 $ 82,069 $(2,544) $ 108,106 $(187,631) $ 121,489 ======== ======== ======= ========== ========= ==========
-77- CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004 -------------------------------------------------------------------------------- NABORS OTHER NABORS DELAWARE NABORS SUBSIDIARIES (PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL ---------- ---------- -------- ------------ ------------- ------------ (IN THOUSANDS) Net cash (used for) provided by operating activities $ (64,596) $ 375,884 $(10,967) $ 581,156 $(318,279) $ 563,198 --------- --------- -------- --------- --------- --------- Cash flows from investing activities: Purchases of marketable securities, available-for-sale (654,819) -- -- (91,584) -- (746,403) Sales of marketable securities, available-for-sale 773,786 -- -- 65,030 -- 838,816 Purchases of non-marketable securities (45,000) -- -- (128,533) -- (173,533) Sales of non-marketable securities -- -- -- 69,793 -- 69,793 Cash paid for investments in consolidated affiliates (218,053) (60,000) -- (170,968) 449,021 -- Capital expenditures -- -- -- (544,429) -- (544,429) Proceeds from sales of assets and insurance claims -- -- -- 6,879 -- 6,879 Investments in affiliate -- -- -- (200) -- (200) --------- --------- -------- --------- --------- --------- Net cash used for investing activities (144,086) (60,000) -- (794,012) 449,021 (549,077) --------- --------- -------- --------- --------- --------- Cash flows from financing activities: Increase in cash overdrafts -- -- -- 9,865 -- 9,865 Decrease in restricted cash -- -- -- 109 -- 109 Intercompany borrowings (198,675) -- -- 198,675 -- -- Reduction of long-term debt -- (298,275) -- (4,136) -- (302,411) Proceeds from issuance of common shares 71,248 -- -- -- -- 71,248 Proceeds from parent contributions -- 160,000 10,968 278,053 (449,021) -- Cash dividends paid -- (177,610) -- (140,669) 318,279 -- --------- --------- -------- --------- --------- --------- Net cash (used for) provided by financing activities (127,427) (315,885) 10,968 341,897 (130,742) (221,189) --------- --------- -------- --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents -- -- -- 12,040 -- 12,040 --------- --------- -------- --------- --------- --------- Net (decrease) increase in cash and cash equivalents (336,109) (1) 1 141,081 -- (195,028) Cash and cash equivalents, beginning of period 403,693 1 17 176,026 -- 579,737 --------- --------- -------- --------- --------- --------- Cash and cash equivalents, end of period $ 67,584 $ -- $ 18 $ 317,107 $ -- $ 384,709 ========= ========= ======== ========= ========= =========
-78-
YEAR ENDED DECEMBER 31, 2003 -------------------------------------------------------------------------------- NABORS OTHER NABORS DELAWARE NABORS SUBSIDIARIES (PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL ---------- ---------- -------- ------------ ------------- ------------ (IN THOUSANDS) Net cash provided by (used for) operating activities $ 169,665 $ 641,821 $(10,786) $ 408,424 $(813,386) $ 395,738 --------- --------- -------- ----------- --------- ----------- Cash flows from investing activities: Purchases of marketable securities, available-for-sale (225,904) -- -- (1,203,641) -- (1,429,545) Sales of marketable securities, available-for-sale 77,640 -- -- 1,315,998 -- 1,393,638 Purchases of non-marketable securities -- -- -- (47,002) -- (47,002) Sales of non-marketable securities -- -- -- 17,506 -- 17,506 Cash paid for investments in consolidated affiliates -- (700,484) -- (236) 700,720 -- Capital expenditures -- -- -- (353,138) -- (353,138) Proceeds from sales of assets and insurance claims -- -- -- 10,476 -- 10,476 Investments in affiliate -- -- -- (175) (175) --------- --------- -------- ----------- --------- ----------- Net cash (used for) provided by investing activities (148,264) (700,484) -- (260,212) 700,720 (408,240) --------- --------- -------- ----------- --------- ----------- Cash flows from financing activities: Decrease in cash overdrafts -- -- -- (778) -- (778) Decrease in restricted cash -- -- -- 1,925 -- 1,925 Proceeds from long-term debt -- 700,000 -- -- -- 700,000 Retirement of intercompany loan 316,050 -- -- (316,050) -- -- Reduction of long-term debt -- (494,903) -- (49,576) -- (544,479) Debt issuance costs -- (11,366) (159) -- -- (11,525) Proceeds from issuance of common shares 26,115 -- -- 226 -- 26,341 Proceeds from parent contributions -- -- 10,755 689,965 (700,720) -- Cash dividends paid -- (135,105) -- (678,281) 813,386 -- --------- --------- -------- ----------- --------- ----------- Net cash provided by (used for) financing activities 342,165 58,626 10,596 (352,569) 112,666 171,484 --------- --------- -------- ----------- --------- ----------- Effect of exchange rate changes on cash and cash equivalents -- -- -- 6,704 -- 6,704 --------- --------- -------- ----------- --------- ----------- Net increase (decrease) in cash and cash equivalents 363,566 (37) (190) (197,653) -- 165,686 Cash and cash equivalents, beginning of period 40,127 38 207 373,679 -- 414,051 --------- --------- -------- ----------- --------- ----------- Cash and cash equivalents, end of period $ 403,693 $ 1 $ 17 $ 176,026 $ -- $ 579,737 ========= ========= ======== =========== ========= ===========
-79-
YEAR ENDED DECEMBER 31, 2002 --------------------------------------------------------------------------------- NABORS OTHER NABORS DELAWARE NABORS SUBSIDIARIES (PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL ---------- ---------- --------- ------------ ------------- ------------ (IN THOUSANDS) Net cash provided by (used for) operating activities $ 78,235 $(193,818) $ (128) $ 597,850 $ (81,263) $ 400,876 -------- --------- --------- --------- --------- --------- Cash flows from investing activities: Purchases of marketable securities, available-for-sale (25,055) -- (21) (720,307) -- (745,383) Sales of marketable securities, available-for-sale -- -- -- 542,133 -- 542,133 Purchases of non-marketable securities -- -- -- (15,000) -- (15,000) Investments in unconsolidated affiliates (15,089) -- (221,484) (24) 236,597 -- Cash paid for acquisitions of businesses, net -- -- -- (135,652) -- (135,652) Capital expenditures -- -- -- (326,536) -- (326,536) Cash paid for other current assets -- -- -- (8,725) -- (8,725) Proceeds from sales of assets and insurance claims -- -- -- 34,877 -- 34,877 -------- --------- --------- --------- --------- --------- Net cash used for investing activities (40,144) -- (221,505) (629,234) 236,597 (654,286) -------- --------- --------- --------- --------- --------- Cash flows from financing activities: Decrease in cash overdrafts -- -- -- (3,658) -- (3,658) Decrease in restricted cash -- -- -- 210 -- 210 Decrease in short-term borrowings -- -- -- (844) -- (844) Proceeds from long-term debt -- 272,765 223,139 -- -- 495,904 Reduction of long-term debt -- (5,047) -- (25,784) -- (30,831) Debt issuance costs -- (1,634) (1,311) -- -- (2,945) Proceeds from issuance of common shares 4,522 8,328 -- -- -- 12,850 Proceeds from parent contributions -- -- 12 236,585 (236,597) -- Repurchase of common shares (2,486) -- -- -- -- (2,486) Cash dividends paid -- (81,263) -- -- 81,263 -- Payments related to cash flow hedges -- (1,494) -- -- -- (1,494) -------- --------- --------- --------- --------- --------- Net cash provided by financing activities 2,036 191,655 221,840 206,509 (155,334) 466,706 -------- --------- --------- --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents -- -- -- 2,312 -- 2,312 -------- --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 40,127 (2,163) 207 177,437 -- 215,608 Cash and cash equivalents, beginning of period -- 2,201 -- 196,242 -- 198,443 -------- --------- --------- --------- --------- --------- Cash and cash equivalents, end of period $ 40,127 $ 38 $ 207 $ 373,679 $ -- $ 414,051 ======== ========= ========= ========= ========= =========
-80- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. We maintain a set of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, as amended, is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. We have investments in certain unconsolidated entities that we do not control or manage. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily more limited than those we maintain with respect to our consolidated subsidiaries. The Company's management, with the participation of the Company's Chairman and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company's Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective, at the reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective, at the reasonable assurance level, in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chairman and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. See Management's Report on Internal Control over Financial Reporting included in Part I Item 8 on page 34 of this report. 81 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this item will be contained in the Nabors Industries Ltd. definitive proxy statement to be distributed in connection with its 2005 annual meeting of shareholders under the captions "Election of Directors" and "Other Executive Officers" and is incorporated into this document by reference. Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 1934 requires Nabors' directors and executive officers, and persons who own more than 10% of a registered class of Nabors' equity securities, to file with the Securities and Exchange Commission and the American Stock Exchange initial reports of ownership and reports of changes in ownership of common shares and other equity securities of Nabors. Officers, directors and greater than 10% shareholders are required by Commission regulation to furnish Nabors with copies of all Section 16(a) forms which they file. To our knowledge, based solely on review of the copies of Forms 3 and 4 and amendments thereto furnished to us during 2004 and Form 5 and amendments thereto furnished to us with respect to the year 2004, and written representations that no other reports were required, all Section 16(a) filings required to be made by Nabors' officers, directors and greater than 10% beneficial owners with respect to the fiscal year 2004 were timely filed, except Mr. Alexander Knaster filed a late Form 3 with respect to his initial holdings. We have adopted a Code of Business Conduct that satisfies the SEC's definition of a "Code of Ethics" and applies to all employees, including our principal executive officer, principal financial officer, and principal accounting officer. The Code of Ethics is posted on our website at www.nabors.com. We intend to disclose on our website any amendments to the Code of Conduct and any waivers of the Code of Conduct that apply to our principal executive officer, principal financial officer, and principal accounting officer. ITEM 11. EXECUTIVE COMPENSATION Except as specified in the following sentence, the information called for by this item will be contained in our definitive proxy statement to be distributed in connection with our 2005 annual meeting of shareholders under the caption "Management Compensation" and is incorporated into this document by reference. Information in Nabors' 2005 proxy statement not deemed to be "soliciting material" or "filed" with the Commission under its rules, including the Report of the Compensation Committee on Executive Compensation, the Report of the Audit Committee and the Five Year Stock Performance Graph, is not deemed to be incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company maintains eleven different equity compensation plans: the 1993 Stock Option Plan for Non-Employee Directors, 1996 Executive Officers Incentive Stock Plan, 1996 Employee Stock Plan, 1996 Chairman's Executive Stock Plan, 1996 Executive Officers Stock Plan, 1997 Executive Officers Incentive Stock Plan, 1998 Employee Stock Plan, 1998 Chairman's Executive Stock Plan, 1999 Stock Option Plan for Non-Employee Directors, 1999 Pool Employee/Director Option Exchange Plan and 2003 Employee Stock Plan pursuant to which it may grant equity awards to eligible persons from certain plans. The terms of the Company's Equity Compensation Plans are described more fully below. -82- The following table gives information about these equity compensation plans as of December 31, 2004:
(a) (b) (c) Number of securities remaining Number of securities to be Weighted-average available for future issuance issued upon exercise of exercise price of under equity compensation outstanding options, outstanding options, plans (excluding securities Plan category warrants and rights warrants and rights reflected in column (a)) - --------------------- -------------------------- -------------------- ------------------------------ Equity compensation plans approved by security holders 9,506,506 $33.9828 6,798,663 (1) Equity compensation plans not approved by security holders (2) 15,519,398 $30.9843 583,383 ---------- --------- Total 25,025,904 7,382,046 ========== =========
(1) The 1996 Employee Stock Plan incorporates an evergreen formula pursuant to which on each January 1, the aggregate number of shares reserved for issuance under the 1996 Employee Stock Plan will increase by an amount equal to 1 1/2 % of the common shares outstanding on December 31 of the immediately preceding fiscal year. (2) The Company issued 153,519 stock options under the 1999 Pool Employee/Director Option Exchange Plan of Pool Energy Services Co. The remaining options are exercisable for 5,560 common shares of the Company (after giving effect to the exchange ratio provided in the Pool acquisition agreement). The options have a weighted-average exercise price of $17.0617 per share. No further awards will be made under the 1999 Pool Employee/Director Option Exchange Plan. Following is a brief summary of the material terms of the plans that have not been approved by our shareholders. Unless otherwise indicated, (1) each plan is administered by an independent committee appointed by the Company's Board of Directors; (2) the exercise price of options granted under each plan shall be no less than 100% of the fair market value per common share on the date of the grant of the option; (3) the term of an award granted under each plan may not exceed ten years; (4) options granted under the plan are nonstatutory options not intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (NSOs); and (5) unless otherwise determined by the committee in its discretion, options may not be exercised after the optionee has ceased to be in the employ of the Company. 1996 EXECUTIVE OFFICERS INCENTIVE STOCK PLAN. The plan reserves for issuance up to 3,600,000 common shares of the Company pursuant to the exercise of options granted under the plan. Options may be granted under the plan to executive officers of the Company. No optionee may receive grants in excess of 50% of the total number of common shares authorized to be issued under the plan. 1996 CHAIRMAN'S EXECUTIVE STOCK PLAN The plan reserves for issuance up to 850,000 common shares of the Company pursuant to the exercise of options granted under the plan. Options may be granted under the plan to the Chairman of the Board of the Company. In the event of a termination of employment for any reason, except by the Company for cause or by voluntary resignation by optionee, all unvested options shall be immediately exercisable as of the date of his termination of his employment. -83- 1996 EXECUTIVE OFFICERS STOCK PLAN The plan reserves for issuance up to 860,000 common shares of the Company pursuant to the exercise of options granted under the plan. Options may be granted under the plan to executive officers of the Company. No optionee may receive grants in excess of 50% of the total number of common shares authorized to be issued under the Plan. 1997 EXECUTIVE OFFICERS INCENTIVE STOCK PLAN The plan reserves for issuance up to 2,450,000 common shares of the Company pursuant to the exercise of options granted under the plan. Options may be granted under the plan to executive officers of the Company. No optionee may receive grants in excess of 50% of the total number of common shares authorized to be issued under the plan. 1998 EMPLOYEE STOCK PLAN The plan reserves for issuance up to 17,500,000 common shares of the Company pursuant to the exercise of options granted under the plan. The persons who shall be eligible to participate in the plan are employees and consultants of the company. Options granted to employees may either be awards of shares, non-qualified stock options (NQSOs), incentive stock options (ISOs) or stock appreciation rights (SARs). An optionee may reduce the option exercise price by paying the Company in cash, shares, options, or the equivalent, an amount equal to the difference between the exercise price and the reduced exercise price of the option. The committee shall establish performance goals for stock awards in writing not later than the date required for compliance under IRC Section 162(m) and the vesting of such shares shall be contingent upon the attainment of such performance goals. Stock awards shall vest over a period determined by the Committee, which period shall expire no later than January 18, 2006. The committee may grant ISOs of not less than 100% of the fair market value per common share on the date of grant; except that in the event the optionee owns on the date of grant, securities possessing more than 10% of the total combined voting power of all classes of securities of the Company or of any subsidiary of the Company, the price per share shall not be less than 110% of the fair market value per common share on the date of the grant and such option shall expire five years from the date such option is granted. SARs may be granted in conjunction with all or part of any option granted under the plan, in which case the exercise of the SAR shall require the cancellation of a corresponding portion of the option and the exercise of the option will result in cancellation of a corresponding portion of the SAR. In the case of a NQSO, such rights may be granted either at or after the time of grant of such option. In the case of an ISO, such rights may be granted only at the time of grant of such option. A SAR may also be granted on a stand alone basis. The term of a SAR shall be established by the committee. The exercise price of a SAR shall in no event be less than 100% of the fair market value per common share on the date of grant. The committee shall have the authority to make provisions in its award and grant agreements to address vesting and other issues arising in connection with a change of control. 1998 CHAIRMAN'S EXECUTIVE STOCK PLAN The plan reserves for issuance up to 764,924 common shares of the Company pursuant to the exercise of options granted under the plan. Options may be granted under the plan to the Chairman of the Board of the Company. In the event of a termination of employment for any reason, except by the Company for cause or by voluntary resignation by optionee, all unvested options shall be immediately exercisable as of the date of his termination of his employment. 1999 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS The plan reserves for issuance up to 1,500,000 common shares of the Company pursuant to the exercise of options granted under the plan. The plan is administered by the Company's Board of Directors, provided that the Board may appoint a committee to administer the plan. In no event shall an eligible director consider or vote on the administration of this plan or serve as a member of the committee. Options may be granted under the plan to non-employee directors of the Company. Options shall vest and become non-forfeitable on the first year anniversary of the day on which such option was granted, if the optionee has continued to serve as a director until that day, unless -84- otherwise provided. In the event of termination of an optionee's service as a director by reason of voluntary retirement, declining to stand for re-election or becoming a full time employee of the Company or a subsidiary of the Company, all unvested options granted pursuant to this Plan shall automatically expire and shall not be exercisable and all options unexercised shall continue to be exercisable until the stated expiration date of such options. In the event of death or disablement of an optionee while the optionee is a director, the then-outstanding options of such optionee shall be exercisable for two years from the date of the death or disablement of the optionee or by his/her successors in interest. All unvested options shall automatically vest and become non-forfeitable as of the date of death or disablement and shall be exercisable for two years from the date of the death of the optionee or until the stated grant expiration date, whichever is earlier, by the optionee or by his/her successors in interest. In the event of the termination of an optionee's service as a director by the Board of Directors for cause or the failure of such director to be re-elected, the administrator of the plan in its sole discretion can cancel the then-outstanding options of such optionee, including those options which have vested and such options shall automatically expire and become non-exercisable on the effective date of such termination. 1999 POOL EMPLOYEE/DIRECTOR OPTION EXCHANGE PLAN The plan reserves for issuance up to 1,466,010 common shares of the Company pursuant to the exercise of options granted under the plan. Options may be granted under the plan to former employees and non-employee directors of Pool Energy Services Co. or its subsidiaries who held options to purchase shares of Pool common stock pursuant to certain stock option plans of Pool. The exercise price of options granted under the plan shall equal the exercise price per share of the corresponding Pool option, divided by 1.025 (rounding the resulting exercise price up to the nearest whole cent). The period for exercise of an option shall be the same as the period for exercise of the corresponding Pool option. If an optionee has ceased to be in the employ of the Company or its subsidiaries, any outstanding options, whether or not vested, generally may not be exercised after the optionee's date of termination and shall be forfeited; provided however, in its sole discretion the committee may extend the time to exercise any option to a period ending on it applicable expiration date. The committee, in its discretion, shall have the authority to make provisions in its grant agreements to address vesting and other issues arising in connection with a change of control. The remainder of the information called for by this item will be contained in Nabors' 2005 proxy statement under the caption "Share Ownership of Management and Principal Shareholders" and is incorporated into this document by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item will be contained in Nabors' 2005 proxy statement under the captions "Certain Relationships" and "Compensation Committee Interlocks and Insider Participation" and is incorporated into this document by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information called for by this item will be contained in Nabors' 2005 Proxy Statement under the caption "Principal Accountant Fees and Services" and is incorporated into this document by reference. -85- PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: (1) Financial Statement Schedules
Page No. -------- Report of Independent Auditors on Financial Statement Schedule................................................ S-1 Schedule II - Valuation and Qualifying Accounts............ S-2
All other supplemental schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or related notes. (b) Exhibits
Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Merger among Nabors Industries, Inc., Nabors Acquisition Corp. VIII, Nabors Industries Ltd. and Nabors US Holdings Inc. (incorporated by reference to Annex I to the proxy statement/prospectus included in Nabors Industries Ltd.'s Registration Statement on Form S-4 (File No. 333-76198) filed with the Commission on May 10, 2002, as amended). 2.2 Amended and Restated Acquisition Agreement, dated as of March 18, 2002, by and between Nabors Industries, Inc. and Enserco Energy Service Company Inc. (incorporated by reference to Exhibit 2.1 to Nabors Industries, Inc.'s Registration Statement on Form S-3 (File No. 333-85228)). 2.3 Form of Plan of Arrangement Under Section 192 of the Canada Business Corporations Act Involving and Affecting Enserco Energy Service Company Inc. and its Securityholders (included in Schedule B to Exhibit 2.2). 2.4 Arrangement Agreement dated August 12, 2002 between Nabors Industries Ltd. and Ryan Energy Technologies Inc. (incorporated by reference to Exhibit 2.4 to Nabors Industries Ltd.'s Form 10-K for the year ended December 31, 2002 (File No. 000-49887)). 3.1 Memorandum of Association of Nabors Industries Ltd. (incorporated by reference to Annex II to the proxy statement/prospectus included in Nabors Industries Ltd.'s Registration Statement on Form S-4 (Registration No. 333-76198) filed with the Commission on May 10, 2002, as amended). 3.2 Amended and Restated Bye-Laws of Nabors Industries Ltd. (incorporated by reference to Annex III to the proxy statement/prospectus included in Nabors Industries Ltd.'s Registration Statement on Form S-4 (Registration No. 333-76198) filed with the Commission on May 10, 2002, as amended). 3.3 Form of Resolutions of the Board of Directors of Nabors Industries Ltd. authorizing the issue of the Special Voting Preferred Share (incorporated by reference to Exhibit 3.3 to Nabors Industries Ltd.'s Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (Registration No. 333-85228-99) filed with the Commission on June 11, 2002).
-86- 4.1 Indenture dated as of February 5, 2001 between Nabors Industries, Inc. and Bank One, N.A., as trustee, in connection with $1,382,200,000 principal amount at maturity of Zero Coupon Convertible Senior Debentures due 2021 (incorporated by reference to Exhibit 4.11 to Nabors Industries, Inc.'s Form 10-K, File No. 1-9245, filed with the Commission on March 30, 2001). 4.2 First Supplemental Indenture, dated as of June 21, 2002 among Nabors Industries, Inc., as issuer, Nabors Industries Ltd. as guarantor, and Bank One, N.A. as trustee, with respect to Nabors Industries, Inc.'s zero coupon convertible senior debentures due 2021 (incorporated by reference to Exhibit 4.5 to Nabors Industries Ltd.'s Form 10-Q, File No. 000-49887, filed with the Commission on August 14, 2002). 4.3 Second Supplemental Indenture dated as of October 25, 2004 by and among Nabors Industries, Inc., as issuer, Nabors Industries Ltd., as guarantor, and J.P. Morgan Trust Company, National Association (as successor to Bank One, N.A.), as Trustee, to the Indenture, dated as of February 5, 2001, as amended, with respect to Nabors Industries, Inc.'s Zero Coupon Convertible Senior Debentures due 2021 (incorporated by reference to Exhibit 4.1 to Nabors Industries Ltd.'s Current Report on Form 8-K, File No. 000-49887, filed October 27, 2004). 4.4 Indenture, dated August 22, 2002, among Nabors Industries, Inc., as issuer, Nabors Industries Ltd., as guarantor, and Bank One, N.A., with respect to Nabors Industries, Inc.'s Series A and Series B 5.375% Senior Notes due 2012 (incorporated by reference to Exhibit 4.1 to Nabors Industries, Inc.'s Registration Statement on Form S-4 (Registration No. 333-10049201) filed with the Commission on October 11, 2002). 4.5 Indenture, dated August 22, 2002, among Nabors Holdings 1, ULC, as issuer, Nabors Industries, Inc. and Nabors Industries Ltd., as guarantors, and Bank One, N.A., with respect to Nabors Holdings 1, ULC's Series A and Series B 4.875% Senior Notes due 2009 (incorporated by reference to Exhibit 4.1 to Nabors Holdings 1, ULC's Registration Statement on Form S-4 (Registration No. 333-10049301) filed with the Commission on October 11, 2002). 4.6 Form of Provisions Attaching to the Exchangeable Shares of Nabors Exchangeco (Canada) Inc. (incorporated by reference to Exhibit 4.1 to Nabors Industries, Inc.'s Registration Statement on Form S-3 (Registration No. 333-85228) filed with the Commission on March 29, 2002, as amended). 4.7 Form of Support Agreement between Nabors Industries, Inc., 3064297 Nova Scotia Company and Nabors Exchangeco (Canada) Inc. (incorporated by reference to Exhibit 4.2 to Nabors Industries, Inc.'s Registration Statement on Form S-3 (Registration No. 333-85228) filed with the Commission on March 29, 2002, as amended). 4.8 Form of Acknowledgement of Novation to Nabors Industries, Inc., Nabors Exchangeco (Canada) Inc., Computershare Trust Company of Canada and 3064297 Nova Scotia Company executed by Nabors Industries Ltd. (incorporated by reference to Exhibit 4.3 to Nabors Industries Ltd.'s Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (Registration No. 333-85228-99) filed with the Commission on June 11, 2002). 4.9 Indenture, dated as of June 10, 2003, between Nabors Industries, Inc., Nabors Industries Ltd. and Bank One, N.A. with respect to Nabors Industries, Inc.'s Zero Coupon Senior Exchangeable Notes due 2023 (incorporated by reference to Exhibit 4.1 to Nabors Industries, Inc.'s and Nabors Industries Ltd.'s Registration Statement on Form S-3, (File No. 333-107806-01, filed with the Commission of August 8, 2003)).
-87- 4.10 Registration Rights Agreement, dated as of June 10, 2003, by and among Nabors Industries, Inc., Nabors Industries Ltd. and Citigroup Global Markets Inc. (incorporated by reference to Exhibit 4.2 to Nabors Industries Inc.'s and Nabors Industries Ltd.'s Registration Statement on Form S-3, File No. 333-107806-01, filed with the Commission on August 8, 2003). 4.11 First Supplemental Indenture, dated as of October 25, 2004, by and among Nabors Industries, Inc., as issuer, Nabors Industries Ltd., as guarantor, and J.P. Morgan Trust Company, National Association, (as successor to Bank One, N.A.), as trustee to the Indenture, dated as of June 10, 2003, with respect to Nabors Industries, Inc.'s Zero Coupon Senior Exchangeable Notes due 2023 (incorporated by reference to Exhibit 4.2 to Nabors Industries Ltd.'s Current Report on Form 8-K, File No. 000-49887, filed October 27, 2004). 4.12 Indenture, dated as of December 13, 2004, by and among Nabors Industries, Inc., Nabors Industries Ltd., and J.P. Morgan Trust Company, National Association, with respect to Nabors Industries, Inc.'s Series B Zero Coupon Senior Exchangeable Notes due 2023.* 10.1 (+) 1996 Employee Stock Plan (incorporated by reference to Nabors Industries Inc.'s Registration Statement on Form S-8, Registration No. 333-11313, filed September 3, 1996). 10.2 (+) 1994 Executive Stock Option Agreement effective December 28, 1994 between Nabors Industries, Inc. and Eugene M. Isenberg (incorporated by reference to Exhibit 10.4 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed December 30, 1996). 10.3 (+) 1994 Executive Stock Option Agreement effective December 28, 1994 between Nabors Industries, Inc. and Anthony G. Petrello (incorporated by reference to Exhibit 10.5 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed December 30, 1996). 10.4 (+) Employment Agreement effective October 1, 1996 between Nabors Industries, Inc. and Eugene M. Isenberg (incorporated by reference to Exhibit 10.7 to Nabors Industries Inc.'s Form 10-Q, File No. 1-9245, filed May 16, 1997). 10.5 (+) First Amendment to Amended and Restated Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg dated as of June 24, 2002 (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd.'s Form 10-Q, File No. 000-49887, filed August 14, 2002). 10.6 (+) Second Amendment to Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg dated as of July 17, 2002 (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd.'s Form 10-Q, File No. 000-49887, filed August 14, 2002). 10.7 (+) Employment Agreement effective October 1, 1996 between Nabors Industries, Inc. and Anthony G. Petrello (incorporated by reference to Exhibit 10.8 to Nabors Industries Inc.'s Form 10-Q, File No. 1-9245, filed May 16, 1997). 10.8 (+) First Amendment to Amended and Restated Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Anthony G. Petrello dated as of June 24, 2002 (incorporated by reference to Exhibit 10.2 to Nabors Industries Ltd.'s Form 10-Q, File No. 000-49887, filed August 14, 2002). 10.9 (+) Second Amendment to Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Anthony G. Petrello dated as of July 17, 2002 (incorporated by reference to Exhibit 10.3 to Nabors Industries Ltd.'s Form 10-Q, File No. 000-49887, filed August 14, 2002).
-88- 10.10 (+) Waiver dated as of September 27, 2002 pursuant to Section 9.[c] and Schedule 9.[c] of the Amended Employment Agreement among Nabors Industries, Inc., Nabors Industries Ltd., and Anthony G. Petrello (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd.'s Form 10-Q, File No. 000-49887, filed November 14, 2002). 10.11 (+) Nabors Industries, Inc. 1996 Chairman's Executive Stock Plan (incorporated by reference to Exhibit 10.17 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed December 29, 1997). 10.12 (+) Nabors Industries, Inc. 1996 Executive Officers Stock Plan (incorporated by reference to Exhibit 10.18 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed December 29, 1997). 10.13 (+) Nabors Industries, Inc. 1996 Executive Officers Incentive Stock Plan (incorporated by reference to Exhibit 10.9 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed December 29, 1997). 10.14 (+) Nabors Industries, Inc. 1997 Executive Officers Incentive Stock Plan (incorporated by reference to Exhibit 10.20 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed December 29, 1997). 10.15 (+) Nabors Industries, Inc. 1998 Employee Stock Plan (incorporated by reference to Exhibit 10.19 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed March 31, 1999). 10.16 (+) Nabors Industries, Inc. 1998 Chairman's Executive Stock Plan (incorporated by reference to Exhibit 10.20 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed March 31, 1999). 10.17 (+) Nabors Industries, Inc. 1999 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.21 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed March 31, 1999). 10.18 (+) Amendment to Nabors Industries, Inc. 1999 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.19 to Nabors Industries Inc.'s Form 10-K, File No. 1-09245, filed March 19, 2002). 10.19 (+) 1999 Pool Employee/Director Option Exchange Plan (incorporated by reference to Exhibit 10.20 to Nabors Industries Inc.'s Form 10-K, File No. 1-09245, filed March 19, 2002). 10.20 Form of Indemnification Agreement entered into between Nabors Industries Ltd. and the directors and executive officers identified in the schedule thereto (incorporated by reference to Exhibit 10.28 to Nabors Industries Ltd.'s Form 10-K, File No. 000-49887, filed March 31, 2003). 10.21 (+) Amended and Restated 1999 Stock Option Plan for Non-Employee Directors (amended on May 2, 2003) (incorporated by reference to Exhibit 10.29 to Nabors Industries Ltd.'s Form 10-Q, File No. 000-49887, filed May 12, 2003). 10.22 (+) 2003 Employee Stock Option Plan (incorporated by reference to Annex D of Nabors Industries Ltd.'s Notice of 2003 Annual General Meeting of Shareholders and Proxy Statement, File No. 000-49887, filed May 8, 2003).
-89- 10.23 Purchase and Sale Agreement (Red River) by and among El Paso Production Company and El Paso Production GOM Inc., jointly and severally as Seller and Ramshorn Investments, Inc., as Purchaser dated October 8, 2003 (incorporated by reference to Exhibit 10.23 to Nabors Industries Ltd.'s Form 10-K, File No. 000-49887, filed March 15, 2004). 10.24 Purchase and Sale Agreement (USA) between El Paso Production Oil & Gas USA, L.P., as Seller and Ramshorn Investments, Inc., as Purchaser dated October 8, 2003 (incorporated by reference to Exhibit 10.24 to Nabors Industries Ltd.'s Form 10-K, File No. 000-49887, filed March 15, 2004). 10.25 Exploration Participation Agreement (South Texas) by and between El Paso Production Oil & Gas Company and El Paso Production Oil & Gas USA, L.P., jointly and severally and Ramshorn Investments, Inc., dated November 6, 2003 (incorporated by reference to Exhibit 10.25 to Nabors Industries Ltd.'s Form 10-K, File No. 000-49887, filed March 15, 2004). 10.26 Exploration Participation Agreement (Catapult) by and between El Paso Production Company, and Ramshorn Investments, Inc., dated November 6, 2003 (incorporated by reference to Exhibit 10.26 to Nabors Industries Ltd.'s Form 10-K, File No. 000-49887, filed March 15, 2004). 10.27(+) Form of Restricted Stock Award--Isenberg/Petrello (incorporated by reference to Exhibit 10.01 to Nabors Industries Ltd.'s Form 8-K, File No. 000-49887, filed March 2, 2005). 10.28(+) Form of Restricted Stock Award--Others (incorporated by reference to Exhibit 10.02 to Nabors Industries Ltd.'s Form 8-K, File No. 000-49887, filed March 2, 2005). 10.29(+) Form of Stock Option Agreement--Isenberg/Petrello (incorporated by reference to Exhibit 10.03 to Nabors Industries Ltd.'s Form 8-K, File No. 000-49887, filed March 2, 2005). 10.30(+) Form of Stock Option Agreement--Others (incorporated by reference to Exhibit 10.04 to Nabors Industries Ltd.'s Form 8-K, File No. 000-49887, filed March 2, 2005). 12 Computation of Ratios. * 14 Code of Business Conduct (incorporated by reference to Exhibit 14 to Nabors Industries Ltd.'s Form 10-K, File No. 000-49887, filed March 15, 2004). 21 Significant Subsidiaries of Nabors Industries Ltd. * 23 Consent of Independent Registered Public Accounting Firm. * 31.1 Rule 13a-14(a)/15d-14(a) Certification, executed by Eugene M. Isenberg, Chairman and Chief Executive Officer of Nabors Industries Ltd. * 31.2 Rule 13a-14(a)/15d-14(a) Certification, executed by Bruce P. Koch, Vice President and Chief Financial Officer of Nabors Industries Ltd. * 32.1 Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), executed by Eugene M. Isenberg, Chairman and Chief Executive Officer of Nabors Industries Ltd. and Bruce P. Koch, Vice President and Chief Financial Officer of Nabors Industries Ltd. (furnished herewith).
- ---------- * Filed herewith. (+) Management contract or compensatory plan or arrangement. -90- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NABORS INDUSTRIES LTD. By: /s/ Eugene M. Isenberg -------------------------------------------- Eugene M. Isenberg Chairman and Chief Executive Officer By: /s/ Bruce P. Koch -------------------------------------------- Bruce P. Koch Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 7, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ James C. Flores Director March 7, 2005 - --------------------------- James C. Flores /s/ Eugene M. Isenberg Chairman and March 7, 2005 - --------------------------- Chief Executive Officer Eugene M. Isenberg /s/ Alexander M. Knaster Director March 7, 2005 - --------------------------- Alexander M. Knaster /s/ James L. Payne Director March 7, 2005 - --------------------------- James L. Payne /s/ Anthony G. Petrello Deputy Chairman, President and March 7, 2005 - --------------------------- Chief Operating Officer Anthony G. Petrello /s/ Hans Schmidt Director March 7, 2005 - --------------------------- Hans Schmidt /s/ Myron M. Sheinfeld Director March 7, 2005 - --------------------------- Myron M. Sheinfeld /s/ Martin J. Whitman Director March 7, 2005 - --------------------------- Martin J. Whitman
-91- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE To the Shareholders and Board of Directors of Nabors Industries Ltd.: Our audits of the consolidated financial statements, of management's assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated March 7, 2005 appearing in this Form 10-K of Nabors Industries Ltd. also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP Houston, Texas March 7, 2005 S-1 NABORS INDUSTRIES LTD. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2004, 2003, and 2002
Balance at Charged to Charged to Balance at Beginning Costs and Other End of (In Thousands) of Period Expenses Accounts Deductions Period - -------------------------------------- ---------- ---------- ---------- ---------- ---------- 2004 Allowance for doubtful accounts ... $10,986 $2,359 $ 281 $ (2,648)(1) $10,978 Inventory reserve ................. 1,367 819 -- (437)(2) 1,749 Valuation allowance on deferred tax assets ..................... 11,703 2,805 -- -- 14,508 2003 Allowance for doubtful accounts ... $13,801 $1,311 $ 178 $ (4,304)(1) $10,986 Inventory reserve ................. 4,270 475 -- (3,378)(2) 1,367 Valuation allowance on deferred tax assets ..................... 6,540 5,163 -- -- 11,703 2002 Allowance for doubtful accounts ... $22,366 $2,221 $3,249(3) $(14,035)(4) $13,801 Inventory reserve ................. 4,308 248 -- (286)(2) 4,270 Valuation allowance on deferred tax assets ..................... -- 6,540 -- -- 6,540
(1) Uncollected receivables written off, net of recoveries. (2) Inventory reserves written off. (3) Primarily related to acquisitions. (4) Includes uncollected receivables written off, net of recoveries, and $6.5 million related to receipt of amounts previously reserved for. S-2 EX-4.12 2 h22801exv4w12.txt INDENTURE Exhibit 4.12 NABORS INDUSTRIES, INC., as Issuer NABORS INDUSTRIES LTD., as Guarantor SERIES B ZERO COUPON SENIOR EXCHANGEABLE NOTES DUE 2023 ---------------- INDENTURE Dated as of December 13, 2004 ---------------------- J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee ---------------------- CROSS REFERENCE TABLE*
TIA INDENTURE SECTION SECTION - ------- --------- 310 (a)(1)..............................................................................7.10 (a)(2)..............................................................................7.10 (a)(3)............................................................................N.A.** (a)(4)..............................................................................N.A. (b)........................................................................7.08; 7.10 (c)..............................................................................N.A. 311 (a)..............................................................................7.11 (b)..............................................................................7.11 (c)..............................................................................N.A. 312 (a)..............................................................................2.05 (b).............................................................................13.03 (c).............................................................................13.03 (d)..............................................................................7.06 313 (a)..............................................................................7.06 (b)(1)..............................................................................N.A. (b)(2)..............................................................................7.06 (c).............................................................................13.02 (d)..............................................................................7.06 314 (a).......................................................................4.02; 13.02 (b)..............................................................................N.A. (c)(1).............................................................................13.04 (c)(2).............................................................................13.04 (c)(3)..............................................................................N.A. (d)..............................................................................N.A. (e).............................................................................13.05 (f)..............................................................................4.03 315 (a)..............................................................................7.01 (b).......................................................................7.05; 13.02 (c)..............................................................................7.01 (d)..............................................................................7.01 (e)..............................................................................6.11 316 (a) (last sentence)..............................................................2.08 (a)(1)(A)..............................................................................6.05 (a)(1)(B)..............................................................................6.04 (a)(2)..............................................................................N.A. (b)..............................................................................6.07 317 (a)(1)..............................................................................6.08 (a)(2)..............................................................................6.09 (b)..............................................................................2.04 318 (a).............................................................................13.01
* Note: This Cross Reference Table shall not, for any purpose, be deemed to be part of the Indenture. ** Note: N.A. means Not Applicable. TABLE OF CONTENTS
PAGE ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE.............................................................1 SECTION 1.01. DEFINITIONS..............................................................................1 SECTION 1.02. OTHER DEFINITIONS........................................................................6 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT........................................7 SECTION 1.04. RULES OF CONSTRUCTION....................................................................8 ARTICLE 2. THE SECURITIES.........................................................................................8 SECTION 2.01. FORM AND DATING..........................................................................8 SECTION 2.02. EXECUTION AND AUTHENTICATION.............................................................9 SECTION 2.03. REGISTRAR, PAYING AGENT AND EXCHANGE AGENT..............................................10 SECTION 2.04. PAYING AGENT TO HOLD CASH AND SECURITIES IN TRUST.......................................10 SECTION 2.05. HOLDER LISTS............................................................................11 SECTION 2.06. EXCHANGE AND REGISTRATION OF TRANSFER OF SECURITIES; RESTRICTIONS ON TRANSFERS; DEPOSITARY..............................................................................11 SECTION 2.07. REPLACEMENT SECURITIES..................................................................15 SECTION 2.08. OUTSTANDING SECURITIES; DETERMINATIONS OF HOLDERS' ACTION...............................16 SECTION 2.09. TEMPORARY SECURITIES....................................................................17 SECTION 2.10. CANCELLATION............................................................................17 SECTION 2.11. PERSONS DEEMED OWNERS...................................................................17 SECTION 2.12. CUSIP NUMBERS...........................................................................18 ARTICLE 3. REDEMPTION AND REPURCHASES............................................................................18 SECTION 3.01. RIGHT TO REDEEM; NOTICES TO TRUSTEE.....................................................18 SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED..................................................18 SECTION 3.03. NOTICE OF REDEMPTION....................................................................19 SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION..........................................................20 SECTION 3.05. DEPOSIT OF REDEMPTION PRICE.............................................................20 SECTION 3.06. SECURITIES REDEEMED IN PART.............................................................21 SECTION 3.07. [RESERVED]..............................................................................21 SECTION 3.08. REPURCHASE OF SECURITIES AT OPTION OF THE HOLDER........................................21 SECTION 3.09. REPURCHASE AT OPTION OF THE HOLDER UPON A FUNDAMENTAL CHANGE............................23 SECTION 3.10. EFFECT OF REPURCHASE NOTICE OR FUNDAMENTAL CHANGE REPURCHASE NOTICE.....................25 SECTION 3.11. DEPOSIT OF PURCHASE PRICE OR FUNDAMENTAL CHANGE PURCHASE PRICE..........................26 SECTION 3.12. SECURITIES REPURCHASED IN PART..........................................................26 SECTION 3.13. COVENANT TO COMPLY WITH SECURITIES LAWS UPON REPURCHASE OF SECURITIES..................26
i SECTION 3.14. REPAYMENT TO THE COMPANY................................................................27 ARTICLE 4. COVENANTS.............................................................................................27 SECTION 4.01. PAYMENT OF SECURITIES...................................................................27 SECTION 4.02. FINANCIAL INFORMATION; SEC REPORTS......................................................28 SECTION 4.03. COMPLIANCE CERTIFICATE..................................................................28 SECTION 4.04. FURTHER INSTRUMENTS AND ACTS............................................................29 SECTION 4.05. MAINTENANCE OF OFFICE OR AGENCY.........................................................29 SECTION 4.06. EXISTENCE...............................................................................29 SECTION 4.07. [RESERVED]..............................................................................29 SECTION 4.08. REGISTRATION RIGHTS.....................................................................30 SECTION 4.09. PAYMENT OF ADDITIONAL AMOUNTS...........................................................30 SECTION 4.10. CONTINGENT DEBT TAX TREATMENT...........................................................32 SECTION 4.11. CALCULATION OF TAX ORIGINAL ISSUE DISCOUNT..............................................32 ARTICLE 5. SUCCESSOR CORPORATION.................................................................................33 SECTION 5.01. WHEN THE COMPANY AND THE GUARANTOR MAY MERGE OR TRANSFER ASSETS.........................33 SECTION 5.02. SUCCESSORS SUBSTITUTED..................................................................34 ARTICLE 6. DEFAULTS AND REMEDIES.................................................................................34 SECTION 6.01. EVENTS OF DEFAULT.......................................................................34 SECTION 6.02. ACCELERATION............................................................................35 SECTION 6.03. OTHER REMEDIES..........................................................................36 SECTION 6.04. WAIVER OF PAST DEFAULTS.................................................................36 SECTION 6.05. CONTROL BY MAJORITY.....................................................................36 SECTION 6.06. LIMITATION ON SUITS.....................................................................36 SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT....................................................37 SECTION 6.08. COLLECTION SUIT BY TRUSTEE..............................................................37 SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM........................................................37 SECTION 6.10. PRIORITIES..............................................................................38 SECTION 6.11. UNDERTAKING FOR COSTS...................................................................38 SECTION 6.12. WAIVER OF STAY, EXTENSION OR USURY LAWS.................................................39 ARTICLE 7. TRUSTEE...............................................................................................39 SECTION 7.01. DUTIES OF TRUSTEE.......................................................................39 SECTION 7.02. RIGHTS OF TRUSTEE.......................................................................40 SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE............................................................42 SECTION 7.04. TRUSTEE'S DISCLAIMER....................................................................42 SECTION 7.05. NOTICE OF DEFAULTS......................................................................42 SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS...........................................................42 SECTION 7.07. COMPENSATION AND INDEMNITY..............................................................43 SECTION 7.08. REPLACEMENT OF TRUSTEE..................................................................44 SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER.............................................................44 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION...........................................................45
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.......................................45 ARTICLE 8. DISCHARGE OF INDENTURE................................................................................45 SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES....................................................45 SECTION 8.02. REPAYMENT TO THE COMPANY................................................................46 ARTICLE 9. AMENDMENTS............................................................................................46 SECTION 9.01. WITHOUT CONSENT OF HOLDERS..............................................................46 SECTION 9.02. WITH CONSENT OF HOLDERS.................................................................47 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT.....................................................47 SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS, WAIVERS AND ACTIONS..................................48 SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES...................................................48 SECTION 9.06. TRUSTEE TO SIGN SUPPLEMENTAL INDENTURES.................................................48 SECTION 9.07. EFFECT OF SUPPLEMENTAL INDENTURES.......................................................48 ARTICLE 10. GUARANTEE OF SECURITIES..............................................................................48 SECTION 10.01. UNCONDITIONAL GUARANTEE.................................................................48 SECTION 10.02. EXECUTION AND DELIVERY OF NOTATION OF GUARANTEE.........................................51 ARTICLE 11. EXCHANGE.............................................................................................51 SECTION 11.01. EXCHANGE PRIVILEGE......................................................................51 SECTION 11.02. EXCHANGE PROCEDURE......................................................................54 SECTION 11.03. FRACTIONAL SHARES.......................................................................55 SECTION 11.04. TAXES ON EXCHANGE.......................................................................55 SECTION 11.05. PAYMENT UPON EXCHANGE...................................................................55 SECTION 11.06. ADJUSTMENT FOR CHANGE IN CAPITAL STOCK..................................................60 SECTION 11.07. ADJUSTMENT FOR RIGHTS OR WARRANTS.......................................................60 SECTION 11.08. ADJUSTMENT FOR OTHER DISTRIBUTIONS......................................................61 SECTION 11.09. [RESERVED]..............................................................................62 SECTION 11.10. WHEN ADJUSTMENT MAY BE DEFERRED.........................................................62 SECTION 11.11. NOTICE OF ADJUSTMENT....................................................................63 SECTION 11.12. VOLUNTARY CHANGE........................................................................63 SECTION 11.13. NOTICE OF CERTAIN TRANSACTIONS..........................................................63 SECTION 11.14. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR TRANSFER...........................64 SECTION 11.15. COMPANY DETERMINATION FINAL.............................................................66 SECTION 11.16. TRUSTEE'S ADJUSTMENT DISCLAIMER.........................................................66 SECTION 11.17. SIMULTANEOUS ADJUSTMENTS................................................................66 SECTION 11.18. SUCCESSIVE ADJUSTMENTS..................................................................66 SECTION 11.19. RIGHTS ISSUED IN RESPECT OF COMMON SHARES ISSUED UPON EXCHANGE..........................67 SECTION 11.20. GENERAL CONSIDERATIONS..................................................................67
ARTICLE 12. CONTINGENT INTEREST..................................................................................68 SECTION 12.01. GENERAL.................................................................................68 SECTION 12.02. DEFAULTED CONTINGENT INTEREST; INTEREST RIGHTS PRESERVED................................68 ARTICLE 13. MISCELLANEOUS........................................................................................69 SECTION 13.01. TRUST INDENTURE ACT.....................................................................69 SECTION 13.02. NOTICES.................................................................................70 SECTION 13.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.............................................71 SECTION 13.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT......................................71 SECTION 13.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION...........................................71 SECTION 13.06. SEPARABILITY CLAUSE.....................................................................72 SECTION 13.07. RULES BY TRUSTEE, PAYING AGENT, EXCHANGE AGENT AND REGISTRAR............................72 SECTION 13.08. GOVERNING LAW...........................................................................72 SECTION 13.09. NO RECOURSE AGAINST OTHERS..............................................................72 SECTION 13.10. RECORD DATE FOR VOTE OR CONSENT OF SECURITYHOLDERS......................................72 SECTION 13.11. [RESERVED.].............................................................................72 SECTION 13.12. SUCCESSORS..............................................................................72 SECTION 13.13. MULTIPLE ORIGINALS......................................................................73 EXHIBIT A FORM OF SECURITY EXHIBIT B PROJECTED PAYMENT SCHEDULE ANNEX I REGISTRATION RIGHTS OF HOLDERS
INDENTURE, dated as of December 13, 2004, among Nabors Industries, Inc., a Delaware corporation (the "COMPANY"), Nabors Industries Ltd., a Bermuda exempted company (the "GUARANTOR"), and J.P. Morgan Trust Company, National Association, a national banking association, as trustee (the "TRUSTEE"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Company's Series B Zero Coupon Senior Exchangeable Notes Due 2023: ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control," when used with respect to any specified Person, means the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "AGENT" means any Registrar or Paying Agent. "AMEX" means the American Stock Exchange. "BANKRUPTCY LAW" means Title 11, United States Code, or any similar Federal or state law or any similar Bermudan or other foreign law for the relief of debtors. "BOARD OF DIRECTORS" means either the board of directors of the Company or the Guarantor, as specified, or any duly authorized committee of such board. "BUSINESS DAY" means each day of the year on which banking institutions are not required or authorized to close in The City of New York, Houston, Texas, Chicago, Illinois, the State of Ohio or the city in which the Corporate Trust Office is located. "COMMON SHARES" means any capital stock of any class of the Guarantor which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Guarantor and which is not subject to redemption by the Guarantor. Subject to the provisions of Section 11.14 hereof, however, shares issuable upon exchange of the Securities shall include only Common Shares, par value of US $0.001 per share, of the Guarantor as such class of shares exists on the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Guarantor and which are not subject to redemption by the Guarantor; PROVIDED that if at any time there shall be more 1 than one such resulting class, the shares of each such class then so issuable pursuant to the terms hereof shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "COMPANY" means the party named as the "Company" in the first paragraph of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. The foregoing sentence shall likewise apply to any subsequent such successor or successors. "COMPANY REQUEST" or "COMPANY ORDER" means a written request or order signed in the name of the Company by its Chairman of the Board, a Vice Chairman, the Chief Executive Officer, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Controller, an Assistant Controller, its Corporate Secretary or an Assistant Corporate Secretary, and delivered to the Trustee. "CONTINGENT INTEREST" shall have the meaning assigned to such term in paragraph 10 of the Securities. "CONTINGENT INTEREST PAYMENT DATE" shall have the meaning assigned to such term in paragraph 10 of the Securities. "CONTINGENT INTEREST RECORD DATE" shall have the meaning assigned to such term in paragraph 10 of the Securities. "CORPORATE TRUST OFFICE" means the designated office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office is, at the date as of which this Indenture is dated, located at Institutional Trust Services, 600 Travis Street, Suite 1150, Houston, Texas 77002-3009. "CUSTODIAN" shall mean the Trustee, as custodian with respect to the Securities in global form, or any successor entity thereto. "DEFAULT" means any event which is, or after notice or passage of time or both would be, an Event of Default. "DEPOSITARY" means, with respect to the Securities issuable or issued in whole or in part in global form, the Person specified in Section 2.06 as the Depositary with respect to the Securities, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and thereafter, "Depositary" shall mean or include such successor. "DOLLARS" or "$" means the lawful currency of the United States of America. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. 2 "EX-DIVIDEND DATE" means the first date upon which a sale of the Common Shares will not automatically transfer the right to receive a distribution described in subparagraph (i) of the last paragraph of Section 11.01 hereof from the seller of the Common Shares to its buyer. "FUNDAMENTAL CHANGE" means the occurrence of any transaction or event in connection with which all or substantially all Common Shares shall be exchanged for, converted into, acquired for or constitute solely the right to receive (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) any form of consideration which is not all or substantially all common stock listed (or, upon consummation of or immediately following such transaction or event, which will be listed) on a United States national securities exchange or approved for quotation on the Nasdaq National Market or any similar United States system of automated dissemination of quotations of securities prices. "GUARANTOR" means the party named as the "Guarantor" in the first paragraph of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture, and thereafter "Guarantor" shall mean such successor. The foregoing sentence shall likewise apply to any subsequent such successor or successors. "HOLDER" means a Person in whose name a Security is registered on the Registrar's books. "INDENTURE" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof. "ISSUE DATE" of any Security means December 13, 2004. "LEGAL HOLIDAY" is any day other than a Business Day. If any specified date (including a date for giving notice) is a Legal Holiday, the action shall be taken on the next succeeding date that is not a Legal Holiday, and to the extent applicable no Contingent Interest, if any, shall accrue for the intervening period. "MARKET PRICE" means, as of any Repurchase Date or date of determination, the average of the Sale Prices of the Common Shares for the five Trading Day period ending on the third Business Day prior to the applicable Repurchase Date or date of determination (if the third Business Day prior to the applicable Repurchase Date or date of determination is a Trading Day or, if it is not a Trading Day, then on the last Trading Day prior to such third Business Day), appropriately adjusted to take into account the occurrence, during the period commencing on the first of such Trading Days during such five Trading Day period and ending on such Repurchase Date or date of determination, of any event described in Section 11.06, 11.07 or 11.08 hereof; subject, however, to the conditions set forth in Sections 11.09 and 11.10 hereof. "NASDAQ NATIONAL MARKET" means the electronic inter-dealer quotation system operated by the Nasdaq Stock Market, Inc., a subsidiary of the National Association of Securities Dealers, Inc. "NON-U.S. PERSON" means a Person that is not a U.S. Person. 3 "OFFICER" means the Chairman of the Board, any Vice Chairman, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, the Controller or the Secretary or any Assistant Treasurer or Assistant Secretary of a Person or any other individual designated by that Person as an "Officer." "OFFICERS' CERTIFICATE" means a written certificate signed in the name of a Person by two Officers of a Person, one of whom must be the Person's Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer or Vice President. "OPINION OF COUNSEL" means a written opinion containing the information specified in Sections 13.04 and 13.05, from legal counsel who is acceptable to the Trustee. The counsel may be an employee of, or counsel to, the Company or the Trustee. "ORIGINAL INDENTURE" means the Indenture dated as of June 10, 2003 by and among the Company, the Guarantor and the trustee named therein, which sets forth the terms of the Company's Zero Coupon Senior Exchangeable Notes Due 2023. "ORIGINAL SECURITIES" means the Company's Zero Coupon Senior Exchangeable Notes Due 2023 issued pursuant to the Original Indenture. "PERSON" means any individual, corporation, partnership, limited liability company, exempted company, joint venture, incorporated or unincorporated association, joint-stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof or other entity of any kind. "PRINCIPAL" or "PRINCIPAL AMOUNT" of a Security means the principal amount as set forth on the face of such Security, or on Schedule A thereto in the case of a Security in global form. "REDEMPTION DATE" means a date specified for redemption of the Securities in accordance with the terms of the Securities and Section 3.01 of this Indenture. "REDEMPTION PRICE" shall have the meaning set forth in paragraph 5 of the Securities. "REGULATION S" means Regulation S as promulgated under the Securities Act. "RULE 144" means Rule 144 as promulgated under the Securities Act. "RULE 144A" means Rule 144A as promulgated under the Securities Act. "SALE PRICE OF THE COMMON SHARES" means, on any date, the closing sale price per share, or if no closing sale price is reported, the average bid and asked prices or, if more than one in either case, the average of the average bid and average asked prices, on such date as reported in transactions for the principal U.S. securities exchange on which the Common Shares are traded or, if the Common Shares are not listed on a U.S. national or regional stock exchange, as reported by the Nasdaq National Market, in each case without reference to after-hours or extended market trading. If the Common Shares are not listed for trading on a U.S. national or 4 regional securities exchange and not reported by the Nasdaq National Market on the relevant date, the "sale price" shall be the last quoted bid price for Common Shares in the over-the-counter market on the relevant date as reported by the National Quotation Bureau or similar organization. If the Common Shares are not so quoted, the "sale price" will be the average of the mid-point of the last bid and asked prices for the Common Shares on the relevant date from each of at least three nationally recognized independent investment banking firms selected by the Company for this purpose. "SEC" or "COMMISSION" means the Securities and Exchange Commission or any successor entity. "SECURITIES" means the Company's Series B Zero Coupon Senior Exchangeable Notes Due 2023. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "STATED MATURITY," when used with respect to any Security, means the date specified in such Security as the fixed date on which an amount equal to the Principal of such Security is due and payable. "TAXES" means any tax, duty, levy, impost, assessment or other governmental charge of whatever nature imposed or levied by or on behalf of the Government of Bermuda or of any province or territory thereof or by an authority or agency therein or thereof having the power to tax, including any interest, penalties or other charges in respect thereof. "TAX ORIGINAL ISSUE DISCOUNT" means the amount of ordinary interest income on a Security that must be accrued as original issue discount for United States Federal income tax purposes pursuant to U.S. Treasury Regulation Section 1.1275-4. "TIA" means the Trust Indenture Act of 1939, as amended, as in effect on the date of this Indenture, except as provided in Section 9.03. "TRADING DAY" means a day during which trading in securities generally occurs on the AMEX or, if the applicable security is not listed on the AMEX, on the principal other national or regional securities exchange on which the applicable security is then listed or, if the applicable security is not listed on a national or regional securities exchange, on the Nasdaq National Market, or if the applicable security is not quoted on the Nasdaq National Market, on the principal other market on which the applicable security is then traded. "TRADING PRICE PER $1,000 PRINCIPAL AMOUNT OF SECURITIES" or "TRADING PRICE" means, on any Trading Day, the average of the secondary market bid quotations (expressed as Dollars per $1,000 Principal Amount of Securities) obtained by the Trustee for $5,000,000 principal amount of Securities at approximately 3:30 p.m., New York City time, on such Trading Day from three independent nationally recognized securities dealers selected by the Company; provided that if at least three such bids cannot reasonably be obtained by the Trustee, but two bids are obtained, then the average of the two bids shall be used, and if only one such bid can reasonably be obtained by the Trustee, one bid shall be used; and provided 5 further that if the Trustee cannot reasonably obtain at least one such bid, then for purposes of evaluating the 95% Trading Exception, the Trading Price per $1,000 Principal Amount of Securities for such Trading Day shall be deemed to be less than 95% of the product of (i) the Exchange Rate in effect as of such Trading Day and (ii) the Sale Price of the Common Shares on such Trading Day. "TRUST OFFICER" means the officer in the Institutional Trust Services department of the Trustee having direct responsibility for administration of this Indenture. "TRUSTEE" means the party named as the "Trustee" in the first paragraph of this Indenture until a successor replaces it pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. The foregoing sentence shall likewise apply to any subsequent such successor or successors. "U.S. PERSON" has the meaning specified in Regulation S. "VOTING STOCK" means stock of any class or classes, however designated, having ordinary voting power for the election of a majority of the board of directors of a corporation, other than stock having such power only by reason of the occurrence of a contingency. SECTION 1.02. OTHER DEFINITIONS.
DEFINED TERM IN SECTION - ----- ---------- "ADDITIONAL AMOUNTS"......................................................................... 4.09 "ALTERNATIVE CONSIDERATION".................................................................. 11.05(b) "APPLICABLE PRICE"........................................................................... 11.05(b) "CASH"....................................................................................... 3.08(a) "CHANGE IN CONTROL".......................................................................... 3.09(f) "CLEARSTREAM"................................................................................ 2.06(c) "COMPANY NOTICE"............................................................................. 3.08(c) "COMPANY NOTICE DATE"........................................................................ 3.08(b) "DEFAULTED CONTINGENT INTEREST".............................................................. 12.02 "DETERMINATION DATE"......................................................................... 11.05(a) "DISTRIBUTED SECURITIES"..................................................................... 11.08(a) "EFFECTIVE DATE"............................................................................. 11.05(b) "EUROCLEAR".................................................................................. 2.06(c) "EVENT OF DEFAULT"........................................................................... 6.01 "EXCHANGE AGENT"............................................................................. 2.03 "EXCHANGE DATE".............................................................................. 11.02 "EXCHANGE PRICE"............................................................................. 11.01 "EXCHANGE PROPERTY".......................................................................... 11.14(b) "EXCHANGE PROPERTY VALUE".................................................................... 11.14(c) "EXCHANGE PROPERTY WEIGHTED AVERAGE PRICE"................................................... 11.14(c) "EXCHANGE RATE".............................................................................. 11.01
6 "EXCHANGE VALUE"............................................................................. 11.05(a) "EXCLUDED HOLDER"............................................................................ 4.09 "EXPIRATION TIME"............................................................................ 11.08(c) "FUNDAMENTAL CHANGE PURCHASE PRICE".......................................................... 3.09(f) "FUNDAMENTAL CHANGE REPURCHASE DATE"......................................................... 3.09(a) "FUNDAMENTAL CHANGE REPURCHASE NOTICE"....................................................... 3.09(b) "FUNDAMENTAL CHANGE REPURCHASE RIGHT"........................................................ 3.09(a) "GUARANTEE".................................................................................. 10.01(a) "INDENTURE OBLIGATIONS"...................................................................... 10.01(a) "LAST ORIGINAL SECURITY MEASUREMENT DATE".................................................... 11.01 "MAKE-WHOLE PREMIUM"......................................................................... 11.05(b) "NET EXCHANGE PROPERTY AMOUNT"............................................................... 11.14(d) "NET SHARE AMOUNT"........................................................................... 11.05(a) "NET SHARES"................................................................................. 11.05(a) "95% TRADING EXCEPTION"...................................................................... 11.01 "NOTICE OF DEFAULT".......................................................................... 6.01 "OFFER CONSIDERATION"........................................................................ 11.08(c) "PAYING AGENT"............................................................................... 2.03 "PRINCIPAL RETURN"........................................................................... 11.05(b) "PURCHASE PRICE"............................................................................. 3.08(a) "PURCHASED SHARES"........................................................................... 11.08(c) "PRINCIPAL RETURN"........................................................................... 11.05(a) "REGISTRAR".................................................................................. 2.03 "REPURCHASE DATE"............................................................................ 3.08(a) "REPURCHASE NOTICE".......................................................................... 3.08(a) "RESTRICTED SECURITIES"...................................................................... 2.06(c) "RESTRICTED SECURITY LEGEND"................................................................. 2.06(c) "SPECIAL CONTINGENT INTEREST RECORD DATE".................................................... 12.02 "STOCK PRICE CAP"............................................................................ 11.05(b) "STOCK PRICE THRESHOLD"...................................................................... 11.05(b) "TEN DAY WEIGHTED AVERAGE PRICE"............................................................. 11.05(a) "TERMINATION OF TRADING"..................................................................... 3.09(f) "TERRITORY".................................................................................. 4.09 "TRIGGER EVENT".............................................................................. 11.19 "VOLUME WEIGHTED AVERAGE PRICE".............................................................. 11.05(a)
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "Indenture Securities" means the Securities and the Guarantee. 7 "Indenture Security Holder" means a Holder. "Indenture to be Qualified" means this Indenture. "Indenture Trustee" or "Institutional Trustee" means the Trustee. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute r defined by SEC rules have the meanings assigned to them by such definitions. SECTION 1.04. 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 generally accepted accounting principles in the United States of America as in effect from time to time; (3) "or" is not exclusive; (4) "including" means including, without limitation; (5) the term "merger" includes a statutory compulsory share exchange and a conversion of a corporation into a limited liability company, a partnership or other entity and vice versa; (6) references to statutes, rules or regulations include any successor statute, rule or regulation, as the case may be; (7) the masculine gender includes the feminine and the neuter; and (8) words in the singular include the plural, and words in the plural include the singular. ARTICLE 2. THE SECURITIES SECTION 2.01. FORM AND DATING. Other than as provided in Section 2.06, the Securities, any notations thereon relating to the Guarantee and the Trustee's certificate of authentication for the Securities shall be substantially in the form of EXHIBIT A, which is a part of this Indenture. In addition to such legends as may be required by Section 2.06, the Securities may have notations, legends or endorsements required by law, stock exchange rule or usage, PROVIDED that any such notation, legend or endorsement required by usage is in a form acceptable to the Company. The Company shall provide any such notations, legends or endorsements to the Trustee in writing. Each Security shall be dated the date of its authentication. 8 Any Security in global form shall represent such of the outstanding Securities as shall be specified therein and shall provide that it shall represent the aggregate amount of outstanding Securities from time to time endorsed thereon and that the aggregate amount of outstanding Securities represented thereby may from time to time be increased or reduced to reflect transfers or exchanges permitted hereby. Any endorsement of a Security in global form to reflect the amount of any increase or decrease in the amount of outstanding Security represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in such manner and upon instructions given by the Holder of such Security in accordance with this Indenture. Payment of Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Additional Amounts, if any, or Contingent Interest, if any, on any Security in global form shall be made to the Holder of such Security. SECTION 2.02. EXECUTION AND AUTHENTICATION. The Securities shall be executed on behalf of the Company by one Officer of the Company. The signature of an Officer on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper Officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of authentication of such Securities. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature of an authorized signatory, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. The Trustee shall authenticate and deliver Securities (i) for original issue in an aggregate Principal Amount of up to $700,000,000 upon a Company Order without any further action by the Company, and (ii) any amount of additional Securities specified by the Company after the Issue Date, in each case, upon a written order of the Company signed by one Officer of the Company; provided, however, that no additional Securities may be issued or guaranteed if a Default or Event of Default shall have occurred and be continuing. Such order shall specify the amount of the Securities to be authenticated and the date of original issue thereof. In authenticating such Securities, the Trustee shall be entitled to receive, and shall be entitled to rely upon, an Opinion of Counsel substantially to the effect that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. The aggregate Principal Amount of Securities outstanding at any time may not exceed the aggregate Principal Amount of Securities authorized for issuance by the Company pursuant to one or more written orders of the Company, except as provided in Section 2.07. Subject to the 9 foregoing, the aggregate principal amount of Securities that may be issued under this Indenture shall not be limited. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate 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 an Agent to deal with the Company, the Guarantor or any of their respective Affiliates. SECTION 2.03. REGISTRAR, PAYING AGENT AND EXCHANGE AGENT. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("REGISTRAR"), an office or agency where Securities may be presented for purchase or payment ("PAYING AGENT") and an office or agency where Securities may be presented for exchange pursuant to Article 11 hereof ("EXCHANGE AGENT"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars, one or more additional paying agents and one or more additional exchange agents. The term Paying Agent includes any additional paying agent. The term Exchange Agent includes any additional exchange agent, including any named in accordance with the provisions hereof. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent, Exchange Agent or co-registrar (if not the Trustee or an Affiliate of the Trustee). The agreement shall implement the provisions of this Indenture that relate to such agent and the relevant Security. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar, Paying Agent or Exchange Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07 hereof. The Company, the Guarantor or an Affiliate of the Company or the Guarantor may act as Paying Agent, Registrar, Exchange Agent or co-registrar. The Company initially appoints the Trustee as Registrar, Exchange Agent and Paying Agent in connection with the Securities. SECTION 2.04. PAYING AGENT TO HOLD CASH AND SECURITIES IN TRUST. Except as otherwise provided herein, prior to 10:00 a.m., New York City time, on each due date of payments in respect of any Security, the Company shall deposit with the Paying Agent cash or securities sufficient to make such payments when such payments are due. The Company shall require the Paying Agent (if not the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all cash and securities held by the Paying Agent for the making of payments in respect of the Securities and shall notify the Trustee of any default by the Company in making any such payment. At any time during the continuance of any such default, the Paying Agent shall, upon the written request of the Trustee, forthwith pay to the Trustee all cash and securities so held in trust. If the Company, the 10 Guarantor or an Affiliate of the Company or the Guarantor acts as Paying Agent, it shall segregate the cash and securities held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require the Paying Agent to pay all cash and securities held by it to the Trustee and to account for any funds and securities disbursed by it. Upon doing so, the Paying Agent shall have no further liability for such cash or securities. SECTION 2.05. 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. If the Trustee is not the Registrar, the Company shall cause to be furnished to the Trustee at least semiannually on May 26 and November 26 a listing of Holders dated within ten days of the date on which the list is furnished and at such other times as the Trustee may request in writing a list, in such form and as of such date as the Trustee may reasonably require, of the names and addresses of Holders. SECTION 2.06. EXCHANGE AND REGISTRATION OF TRANSFER OF SECURITIES; RESTRICTIONS ON TRANSFERS; DEPOSITARY. (a) Upon surrender for registration of transfer of any Security at any office or agency of the Company designated as Registrar or co-registrar pursuant to Section 2.03 hereof and satisfaction of the requirements for such transfer set forth in this Section 2.06, 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 denominations and of a like aggregate Principal Amount and bearing such restrictive legends as may be required by this Indenture. Securities may be exchanged for a like aggregate Principal Amount of Securities of other authorized denominations. Securities to be exchanged shall be surrendered at any office or agency to be maintained by the Company designated as Registrar or co-registrar pursuant to Section 2.03 hereof and the Company shall execute and register, and the Trustee shall authenticate and deliver in exchange therefor, the Security or Securities which the Holder making the exchange shall be entitled to receive, bearing registration numbers not contemporaneously outstanding. All Securities presented for registration of transfer or for exchange into like Securities, repurchase, redemption or exchange pursuant to Article 11 hereof or payment shall (if so required by the Company, the Trustee, the Registrar or any co-registrar) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee, duly executed by the Holder or such Holder's attorney duly authorized in writing. No service charge shall be charged to the Holder for any exchange for like Securities or registration of transfer of Securities, but the Company may require payment of a sum sufficient to cover any tax, assessments or other governmental charges that may be imposed in connection therewith. 11 None of the Company, the Trustee, the Registrar or any co-registrar shall be required to exchange for like Securities or register a transfer of (a) any Securities for a period of 15 days next preceding the mailing of notice of Securities to be redeemed, or (b) any Securities or portions thereof selected or called for redemption, or (c) any Securities or portion thereof surrendered for exchange pursuant to Article 11 hereof, or (d) any Securities or portion thereof surrendered for repurchase or redemption (and not withdrawn) pursuant to Section 3.08 or 3.09 hereof, respectively. All Securities issued upon any transfer or exchange for like Securities shall be valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture as the Securities surrendered upon such exchange or transfer. (b) So long as the Securities are eligible for book-entry settlement with the Depositary, or unless otherwise required by law, all Securities that are so eligible may be represented by a Security in global form registered in the name of the Depositary or the nominee of the Depositary, except as otherwise specified below. The transfer and exchange of beneficial interests in such Security in global form shall be effected through the Depositary in accordance with this Indenture and the procedures of the Depositary therefor. Any Security in global form may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Indenture as may be required by the Custodian, the Depositary or by the National Association of Securities Dealers, Inc. or to comply with any applicable law or any regulation or with the rules and regulations of any securities exchange or automated quotation system upon which the Securities may be listed or traded or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Securities are subject. (c) Every Security that bears or is required under this Section 2.06(c) to bear the Restricted Securities Legend (together with any Common Shares issued upon exchange of the Securities and required to bear the legend set forth in Section 2.06(d), collectively, the "RESTRICTED SECURITIES") shall be subject to the restrictions on transfer set forth in this Section 2.06(c) (including those set forth in the legend set forth below) unless such restrictions on transfer shall be waived by written consent of the Company, and the Holder of each such Transfer Restricted Security, by such Holder's acceptance thereof, agrees to be bound by all such restrictions on transfer. As used in Sections 2.06(c) and 2.06(d), the term "transfer" encompasses any sale, pledge, transfer or other disposition whatsoever of any Restricted Security. Until transferred under Rule 144(k) under the Securities Act (or any successor provision), any certificate evidencing such Security (and all securities issued in exchange therefor or substitution thereof, other than Common Shares issued upon exchange or repurchase thereof, which shall bear the legend set forth in Section 2.06(d) if applicable) shall bear a legend in substantially the form set forth on the face of the Security in EXHIBIT A (the "RESTRICTED SECURITY LEGEND"), unless such Security has been sold pursuant to a registration statement that has been declared effective under the Securities Act (and which continues to be effective at the time of such transfer), or unless otherwise agreed by the Company in writing, with written notice thereof to the Trustee. 12 Any Security (or security issued in exchange or substitution therefor) as to which the conditions for removal of the Restricted Security Legend have been satisfied may, upon surrender of such Security for exchange to the Registrar in accordance with the provisions of this Section 2.06, be exchanged for a new Security or Securities, of like tenor and aggregate Principal Amount, which shall not bear the Restricted Security Legend required by this Section 2.06(c). Notwithstanding any other provisions of this Indenture (other than the provisions set forth in Section 2.06(b) and in this Section 2.06(c)), a Security in global form may not be transferred as a whole or in part 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. The Depositary shall be a clearing agency registered under the Exchange Act. The Company initially appoints The Depository Trust Company to act as Depositary. Initially, one or more Securities in global form shall be issued to the Depositary, registered in the name of Cede & Co., as the nominee of the Depositary, and deposited with the Custodian for Cede & Co. Each Security in global form, to the extent that it represents the interests of Non-U.S. Persons, will be held by Cede & Co. for the accounts of designated agents on behalf of the Euroclear System ("EUROCLEAR") and Clearstream Banking, Societe Anonyme ("CLEARSTREAM"). If at any time the Depositary for Security in global form notifies the Company that it is unwilling or unable to continue as Depositary for such Security, the Company may appoint a successor Depositary with respect to such Security. If a successor Depositary is not appointed by the Company within ninety (90) days after the Company receives such notice, the Company will execute, and the Trustee, upon receipt of an Officers' Certificate for the authentication and delivery of Securities, will authenticate and deliver, Securities in certificated or definitive form, in aggregate Principal Amount equal to the Principal Amount of the Security in global form, in exchange for such Security in global form. Securities in certificated form issued in exchange for all or a part of a Security in global form pursuant to this Section 2.06 shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. Upon execution and authentication, the Trustee shall deliver such Securities in certificated form to the persons in whose names such Securities in certificated form are so registered. At such time as all interests in a Security in global form have been redeemed, exchanged pursuant to Article 11 hereof, canceled or repurchased or exchanged for Securities in certificated form, or transferred to a transferee who receives Securities in certificated form, such Security in global form shall, upon receipt thereof, be canceled by the Trustee in accordance with standing procedures and instructions existing between the Depositary and the Custodian. At any time prior to such cancellation, if any interest in a Security in global form is exchanged for Securities in certificated form, redeemed, exchanged pursuant to Article 11 hereof, repurchased or canceled, the Principal Amount of the Security in global form shall, in accordance with the standing procedures and instructions existing between the Depositary and the Custodian, be appropriately reduced and an endorsement shall be made on such Security in global form, by the Trustee or the Custodian, at the direction of the Trustee, to reflect such reduction. 13 (d) Until transferred under Rule 144(k) under the Securities Act (or any successor provision), any certificate representing Common Shares issued upon exchange of any Security shall bear a legend in substantially the following form, unless such Common Shares have been originally issued upon exchange of Securities or sold pursuant to a registration statement that has been declared effective under the Securities Act (and which continues to be effective at the time of such issuance or sale), or unless otherwise agreed by the Company in writing with written notice thereof to the transfer agent for the Common Shares: THE COMMON SHARES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U. S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. THE HOLDER HEREOF AGREES THAT UNTIL THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), (1) IT WILL NOT RESELL OR OTHERWISE TRANSFER THE COMMON SHARES EVIDENCED HEREBY WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OF, U. S. PERSONS EXCEPT (A) TO NABORS INDUSTRIES LTD. OR TO NABORS INDUSTRIES, INC. OR ANY SUBSIDIARY THEREOF, (B) TO A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (C) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a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k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION). AS USED HEREIN, THE TERMS "UNITED STATES" AND "U. S. PERSON" HAVE THE MEANING GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. Any such Common Shares as to which such restrictions on transfer shall have expired in accordance with their terms or as to which the conditions for removal of the foregoing legend set forth therein have been satisfied may, upon surrender of the certificates representing such Common Shares for exchange in accordance with the procedures of the transfer agent for the Common Shares, be exchanged for a new certificate or certificates for a like number of Common Shares, which shall not bear the restrictive legend required by this Section 2.06(d). (e) Any Security that, prior to the expiration of the holding period applicable to sales thereof under Rule 144(k) under the Securities Act, is purchased or owned by the Company, the Guarantor or any Affiliate of the Company or the Guarantor may not be resold by the Guarantor, the Company or such Affiliate unless registered under the Securities Act or resold pursuant to an exemption from the registration requirements of the Securities Act in a transaction which results in such Security no longer being "restricted securities" (as defined under Rule 144). (f) Each Holder of a Security agrees to indemnify the Guarantor, the Company and the Trustee against any liability that may result from the transfer, exchange or assignment of such Holder's Security in violation of any provision of this Indenture and/or applicable United States Federal or state securities laws or foreign securities laws. The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Depositary participants or beneficial owners of interests in a Security in global form) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 2.07. REPLACEMENT SECURITIES. If (a) any mutilated Security is surrendered to the Trustee, or (b) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Trustee such security or indemnity as may be required by it to save the Company and the Trustee harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and, upon its written request, the Trustee shall authenticate and deliver, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and Principal Amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, or is about to be repurchased or redeemed by the Company pursuant to 15 Article 3 hereof, or exchanged pursuant to Article 11 hereof, the Company in its discretion may, instead of issuing a new Security, pay, repurchase or redeem such Security, or the Guarantor may issue the underlying securities, as the case may be. Upon the issuance of any new Securities under this Section 2.07, the Company may, as a condition to such issuance, require the payment of a sum sufficient to cover any tax, assessment 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 2.07 in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the mutilated destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section 2.07 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 2.08. OUTSTANDING SECURITIES; DETERMINATIONS OF HOLDERS' ACTION. Securities outstanding at any time are all the Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those paid pursuant to Section 4.01 hereof, those exchanged pursuant to Article 11 hereof, those replaced or paid pursuant to Section 2.07 hereof and those described in this Section 2.08 as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate thereof holds the Security; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite Principal Amount of Securities have given or concurred in any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any Affiliate of the Company shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trust Officer actually knows to be so owned shall be so disregarded unless written notice of such ownership is received by the Trustee at the Corporate Trust Office of the Trustee in accordance with Section 13.02 hereof and such notice references the Securities and this Indenture. Subject to the foregoing, only Securities outstanding at the time of such determination shall be considered in any such determination (including determinations pursuant to Articles 6 and 9 hereof). If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the Paying Agent holds, in accordance with this Indenture, by 10:00 a.m., New York City time, on a Redemption Date, or on the Business Day following a Repurchase Date or a Fundamental Change Repurchase Date, or on Stated Maturity, cash or securities, if permitted hereunder, sufficient to pay all Securities payable on that date, then on and after that date such 16 Securities shall cease to be outstanding and Additional Amounts, if any, and Contingent Interest, if any, on such Securities shall cease to accrue; PROVIDED, that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made. If a Security is exchanged in accordance with Article 11 hereof, then from and after such exchange such Security shall cease to be outstanding and Additional Amounts, if any, and Contingent Interest, if any, shall cease to accrue on such Security. SECTION 2.09. TEMPORARY SECURITIES. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company shall cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 2.03 hereof, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like Principal Amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 2.10. CANCELLATION. All Securities surrendered for payment, purchase, exchange, redemption or registration of transfer or exchange for the Securities shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. The Company may not issue new Securities to replace Securities it has paid for or delivered to the Trustee for cancellation or that any Holder has exchanged pursuant to Article 11 hereof. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section 2.10, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be disposed of by the Trustee in accordance with its customary procedures. SECTION 2.11. PERSONS DEEMED OWNERS. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of 17 Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Additional Amounts, if any, and Contingent Interest, if any, in respect thereof, for the purpose of exchange and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, the Guarantor, the Trustee or any agent of the Company, the Guarantor or the Trustee shall be affected by notice to the contrary. SECTION 2.12. 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, 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 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. The Company will promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE 3. REDEMPTION AND REPURCHASES SECTION 3.01. RIGHT TO REDEEM; NOTICES TO TRUSTEE. The Company, at its option, may redeem the Securities in accordance with the provisions of paragraphs 5 and 7 of the Securities. If the Company elects to redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the Trustee in writing of the Redemption Date, the Principal Amount of Securities to be redeemed and the Redemption Price. The Company shall give the notice to the Trustee provided for in this Section 3.01 in the case of any redemption of the Securities, at least 20 days before the Redemption Date unless a shorter notice shall be satisfactory to the Trustee. The Company may, upon at least 30 days' notice given to the Holders, on one or more occasions, elect to extend the period during which the Company cannot redeem any of the Securities pursuant to paragraph 5 of the Securities. Such extension period will be as designated in such notice of extension. Each such election, once made, shall be irrevocable. SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED. If less than all the Securities held in definitive form are to be redeemed pursuant to Section 3.01, the Trustee shall select the definitive Securities to be redeemed pro rata or by lot or by another method the Trustee considers fair and appropriate (as long as such method is not prohibited by the rules of any securities exchange or quotation system on which the Securities are then listed or quoted). The Trustee shall make the selection at least 18 days, but not more than 65 days, before the Redemption Date from outstanding definitive Securities not previously called for redemption. The Trustee may select for redemption portions of the Principal Amount of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects shall be in Principal Amounts of $1,000 or an integral multiple of $1,000. Except as expressly stated otherwise, provisions of this Indenture that apply to definitive Securities 18 called for redemption also apply to portions of definitive Securities called for redemption. The Trustee shall notify the Company promptly of the definitive Securities or portions of definitive Securities to be redeemed. Any interest in a Security held in global form by and registered in the name of the Depositary or its nominee to be redeemed in whole or in part will be redeemed in accordance with the procedures of the Depositary. If any Security selected for partial redemption is exchanged in part before termination of the exchange right with respect to the portion of the Security so selected, the exchanged portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been exchanged during a selection of Securities to be redeemed may be treated by the Trustee as outstanding for the purpose of such selection. SECTION 3.03. NOTICE OF REDEMPTION. At least 15 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first-class mail, postage prepaid, to each Holder of Securities to be redeemed. The notice shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the Exchange Rate; (4) the name and address of the Paying Agent and Exchange Agent; (5) that Securities called for redemption may be exchanged at any time before the close of business on the last Trading Day prior to the Redemption Date; (6) that Holders who want to exchange Securities must satisfy the requirements set forth in paragraph 9 of the Securities; (7) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (8) if fewer than all the outstanding Securities are to be redeemed, the certificate numbers and Principal Amounts of the particular Securities to be redeemed; (9) that Additional Amounts, if any, Contingent Interest, if any, and overdue interest, if any, on Securities called for redemption will cease to accrue on and after the Redemption Date; and (10) the CUSIP number or numbers for the Securities called for redemption. 19 The notice, if mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is given, pursuant to Section 3.03 hereof, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price stated in the notice, together with Additional Amounts, if any, accrued and unpaid Contingent Interest, if any, and overdue interest, if any, except for Securities which are exchanged in accordance with the terms of this Indenture; PROVIDED that if the Redemption Date falls after a Contingent Interest Record Date and on or prior to the corresponding Contingent Interest Payment Date, then the Contingent Interest payable on such Contingent Interest Payment Date shall be paid to the holders of record of the Securities on the applicable Contingent Interest Record Date instead of the holders surrendering the Securities for redemption. Upon the later of the Redemption Date or the date such Securities are surrendered to the Paying Agent, such Securities shall be paid at the Redemption Price stated in the notice. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. By 10 a.m., New York City time, on the Redemption Date, the Company shall deposit with the Paying Agent (or if the Company or an Affiliate of the Company is the Paying Agent, shall segregate and hold in trust) cash sufficient to pay the Redemption Price of all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which prior thereto have been delivered by the Company to the Trustee for cancellation or have been exchanged pursuant to Article 11 hereof, together with Additional Amounts, if any, accrued and unpaid Contingent Interest, if any, and overdue interest, if any, subject to the proviso at the end of Section 3.04. On or after the Redemption Date (unless the Company shall default in the payment of the Securities at the Redemption Price), Additional Amounts, if any, Contingent Interest, if any, and overdue interest, if any, on the Securities or portion of Securities called for redemption shall cease to accrue and such Securities shall cease after the close of business on the Trading Day immediately preceding the Redemption Date to be exchangeable pursuant to Article 11 hereof and, except as provided in Section 8.02 hereof, to be entitled to any benefit or security under this Indenture, and the Holders thereof shall have no right in respect of such Securities except the right to receive the Redemption Price, and accrued and unpaid Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any, to (but excluding) the Redemption Date. The Paying Agent shall as promptly as practicable return to the Company any money, with interest, if any, thereon, not required for that purpose because of exchange of Securities. If such money is then held by the Company in trust and is not required for such purpose, it shall be discharged from such trust. 20 SECTION 3.06. SECURITIES REDEEMED IN PART. Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder a new Security in an authorized denomination equal in Principal Amount to the unredeemed portion of the Security surrendered. SECTION 3.07. [RESERVED] SECTION 3.08. REPURCHASE OF SECURITIES AT OPTION OF THE HOLDER. (a) GENERAL. Securities shall be repurchased by the Company in U.S. legal tender ("CASH") pursuant to paragraph 6 of the Securities as of June 15, 2008, June 15, 2013 and June 15, 2018 (each, a "REPURCHASE DATE"), at the purchase price specified therein (the "PURCHASE PRICE"), together with accrued and unpaid Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any, at the option of the Holder thereof, upon: (1) delivery to the Paying Agent by the Holder of a written notice of purchase (a "REPURCHASE NOTICE") at any time from the opening of business on the date that is 20 Business Days prior to a Repurchase Date until the close of business on such Repurchase Date, stating: (A) the certificate number of any Security in certificated form which the Holder will deliver to be repurchased; (B) the portion of the Principal Amount of the Security which the Holder will deliver to be repurchased, which portion must be $1,000 in Principal Amount or a multiple thereof; and (C) that such Security shall be repurchased as of the Repurchase Date pursuant to the terms and conditions specified in paragraph 6 of the Securities and in this Indenture, and (2) delivery of such Security to the Paying Agent prior to, on or after the Repurchase Date (together with all necessary endorsements) at the offices of the Paying Agent, such delivery being a condition to receipt by the Holder of the Purchase Price therefor; PROVIDED, HOWEVER, that such Purchase Price shall be so paid pursuant to this Section 3.08 only if the Security so delivered to the Paying Agent shall conform in all respects to the description thereof in the related Repurchase Notice. The Company shall purchase from the Holder thereof, pursuant to this Section 3.08, a portion of a Security if the Principal Amount of such portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to the purchase of all of a Security also apply to the repurchase of such portion of such Security. Any purchase by the Company contemplated pursuant to the provisions of this Section 3.08 shall be consummated by the delivery of the consideration to be received by the Holder promptly following the later of the Repurchase Date and the time of delivery of the Security. 21 Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Repurchase Notice contemplated by this Section 3.08(a) shall have the right at any time prior to the close of business on the Repurchase Date to withdraw such Repurchase Notice by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 3.10 hereof. The Paying Agent shall promptly notify the Company of the receipt by it of any Repurchase Notice or written notice of withdrawal thereof. (b) REPURCHASE WITH CASH. The Purchase Price of Securities in respect of which a Repurchase Notice pursuant to Section 3.08(a) has been given shall be paid by the Company with cash equal to the aggregate Purchase Price of such Securities. The Company Notice as provided in Section 3.08(c) shall be sent to Holders (and to beneficial owners as required by applicable law) not less than 20 Business Days (the "COMPANY NOTICE DATE") prior to the Repurchase Date. (c) COMPANY NOTICE. The Company's notices shall be sent to the Holders (and to beneficial owners as required by applicable law) in the manner provided in Section 13.02 hereof at the time specified in Section 3.08(b) hereof (each, a "COMPANY NOTICE"). Such Company Notices shall include a form of Repurchase Notice to be completed by a Holder and shall state: (i) the Purchase Price and Exchange Rate; (ii) the name and address of the Paying Agent and the Exchange Agent; (iii) that Securities as to which a Repurchase Notice has been given may be exchanged only if the applicable Repurchase Notice has been withdrawn in accordance with the terms of this Indenture; (iv) that Securities must be surrendered to the Paying Agent to collect payment; (v) that the Purchase Price for any Security as to which a Repurchase Notice has been given and not withdrawn will be paid promptly following the later of the Repurchase Date and the time of surrender of such Security as described in clause (iv) above; (vi) the procedures the Holder must follow under this Section 3.08; (vii) briefly, the exchange rights of the Securities; and (viii) the procedures for withdrawing a Repurchase Notice. At the Company's request, the Trustee shall give the Company Notice in the Company's name and at the Company's expense; PROVIDED, HOWEVER, that, in all cases, the text of the Company Notice shall be prepared by the Company. 22 (d) PROCEDURE UPON PURCHASE. At or before 10:00 a.m., New York City time, on the Business Day following the Repurchase Date, the Company shall deposit with the Paying Agent cash sufficient to pay the aggregate Purchase Price in respect of the Securities to be repurchased pursuant to this Section 3.08, plus accrued and unpaid Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any, to (but excluding) the Repurchase Date. SECTION 3.09. REPURCHASE AT OPTION OF THE HOLDER UPON A FUNDAMENTAL CHANGE. (a) In the event any Fundamental Change (as defined below) shall occur, each Holder of Securities shall have the right (the "FUNDAMENTAL CHANGE REPURCHASE RIGHT"), at the Holder's option, to require the Company to repurchase any or all of such Holder's Securities (or portions thereof that are integral multiples of $1,000 of Principal Amount), on a date selected by the Company (the "FUNDAMENTAL CHANGE REPURCHASE DATE"), which Fundamental Change Repurchase Date shall be no later than 35 Trading Days and no earlier than 20 Trading Days after the date the Fundamental Change Repurchase Notice (as defined below) is mailed in accordance with Section 3.09(b) and in no event prior to the date on which the Fundamental Change occurs, at a price payable in cash (the "FUNDAMENTAL CHANGE PURCHASE PRICE") equal to the Principal Amount plus accrued and unpaid Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any, to, but excluding, the Fundamental Change Repurchase Date; PROVIDED that if such Fundamental Change Repurchase Date falls after a Contingent Interest Record Date and on or prior to the corresponding Contingent Interest Payment Date, then the Contingent Interest payable on such Contingent Interest Payment Date shall be paid to the holders of record of the Securities on the applicable Contingent Interest Record Date instead of the holders surrendering the Securities for repurchase. (b) The Company, or at its request (which must be received by the Trustee at least three Business Days prior to the date the Trustee is requested to give such notice as described below) the Trustee in the name of and at the expense of the Company, shall mail to all Holders of record of the Securities a notice (a "FUNDAMENTAL CHANGE REPURCHASE NOTICE") of the occurrence of a Fundamental Change and of the repurchase right arising as a result thereof on or before the 30th day after the occurrence of such Fundamental Change. The Company shall deliver a copy of the Fundamental Change Repurchase Notice to the Trustee. Each Fundamental Change Repurchase Notice shall state: (i) the events causing the Fundamental Change; (ii) the date of such Fundamental Change; (iii) the Fundamental Change Repurchase Date; (iv) the last date on which a Holder may exercise its Fundamental Change Repurchase Right pursuant to this Section 3.09; (v) the Fundamental Change Purchase Price; 23 (vi) the names and addresses of the Paying Agent and the Exchange Agent; (vii) a description of the procedures which a Holder must follow to exercise its Fundamental Change Repurchase Right; (viii) the following additional information with respect to a Holder's right to exchange the Securities pursuant to Article 11 hereof: (A) the Exchange Rate and any adjustments to the Exchange Rate that will result from the Fundamental Change; (B) the Make-Whole Premium, if any, payable pursuant to Section 11.05(b) hereof if a Holder exchanges the Securities following such Fundamental Change and whether such Make-Whole Premium will be payable in cash, Common Shares or Alternative Consideration or a combination thereof; and (C) if a Make-Whole Premium is payable by the Company pursuant to Section 11.05 hereof, that a Make-Whole Premium shall be paid by the Company on the Fundamental Change Repurchase Date to Holders of Securities who have exchanged their Securities during the period beginning on (and including) the date on which the Company gives the Fundamental Change Repurchase Notice pursuant to this Section 3.09(b) and ending on (and including) the Fundamental Change Repurchase Date; (ix) that Securities with respect to which an Option to Elect Repurchase Upon a Fundamental Change is given by a Holder may be exchanged pursuant to Article 11 only if such Option to Elect Repurchase Upon a Fundamental Change has been withdrawn in accordance with Section 3.10; and (x) the CUSIP number or numbers, as the case may be, of the Securities. No failure of the Company to give a Fundamental Change Notice shall limit any Holder's right to exercise a Fundamental Change Repurchase Right. 24 (c) For a Security to be so repurchased at the option of the Holder, the Paying Agent must receive such Security with the form entitled "Option to Elect Repurchase Upon a Fundamental Change" on the reverse thereof duly completed, together with such Security duly endorsed for transfer, no later than the close of business on the Business Day immediately preceding the Fundamental Change Repurchase Date. All questions as to the validity, eligibility (including time of receipt) and acceptance of any Security for repurchase shall be determined by the Company, whose determination shall be final and binding. (d) [Reserved]. (e) [Reserved]. SECTION 3.10. EFFECT OF REPURCHASE NOTICE OR FUNDAMENTAL CHANGE REPURCHASE NOTICE. Upon receipt by the Company of the Repurchase Notice or Option to Elect Repurchase Upon a Fundamental Change specified in Section 3.08(a) hereof or Section 3.09(c) hereof, as applicable, the Holder of the Security in respect of which such Repurchase Notice or Option to Elect Repurchase Upon a Fundamental Change, as the case may be, was given shall (unless such Repurchase Notice or Option to Elect Repurchase Upon a Fundamental Change is withdrawn as specified in the following two paragraphs) thereafter be entitled to receive solely the Purchase Price or Fundamental Change Purchase Price, as the case may be, with respect to such Security, including accrued and unpaid Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any. Such Purchase Price or Fundamental Change Purchase Price, including accrued and unpaid Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any, subject to the proviso at the end of Section 3.09(a), shall be paid to such Holder promptly following the later of (x) the Repurchase Date or the Fundamental Change Repurchase Date, as the case may be, with respect to such Security (provided the conditions in Section 3.08(a) hereof or Section 3.09(c) hereof, as applicable, have been satisfied) and (y) the time of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by Section 3.08(a) hereof or Section 3.09(c) hereof, as applicable. Securities in respect of which a Repurchase Notice or Option to Elect Repurchase Upon a Fundamental Change, as the case may be, has been given by the Holder thereof may not be exchanged pursuant to Article 11 hereof on or after the date of the delivery of such Repurchase Notice (or Option to Elect Repurchase Upon a Fundamental Change, as the case may be), unless such Repurchase Notice (or Option to Elect Repurchase Upon a Fundamental Change, as the case may be) has first been validly withdrawn as specified in the following two paragraphs. A Repurchase Notice or Option to Elect Repurchase Upon a Fundamental Change, as the case may be, may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent at any time prior to the close of business on the Repurchase Date or the Fundamental Change Repurchase Date, as the case may be, to which it relates specifying: (1) the name of the Holder, (2) a statement that the Holder is withdrawing its election to require the Company to repurchase its Securities, 25 (3) the certificate number of any certificated Security in respect of which such notice of withdrawal is being submitted, (4) the Principal Amount of the Security with respect to which such notice of withdrawal is being submitted, and (5) the Principal Amount, if any, of such Security which remains subject to the original Repurchase Notice or Option to Elect Repurchase Upon a Fundamental Change, as the case may be, and which has been or will be delivered for purchase or redemption by the Company. There shall be no repurchase of any Securities pursuant to Section 3.08 hereof or repurchase pursuant to Section 3.09 hereof if there has occurred (prior to, on or after, as the case may be, the giving, by the Holders of such Securities, of the required Repurchase Notice or Option to Elect Repurchase Upon a Fundamental Change, as the case may be) and is continuing an Event of Default (other than a default in the payment of the Purchase Price or Fundamental Change Purchase Price, as the case may be, with respect to such Securities). SECTION 3.11. DEPOSIT OF PURCHASE PRICE OR FUNDAMENTAL CHANGE PURCHASE PRICE. At or before 10 a.m., New York City time, on the Business Day following a Repurchase Date or a Fundamental Change Repurchase Date, as the case may be, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or an Affiliate of the Company is acting as the Paying Agent, shall segregate and hold in trust as provided in Section 2.04 hereof) an amount of cash sufficient to pay the aggregate Purchase Price or Fundamental Change Purchase Price, as the case may be, of all the Securities or portions thereof which are to be purchased as of such Repurchase Date or Fundamental Change Repurchase Date, as the case may be, including accrued and unpaid Contingent Interest, if any, and Additional Amounts, if any, and overdue interest, if any. SECTION 3.12. SECURITIES REPURCHASED IN PART. Any Security that is to be repurchased only in part shall be surrendered at the office of the Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder in aggregate Principal Amount equal to, and in exchange for, the portion of the Principal Amount of the Security so surrendered which is not repurchased. SECTION 3.13. COVENANT TO COMPLY WITH SECURITIES LAWS UPON REPURCHASE OF SECURITIES. In connection with any repurchase of Securities under Section 3.08 or 3.09 hereof, the Company shall (i) comply with Rule 13e-4 (which term, as used herein, includes any successor provision thereto) under the Exchange Act, if applicable, (ii) file the related Schedule 13E-4 (or 26 any successor schedule, form or report) under the Exchange Act, if applicable, and (iii) otherwise comply with all Federal and state securities laws so as to permit the rights and obligations under Sections 3.08 and 3.09 to be exercised in the time and in the manner specified in Sections 3.08 and 3.09. SECTION 3.14. REPAYMENT TO THE COMPANY. The Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed as provided in paragraph 14 of the Securities, together with interest, if any, thereon, held by them for the payment of a Purchase Price or Fundamental Change Purchase Price, as the case may be, including Contingent Interest, if any, and Additional Amounts, if any; PROVIDED, HOWEVER, that to the extent that the aggregate amount of cash deposited by the Company pursuant to Section 3.11 hereof exceeds the aggregate Purchase Price or Fundamental Change Purchase Price, as the case may be, of the Securities or portions thereof which the Company is obligated to repurchase as of the Repurchase Date or Fundamental Change Repurchase Date, as the case may be, including Contingent Interest, if any, and Additional Amounts, if any, then promptly after the Business Day following the Repurchase Date or Fundamental Change Repurchase Date, as the case may be, the Trustee and the Paying Agent shall return any such excess to the Company together with interest, if any, thereon. ARTICLE 4. COVENANTS SECTION 4.01. PAYMENT OF SECURITIES. The Company shall promptly pay or cause to be paid all payments in respect of the Securities on the dates and in the manner provided in the Securities or pursuant to this Indenture. Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Contingent Interest, if any, and Additional Amounts, if any, shall be considered paid on the applicable date due or, in the case of a Purchase Price or Fundamental Change Purchase Price, on the Business Day following the applicable Repurchase Date or Fundamental Change Repurchase Date, as the case may be, if by 10:00 a.m., New York City time, on such date the Trustee or the Paying Agent holds, in accordance with this Indenture, cash or securities, if permitted hereunder, sufficient to pay all such amount then due. The Company shall pay interest on overdue amounts at the rate set forth in paragraph 1 of the Securities and it shall pay interest on overdue interest at the same rate compounded semiannually (to the extent that the payment of such interest shall be legally enforceable), which interest on overdue interest shall accrue from the date such amounts became overdue. 27 SECTION 4.02. FINANCIAL INFORMATION; SEC REPORTS. The Guarantor will deliver to the Trustee (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Guarantor (i) a consolidated balance sheet of the Guarantor and its subsidiaries as of the end of such fiscal year and the related consolidated statements of operations, stockholders' equity and cash flows for such fiscal year, all reported on by an independent public accountant of nationally recognized standing and (ii) a report containing a management's discussion and analysis of the financial condition and results of operations and a description of the business and properties of the Guarantor and (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Guarantor (i) an unaudited consolidated financial report for such quarter and (ii) a report containing a management's discussion and analysis of the financial condition and results of operations of the Guarantor; PROVIDED that the foregoing shall not be required for any fiscal year or quarter, as the case may be, with respect to which the Guarantor files or expects to file with the Trustee an annual report or quarterly report, as the case may be, pursuant to the third paragraph of this Section 4.02. At any time when neither the Guarantor nor the Company is subject to either Section 13 or 15(d) of the Exchange Act, the Guarantor and the Company shall at the request of any Holder (or holders of Common Shares issued upon exchange of the Securities) provide to such Holder (or holders of such Common Shares) and any prospective purchaser designated by such Holders (or holders of such Common Shares), as the case may be, such information, if any, required by Rule 144A(d)(4) under the Securities Act. The Guarantor shall file with the Trustee, within 15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Guarantor is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from the information contained therein, including the Guarantor's and the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 4.03. COMPLIANCE CERTIFICATE. The Company and the Guarantor shall each deliver to the Trustee, within 120 days after the end of each fiscal year of the Company, an Officers' Certificate in which one of the two Officers signing such certificate is either the Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer of the Company or the Guarantor, as applicable, stating whether or not to the knowledge of the signers thereof the Company or the Guarantor, as applicable, is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company or the Guarantor, as applicable, shall be in default, specifying all such defaults and the nature and status thereof of which the signers may have knowledge. 28 The Company and the Guarantor will deliver to the Trustee, as soon as possible and in any event within five days, upon becoming aware of any default or any Event of Default, an Officers' Certificate specifying with particularity such Default or Event of Default and further stating what action the Company and the Guarantor has taken, is taking or proposes to take with respect thereto. Any notice required to be given under this Section 4.03 shall be delivered to the Trustee at its Corporate Trust Office. SECTION 4.04. FURTHER INSTRUMENTS AND ACTS. Upon request of the Trustee, the Company and the Guarantor 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 purposes of this Indenture. SECTION 4.05. MAINTENANCE OF OFFICE OR AGENCY. The Company will appoint in the Borough of Manhattan, 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, exchange, purchase, redemption or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The office or agency of the Trustee in the Borough of Manhattan, The City of New York, which on the date hereof is located at J.P. Morgan Institutional Trust Services, GIS Unit Trust Window, 4 New York Plaza, 1st Floor, New York, New York 10004, shall be the office or agency for all of the aforesaid purposes unless the Company shall appoint some other office or agency for such purposes and shall give prompt written notice to the Trustee of the location, and any change in the location, of such other 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 Corporate Trust Office. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. SECTION 4.06. EXISTENCE. Subject to Article 5 hereof, each of the Company and the Guarantor will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence under the laws of its jurisdiction of incorporation and rights (charter and statutory); PROVIDED, HOWEVER, that neither the Company nor the Guarantor shall be required to preserve any such right if the Company or the Guarantor shall determine that the maintenance thereof is no longer desirable in the conduct of the business of the Company or the Guarantor and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 4.07. [RESERVED] 29 SECTION 4.08. REGISTRATION RIGHTS. The Company and the Guarantor agree that the Holders (and any Person that has a beneficial interest in a Security) from time to time of Registrable Securities (as such term is defined in ANNEX I hereto) are entitled to the benefits of the terms and conditions set forth on ANNEX I hereto. By acceptance of any interest in a Security, each Holder consents and agrees for the benefit of the Company and the Guarantor to comply with the terms and conditions of ANNEX I hereto. SECTION 4.09. PAYMENT OF ADDITIONAL AMOUNTS. Unless otherwise required by Bermudan law, neither the Company nor the Guarantor will deduct or withhold from payments made with respect to the Securities and the Guarantee on account of any present or future Taxes. In the event that either the Company or the Guarantor is required to withhold or deduct on account of any Taxes due from any payment made under or with respect to the Securities or the Guarantee, as the case may be, the Company or the Guarantor, as the case may be, will pay such additional amounts ("ADDITIONAL AMOUNTS") as may be necessary so that the net amount received by each Holder of Securities will equal the amount that the Holder would have received if the Taxes had not been required to be withheld or deducted; PROVIDED that no Additional Amounts will be payable with respect to a payment made to a Holder (an "EXCLUDED HOLDER") to the extent: (i) that any Taxes would not have been so imposed but for the existence of any present or former connection between the Holder and Bermuda, other than the mere receipt of the payment, the acquisition, ownership or disposition of such Securities or the exercise or enforcement of rights under the Securities, the Guarantee or this Indenture; (ii) of any estate, inheritance, gift, sales, transfer or personal property Taxes imposed with respect to the Securities, except as described below or as otherwise provided in this Indenture; (iii) that any such Taxes would not have been imposed but for the presentation of the Securities, where presentation is required, for payment on a date more than 30 days after the date on which the payment became due and payable or the date on which payment thereof is duly provided for, whichever is later, except to the extent that the beneficiary or Holder thereof would have been entitled to Additional Amounts had the Securities been presented for payment on any date during such 30-day period; or (iv) that the Holder would not be liable or subject to such withholding or deduction of Taxes but for the failure to make a valid declaration of non-residence or other similar claim for exemption, if: (a) the making of the declaration or claim is required or imposed by statute, treaty, regulation, ruling or administrative practice of the relevant taxing authority as a precondition to an exemption from, or reduction in, the relevant Taxes; and (b) at least 60 days prior to the first payment with respect to which the Company or the Guarantor shall apply this clause (iv), the Company or the Guarantor shall have notified all Holders of the Securities in writing that they shall be required to provide this declaration or claim. The Company and the Guarantor shall also (i) withhold or deduct such Taxes as required; (ii) remit the full amount of Taxes deducted or withheld to the relevant taxing authority in accordance with all applicable laws; (iii) use reasonable efforts to obtain from each relevant taxing authority imposing the Taxes certified copies of tax receipts evidencing the payment of any Taxes deducted or withheld; and (iv) upon request, make available to the Holders of the Securities, within 60 days after the date the payment of any Taxes deducted or withheld is due pursuant to applicable law, certified copies of tax receipts evidencing such payment by the 30 Company or the Guarantor and, notwithstanding the Company's or the Guarantor's efforts to obtain the receipts, if the same are not obtainable, other evidence of such payments. In addition, the Company or the Guarantor will pay any stamp, issue, registration, documentary or other similar taxes and duties, including interest, penalties and additional amounts with respect thereto, payable in Bermuda or the United States, or any political subdivision or taxing authority of or in the foregoing with respect to the creation, issue, offering, enforcement, redemption or retirement of the Securities or the Guarantee. At least 30 days prior to each date on which any payment under or with respect to the Securities is due and payable, if the Company or the Guarantor becomes obligated to pay Additional Amounts with respect to such payment, the Company (or in respect of the Guarantee, the Guarantor) shall deliver to the Trustee an Officers' Certificate stating the fact that such Additional Amounts will be payable, and the amounts so payable and will set forth such other information as is necessary to enable the Trustee to pay such Additional Amounts to the Holders on the payment date. Whenever in this Indenture there is mentioned, in any context, the payment of Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Contingent Interest, if any, or overdue interest, or any other amount payable on or with respect to any of the Securities, such mention shall be deemed to include mention of the payment of Additional Amounts provided for in this Section 4.09 to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this Section 4.09 and express mention of the payment of Additional Amounts in those provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made (if applicable). If payments with respect of the Securities or the Guarantee become subject generally to the taxing jurisdiction of any Territory or any political subdivision or taxing authority thereof or therein having power to tax, other than or in addition to Bermuda or any political subdivision or taxing authority therein or thereof having power to tax, immediately upon becoming aware thereof the Company shall notify the Trustee of such event, and thereupon the Company or the Guarantor, as the case may be, shall be obligated to pay Additional Amounts in respect thereof on terms corresponding to the terms of the foregoing provisions of this Section 4.09 with the substitution for (or, as the case may be, in addition to) the references herein to Bermuda or any political subdivision or authority therein or thereof having power to tax of references to that other or additional Territory or any political subdivision or authority therein or thereof having power to tax to whose taxing jurisdiction such payments shall have become subject as aforesaid. The term "TERRITORY" means for this purpose any jurisdiction in which the Company or the Guarantor, as the case may be, is incorporated or in which it has its place of central management or central control. The obligations of the Company and the Guarantor under this Section 4.09 shall survive the termination of this Indenture and the payment of all amounts under or with respect to this Indenture and the Securities. 31 SECTION 4.10. CONTINGENT DEBT TAX TREATMENT. The Company agrees, and by acceptance of a Security or beneficial interest in a Security, each Holder and beneficial holder of the Security is deemed to have agreed, with respect to each of the matters set forth in (a) and (b) below, as follows: (a) Tax Treatment: (i) to treat the Securities as indebtedness of the Company for all tax purposes; (ii) to treat the Securities as indebtedness that is subject to the special regulations governing contingent payment debt instruments that are contained in U.S. Treasury Regulation section 1.1275-4; and (iii) to treat any payment to and receipt by a holder of Common Shares upon exchange of a Security as a contingent payment that may result in an adjustment under U.S. Treasury Regulation section 1.1275-4(b). (b) Comparable Yield and Projected Payment Schedule. Solely for purposes of applying U.S. Treasury Regulation section 1.1275-4 to the Securities: (i) for United States Federal Income Tax purposes, the Company shall accrue interest with respect to outstanding Securities as Tax Original Issue Discount according to the "noncontingent bond method," as set forth in U.S. Treasury Regulation section 1.1275-4(b); (ii) the Company has determined that the comparable yield as defined in U.S. Treasury Regulation section 1.1275-4(b)(4)(i), for the Securities is 5.53%, compounded semiannually; (iii) the Company has determined that the projected payment schedule, as defined in U.S. Treasury Regulation section 1.1275-4(b)(ii), for the Securities consists of the projected payment schedule referred to in (v) below; (iv) the Company acknowledges and agrees, and each Holder and any beneficial holder of Securities, by its acceptance of a Security or beneficial interest in a Security, shall be deemed to acknowledge and agree that (A) the projected payment schedule is determined on a basis of an assumption of linear growth of stock price, (B) the comparable yield and the projected payment schedule are not determined for any purpose other than for the purpose of applying U.S. Treasury Regulation section 1.1275-4(b) to the Securities and (C) the comparable yield and the projected payment schedule do not constitute a projection or representation regarding the actual amounts payable on the Securities; and (v) the projected payment schedule, as defined in U.S. Treasury Regulation section 1.1275-4(b)(4)(ii), for the Securities is set forth in EXHIBIT B hereto. 32 SECTION 4.11. CALCULATION OF TAX ORIGINAL ISSUE DISCOUNT. The Company shall file with the Trustee promptly at the end of each calendar year (i) a written notice specifying the amount of Tax Original Issue Discount (including daily rates and accrual periods) accrued on outstanding Securities as of the end of such year and (ii) such other specific information relating to such Tax Original Issue Discount as may then be relevant under the Internal Revenue Code of 1986, as amended from time to time. ARTICLE 5. SUCCESSOR CORPORATION SECTION 5.01. WHEN THE COMPANY AND THE GUARANTOR MAY MERGE OR TRANSFER ASSETS. (a) The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (i) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer or lease the properties and assets of the Company substantially as an entirety shall be a corporation, limited liability company, partnership or trust organized and validly existing under the laws of the United States or any State thereof or the District of Columbia, and shall expressly assume by an indenture supplemental hereto, executed and delivered to the Trustee in form reasonably satisfactory to the Trustee, the due and punctual payment of the Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Make-Whole Premium, if any, Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any, on the Securities, according to their tenor, and the due and punctual performance of all of the covenants and obligations of the Company under the Securities and this Indenture, and shall have provided for exchange rights in accordance with this Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (iii) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with this Article 5 and that all conditions precedent herein provided for relating to such transaction have been satisfied. (b) The Guarantor shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person unless: (i) the Person (if other than the Guarantor) formed by such consolidation or into which the Guarantor is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Guarantor substantially as an entirety shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, the due and punctual payment of all obligations in respect of the Guarantee and the performance of every covenant of this Indenture on the part of the Guarantor to be performed or observed; 33 (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (iii) the Guarantor has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is executed in connection with such transaction, such supplemental indenture comply with this Article 5 and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 5.02. SUCCESSORS SUBSTITUTED. Upon any consolidation of the Company or Guarantor with, or merger of the Company or Guarantor into, any other Person, or any conveyance, transfer or lease of the properties and assets of the Company or the Guarantor substantially as an entirety in accordance with Section 5.01, the successor Person formed by such consolidation or into which the Company or the Guarantor is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or the Guarantor, as the case may be, under this Indenture with the same effect as if such successor Person had been named as the Company or the Guarantor, as the case may be, herein, and thereafter, except in the case of a lease to another Person, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE 6. DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" occurs if: (1) there is a default in the payment of the Principal Amount, Redemption Price, Purchase Price or a Fundamental Change Purchase Price on any Security when the same becomes due and payable at its Stated Maturity, upon redemption, upon declaration, when due for repurchase by the Company or otherwise, and such default continues for a period of ten days; (2) there is a default in the payment of Contingent Interest, if any, Additional Amounts, if any, or a Make-Whole Premium, if any, on any Security when it becomes due and payable, and such default continues for a period of 30 days; (3) failure of the Company or the Guarantor to perform or comply with the provisions of Section 11.02 hereof, and such failure continues for a period of 20 days; (4) the Company or the Guarantor fails to comply with any of its agreements or covenants in the Securities or this Indenture (other than those referred to in clauses (1) through (3) above and those set forth in Section 4.08 and ANNEX I hereof) and such failure continues for 90 days after receipt by the Company of a Notice of Default; (5) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company or the Guarantor a bankrupt or insolvent, or approving as 34 properly filed a petition seeking reorganization of the Company or the Guarantor under any Bankruptcy Law, and such decree or order shall have continued undischarged and unstayed for a period of 90 consecutive days; or a decree or order of a court having jurisdiction in the premises of the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of the Company or the Guarantor or of its property, or for the winding-up or liquidation of its affairs, shall have been entered, and such decree or order shall have remained in force undischarged and unstayed of a period of 90 consecutive days; (6) the Company or the Guarantor shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under any Bankruptcy Law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of its property 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 (7) the Guarantee ceases to be in full force and effect or becomes unenforceable or invalid or is declared null and void (other than in accordance with the terms of the Guarantee) or the Guarantor denies or disaffirms its obligations under the Guarantee. A Default under clause (4) above is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in aggregate Principal Amount of the Securities at the time outstanding notify the Company and the Trustee, of the Default and neither the Company nor the Guarantor cures such Default (and such Default is not waived) within the time specified in clause (4) above after actual receipt of such notice (a "NOTICE OF DEFAULT"). Any such notice must specify the Default, demand that it be remedied and state that such notice is a Notice of Default. SECTION 6.02. ACCELERATION. If an Event of Default (other than an Event of Default specified in Section 6.01(5) or (6) hereof) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in aggregate Principal Amount of the Securities at the time outstanding by notice to the Company and the Trustee, may declare the Principal Amount, Make-Whole Premium, if any, Contingent Interest, if any, and Additional Amounts, if any, accrued and unpaid to the date of declaration on all the Securities to be immediately due and payable. Upon such a declaration, such Principal Amount and Contingent Interest, if any, and Additional Amounts, if any, shall become and be due and payable immediately. If an Event of Default specified in Section 6.01(5) or (6) hereof occurs and is continuing, the Principal Amount and Contingent Interest, if any, and Additional Amounts, if any, accrued and unpaid to the date of such occurrence on all the Securities shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. The Holders of a majority in aggregate Principal Amount of the Securities at the time outstanding, by notice to the Company and the Trustee (and without notice to any other Holder), may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of the Principal Amount that has become due solely as a result of acceleration and if all amounts due to the Trustee under Section 7.07 hereof 35 have been paid. No such rescission shall affect any subsequent or other Default or Event of Default or impair any consequent right. 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 all amounts due on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if the Trustee does not possess any of the Securities or does not produce any of the Securities 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. The Holders of a majority in aggregate Principal Amount of the Securities at the time outstanding, by notice to the Company and the Trustee (and without notice to any other Holder), may waive an existing Default or Event of Default and its consequences except (1) an Event of Default described in Section 6.01(1) or (2) hereof, (2) a Default in respect of a provision that under Section 9.02 hereof cannot be amended without the consent of each Holder affected or (3) a Default that constitutes a failure to exchange any Security in accordance with the terms of Article 11 hereof. When a Default or Event of Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any consequent right. SECTION 6.05. CONTROL BY MAJORITY. The Holders of a majority in aggregate Principal Amount of the Securities at the time 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 any law or this Indenture or that the Trustee determines in good faith is unduly prejudicial to the rights of other Holders or would involve the Trustee in personal liability unless the Trustee is offered indemnity reasonably satisfactory to it. SECTION 6.06. LIMITATION ON SUITS. A Holder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Company and the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in aggregate Principal Amount of the Securities at the time outstanding make a written request to the Trustee to pursue the remedy; 36 (3) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense satisfactory to the Trustee; (4) the Trustee does not comply with the request within 60 days after receipt of the notice, the request and the offer of security or indemnity; and (5) the Holders of a majority in aggregate Principal Amount of the Securities at the time outstanding do not give the Trustee a direction inconsistent with the request during such 60 day period. A Holder may not use this Indenture to prejudice the rights of any other Holder or to obtain a preference or priority over any other 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 the Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Contingent Interest, if any, Additional Amounts, if any, overdue interest, if any, and Make-Whole Premium, if any, in respect of the Securities held by such Holder, on or after the respective due dates expressed in the Securities, to exchange the Securities in accordance with Article 11, or to bring suit for the enforcement of any such payment on or after such respective dates or the right to exchange the Securities in accordance with Article 11, shall not be impaired or affected adversely without the consent of each such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default described in Section 6.01(1) or (2) hereof 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 owing with respect to the Securities and the amounts provided for in Section 7.07 hereof. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company, the Guarantor or any other obligor upon the Securities or the property of the Company, of the Guarantor or of such other obligor or their creditors, the Trustee (irrespective of whether the Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Contingent Interest, if any, Additional Amounts, if any, or overdue interest, if any, in respect of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company or the Guarantor for the payment of any such amount) shall be entitled and empowered, by intervention in such proceeding or otherwise: (a) to file and prove a claim for the whole amount of the Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Contingent Interest, if any, Additional Amounts, if any, or overdue interest, if any, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including 37 any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any money or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to 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 claims of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: FIRST: to the Trustee for amounts due under Section 7.07 hereof; SECOND: to Holders for amounts due and unpaid on the Securities for the Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Contingent Interest, if any, or Additional Amounts, if any, or overdue interest, if any, as the case may be, ratably, without preference or priority of any kind, according to such amounts due and payable on the Securities; and THIRD: the balance, if any, to the Company. The Trustee may fix a proposed record date and payment date for any payment to Holders pursuant to this Section 6.10 and shall notify the Company in writing with respect to such proposed record date and payment date. At least 15 days before such record date, the Company (or the Trustee at the request of 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. 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 (other than the Trustee) 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 and expenses, 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 6.11 does not apply to a suit by the Trustee, any suit by a Holder for the enforcement of the 38 payment of the Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Contingent Interest, if any, or Additional Amounts, if any, or overdue interest, if any, on or after the due date expressed in such Security or to any suit for the enforcement of the right to exchange the Security pursuant to Article 11, or a suit by Holders of more than 10% in aggregate Principal Amount of the Securities at the time outstanding. SECTION 6.12. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the Principal Amount, Redemption Price, Purchase Price or Fundamental Change Purchase Price in respect of Securities, Contingent Interest, if any, or Additional Amounts, if any, or any overdue interest on any such amounts, as contemplated herein, or which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such laws and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. 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 its exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (1) the Trustee need perform only those duties that 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, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. This Section 7.01(b) shall be in lieu of Section 315(a) of the TIA and such Section 315(a) is hereby expressly excluded from this Indenture, as permitted by the TIA. 39 (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 paragraph (c) does not limit the effect of paragraph (b) of this Section 7.01; (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 hereof. Subparagraphs (c)(1),(2) and (3) shall be in lieu of Sections 315(d)(1), 315(d)(2) and 315(d)(3) of the TIA and such Sections 315(d)(1), 315(d)(2) and 315(d)(3) are hereby expressly excluded from this Indenture, as permitted by the TIA. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (e) of this Section 7.01. (e) The Trustee may refuse to perform any duty or exercise any right or power or extend or risk its own funds or otherwise incur any financial liability unless it receives indemnity reasonably satisfactory to it against any loss, liability or expense. (f) Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. Subject to Section 7.01: (a) The Trustee may conclusively rely on any document reasonably 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 a Company Order, 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 a Company Order, 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. 40 (e) The Trustee may consult with counsel selected by it and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture, unless the Holders shall have offered to the Trustee reasonable security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby. (g) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company and the Guarantor during normal business hours at reasonable frequencies, personally or by agent or attorney at the sole cost of the Company and the Guarantor and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation. (h) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any negligent act on the part of any agent or attorney appointed with due care by it hereunder. (i) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Trust Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee in accordance with Section 13.02 hereof, and such notice references the Securities and this Indenture. In the absence of such notice, the Trustee may conclusively assume that no such Default or Event of Default exists. (j) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder. (k) The Trustee shall be under no obligation to expend or risk its own funds or to exercise, at the request or direction of any of the Holders, any of the rights or powers vested in it by this Indenture pursuant to this Indenture. (l) The Trustee is not required to give any bond or surety with respect to the performance of its duties or the exercise of its powers under this Indenture. (m) In the event the Trustee receives inconsistent or conflicting requests or indemnity from two or more groups of Holders of Securities, each representing less than a majority in principal amount of the Securities Outstanding, the Trustee, in its sole discretion, may determine what action, if any, shall be taken. 41 (n) The Trustee's immunities and protections from liability and its right to indemnification in connection with the performance of its duties under this Indenture shall extend to the Trustee's officers, directors, agents, attorneys and employees. Such immunities and protections, together with the Trustee's right to compensation, shall survive the Trustee's resignation or removal, the discharge of this Indenture and the final payment of the Securities. (o) The permissive right of the Trustee to take the actions permitted by this Indenture shall not be construed as an obligation or duty to do so. (p) Except for information provided by the Trustee concerning the Trustee, the Trustee shall have no responsibility for any information in any offering memorandum or other disclosure material distributed with respect to the Securities, and the Trustee shall have no responsibility for compliance with any state or federal securities in connection with the Securities. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its commercial banking or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company, the Guarantor or their Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar, Exchange Agent or co-registrar may do the same with the like rights. However, the Trustee must comply with Sections 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee 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 in the offering memorandum for the Securities or in this Indenture or the Securities (other than its certificate of authentication), the acts of a prior Trustee hereunder, or the determination as to which beneficial owners are entitled to receive any notices hereunder. SECTION 7.05. NOTICE OF DEFAULTS. If a Default occurs and is continuing and if it is actually known by a Trust Officer or if written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee in accordance with Section 13.02 hereof, and such notice references the Securities and this Indenture, the Trustee shall give to each Holder notice of the Default within 90 days after it is actually known to a Trust Officer. Except in the case of a Default described in Section 6.01(1) or (2) hereof, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders. The second sentence of this Section 7.05 shall be in lieu of the proviso to Section 315(b) of the TIA and such provision is hereby expressly excluded from this Indenture, as permitted by the TIA. The Trustee shall not give notice of a Default pursuant to Section 6.01(4) until at least 90 days have passed since its occurrence. 42 SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each May 1, beginning with the May 1 following the date of this Indenture, the Trustee shall mail to each Holder a brief report dated as of such May 1 that complies with TIA Section 313(a), if required by such Section 313(a). The Trustee also shall comply with TIA Section 313(b). A copy of each report at the time of its mailing to Holders shall be filed with the SEC and each securities exchange on which the Securities are listed. The Company agrees to promptly notify the Trustee whenever the Securities become listed on any securities exchange and of any delisting thereof. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company agrees: (a) to pay to the Trustee from time to time such compensation as the Company and the Trustee shall from time to time agree in writing for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the compensation and the expense, advances and disbursements of its outside agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to indemnify the Trustee for, and to hold it harmless against, any and all loss, damage, claims, liability or expense (including taxes other than taxes based upon, measured by, or determined by the income of the Trustee) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim (whether asserted by the Company, any Holder or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder. To secure the Company's payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay the Principal Amount, Redemption Price, Purchase Price, Fundamental Change Purchase Price, Contingent Interest, if any, Additional Amounts, if any, or overdue interest, if any, as the case may be, on particular Securities. The Company's payment obligations pursuant to this Section 7.07 shall survive the discharge of this Indenture. When the Trustee incurs expenses after the occurrence of a Default specified in Section 6.01(5) or (6), the expenses are intended to constitute expenses of administration under any Bankruptcy Law. 43 SECTION 7.08. REPLACEMENT OF TRUSTEE. The Trustee may resign by so notifying the Company; PROVIDED, HOWEVER, that no such resignation shall be effective until a successor Trustee has accepted its appointment pursuant to this Section 7.08. The Holders of a majority in aggregate Principal Amount of the Securities at the time outstanding may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. The Company shall remove the Trustee if: (1) the Trustee fails to comply with, or ceases to be eligible under, Section 7.10 hereof; (2) the Trustee is adjudged bankrupt or insolvent; (3) a receiver or public officer takes charge or control of the Trustee or its property or affairs; or (4) the Trustee otherwise in the Company's reasonable judgment becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint, by resolution of its Board of Directors, a successor Trustee. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject to the lien provided for in Section 7.07 hereof. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be eligible under this Article. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in aggregate Principal Amount of the Securities at the time outstanding may petition any court of competent jurisdiction for the appointment of a successor Trustee at the expense of the Company. If the Trustee fails to comply with Section 7.10 hereof, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 44 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 (including the trust created by this Indenture) or assets to, another corporation, bank, banking association or trust company, the resulting, surviving or transferee corporation bank, banking association or trust company, without any further act shall be the successor Trustee hereunder, PROVIDED such corporation shall be otherwise eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. As soon as practicable, the successor Trustee shall give written notice of its succession to the Company. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all times satisfy the requirements of TIA Sections 310(a)(1) and 310(b). The Trustee shall have a combined capital and surplus of at least $50,000,000 (or if the Trustee is a member of a bank holding company system, its bank holding company shall have a combined capital and surplus of at least $50,000,000) as set forth in its most recent published annual report of conditions. Nothing herein contained shall prevent the Trustee from filing with the SEC the application referred to in the penultimate paragraph of TIA Section 310(b). If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 7.10, it shall correct such ineligibility or resign immediately in the manner and with the effect specified in this Article 7. 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. DISCHARGE OF INDENTURE SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES. When (i) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.07 hereof) for cancellation or (ii) all outstanding Securities have become due and payable and the Company deposits with the Trustee cash and/or securities, as permitted by the terms hereof, sufficient to pay at Stated Maturity the Principal Amount of all outstanding Securities (other than Securities replaced pursuant to Section 2.07 hereof), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Section 7.07 hereof, cease to be of further effect. The Trustee shall join in the execution of a document prepared by the Company acknowledging satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate and Opinion of Counsel and at the cost and expense of the Company. 45 SECTION 8.02. REPAYMENT TO THE COMPANY. The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Securities that remains unclaimed for six months; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such return, shall, in the event that the Securities are no longer held in global form, at the expense of the Company cause to be published once in a newspaper of general circulation in The City of New York or mail to each such Holder notice that such money or securities remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication or mailing, any unclaimed money or securities then remaining will be returned to the Company. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person. In the absence of a written request from the Company to return unclaimed funds to the Company, the Trustee shall from time to time deliver all unclaimed funds to or as directed by applicable escheat authorities, as determined by the Trustee in its sole discretion, in accordance with the customary practices and procedures of the Trustee. Any unclaimed funds held by the Trustee pursuant to this section shall be held uninvested and without any liability for interest. ARTICLE 9. AMENDMENTS SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company, the Guarantor and the Trustee may amend this Indenture and the Securities without the consent of any Holder: (1) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, PROVIDED that, in any case, such change shall not materially adversely affect the interests of the Holders; (2) to provide for the assumption of the Company's or the Guarantor's obligations to the Holders of the Securities in case of a merger or consolidation or conveyance, transfer or lease of the Company's or the Guarantor's properties and assets substantially as an entirety; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities so long as such uncertificated Securities are in registered form for purposes of the Internal Revenue Code of 1986, as amended; (4) to make any change that does not adversely affect the right of any Holder; or (5) to make any change to comply with the TIA, or any amendment thereto, or to comply with any requirement of the SEC in connection with the qualification, if any, of this Indenture under the TIA. 46 SECTION 9.02. WITH CONSENT OF HOLDERS. The Company, the Guarantor and the Trustee, with the written consent of the Holders of at least a majority in aggregate Principal Amount of the Securities at the time outstanding, may amend this Indenture or the Securities. However, without the consent of each Holder affected, an amendment to this Indenture or the Securities may not: (1) make any change to the Principal Amount of Securities whose Holders must consent to an amendment; (2) make any change to the manner or rate of accrual in connection with Contingent Interest, if any, Additional Amounts, if any, or overdue interest, if any, reduce the rate of overdue interest referred to in paragraph 1 of the Securities or extend the time for payment of Contingent Interest, if any, Additional Amounts, if any, or overdue interest, if any, on any Security; (3) reduce the Principal Amount of or extend the Stated Maturity of any Security; (4) reduce the Redemption Price, Purchase Price or Fundamental Change Purchase Price of any Security; (5) make any Security payable in money or securities other than that stated in the Security; (6) reduce the Make-Whole Premium; (7) make any change in Section 6.04 or 6.07 hereof or this Section 9.02, except to increase the percentage of Holders referenced in Section 6.04 or 6.07 hereof or this Section 9.02, as applicable; (8) make any change that adversely affects the right of Holders to exchange any Security; or (9) make any change that adversely affects the right of Holders to require the Company to repurchase the Securities, or the right to require the Company to repurchase the Securities upon a Fundamental Change, in accordance with the terms thereof and this Indenture. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Section 9.02 becomes effective, the Company shall mail to each Holder a notice briefly describing the amendment. 47 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article 9 shall comply with the TIA as then in effect, if then required to so comply. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS, WAIVERS AND ACTIONS. Until an amendment, waiver or other action becomes effective, a consent to it or any other action by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same obligation as the consenting Holder's Security, even if notation of the consent, waiver or action is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent, waiver or action as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment, waiver or action becomes effective. After an amendment, waiver or action becomes effective, it shall bind every Holder. SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article 9 may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors of the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for outstanding Securities. SECTION 9.06. TRUSTEE TO SIGN SUPPLEMENTAL INDENTURES. The Trustee shall sign any supplemental indenture authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign such supplemental indenture. In signing such amendment the Trustee shall be entitled to receive, and (subject to the provisions of Section 7.01 hereof) shall be fully protected in relying upon, an Officers' Certificate of the Company and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. SECTION 9.07. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article 9, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall 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. ARTICLE 10. GUARANTEE OF SECURITIES SECTION 10.01. UNCONDITIONAL GUARANTEE. (a) For value received, the Guarantor hereby fully, irrevocably, unconditionally and absolutely guarantees to the Holders and to the Trustee the due and punctual 48 payment of the principal of, Additional Amounts, if any, and Contingent Interest, if any, on the Securities and all other amounts due and payable under this Indenture and the Securities by the Company (including, without limitation, all costs and expenses (including reasonable legal fees and disbursements) incurred by the Trustee or the Holders in connection with the enforcement of this Indenture, the Securities and the Guarantee) (collectively, the "INDENTURE OBLIGATIONS"), when and as such principal, Make-Whole Premium, if any, Additional Amounts, if any, Contingent Interest, if any, and such other amounts shall become due and payable, whether at the Stated Maturity, upon redemption or repurchase or by declaration of acceleration or otherwise, according to the terms of the Securities and this Indenture. The guarantee by the Guarantor set forth in this Article 10 is referred to herein as the "GUARANTEE." Without limiting the generality of the foregoing, the Guarantor's liability shall extend to all amounts that constitute part of the Indenture Obligations and would be owed by the Company under this Indenture and the Securities but for the fact that they are unenforceable, reduced, limited, impaired, suspended or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Company. (b) Failing payment when due of any amount guaranteed pursuant to the Guarantee, for whatever reason, the Guarantor will be obligated to pay the same immediately to the Trustee, without set-off or counterclaim or other reduction whatsoever (whether for taxes, withholding or otherwise). The Guarantee is intended to be a general, unsecured, senior obligation of the Guarantor and will rank pari passu in right of payment with all indebtedness of the Guarantor that is not, by its terms, expressly subordinated in right of payment to the Guarantee. The Guarantor hereby agrees that its obligations hereunder shall be full, irrevocable, unconditional and absolute, irrespective of the validity, regularity or enforceability of the obligations and liabilities of any other obligor with respect to the Securities, the Guarantee or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder with respect to any provisions hereof or thereof with respect to the same, the recovery of any judgment against the Company, or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of the Guarantor. The Guarantor hereby agrees that in the event of a default in payment of the principal of, Make-Whole Premium, if any, Additional Amounts, if any, or Contingent Interest, if any, on the Securities or any other amounts payable under this Indenture and the Securities by the Company, whether at the Stated Maturity, upon redemption or repurchase or by declaration of acceleration or otherwise, legal proceedings may be instituted by the Trustee on behalf of the Holders or, subject to Section 6.06, by the Holders, on the terms and conditions set forth in this Indenture, directly against the Guarantor to enforce the Guarantee without first proceeding against the Company. (c) To the fullest extent permitted by applicable law, the obligations of the Guarantor under this Article 10 shall be as aforesaid full, irrevocable, unconditional and absolute and shall not be impaired, modified, discharged, released or limited by any occurrence or condition whatsoever, including, without limitation, (i) any compromise, settlement, release, waiver, renewal, extension, indulgence or modification of, or any change in, any of the obligations and liabilities of any other obligor with respect to the Securities contained in any of the Securities or this Indenture, (ii) any impairment, modification, release or limitation of the liability of the Company, the Guarantor or any of their respective estates in bankruptcy, or any 49 remedy for the enforcement thereof, resulting from the operation of any present or future provision of any applicable Bankruptcy Law, as amended, or other statute or from the decision of any court, (iii) the assertion or exercise by the Company, the Guarantor or the Trustee of any rights or remedies under any of the Securities or this Indenture or its delay in or failure to assert or exercise any such rights or remedies, (iv) the assignment or the purported assignment of any property as security for any of the Securities, including all or any part of the rights of the Company or the Guarantor under this Indenture, (v) the extension of the time for payment by the Company or the Guarantor of any payments or other sums or any part thereof owing or payable under any of the terms and provisions of any of the Securities or this Indenture or of the time for performance by the Company or the Guarantor of any other obligations under or arising out of any such terms and provisions or the extension or the renewal of any thereof, (vi) the modification or amendment (whether material or otherwise) of any duty, agreement or obligation set forth in this Indenture of any other obligor with respect to the Securities, (vii) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all of the assets, marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceeding affecting, either the Company or the Guarantor or any of their respective assets, or the disaffirmance of any of the Securities, the Guarantee or this Indenture in any such proceeding, (viii) the release or discharge of the Company or the Guarantor from the performance or observance of any agreement, covenant, term or condition contained in any of such instruments by operation of law, (ix) the unenforceability of any of the obligations of any of the other obligors under the Securities, the Guarantee or this Indenture, (x) any change in the name, business, capital structure, corporate existence, or ownership of the Company or the Guarantor, or (xi) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, a surety or the Guarantor. (d) The Guarantor hereby (i) waives diligence, presentment, demand of payment, notice of acceptance, filing of claims with a court in the event of the merger, insolvency or bankruptcy of the Company or the Guarantor, and all demands and notices whatsoever, (ii) acknowledges that any agreement, instrument or document evidencing the Guarantee may be transferred and that the benefit of its obligations hereunder shall extend to each holder of any agreement, instrument or document evidencing the Guarantee without notice to them and (iii) covenants that its Guarantee will not be discharged except by complete performance of the Guarantee or of the obligations guaranteed thereby. The Guarantor further agrees that if at any time all or any part of any payment theretofore applied by any Person to the Guarantee is, or must be, rescinded or returned for any reason whatsoever, including, without limitation, the insolvency, bankruptcy or reorganization of the Guarantor, the Guarantee shall, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence notwithstanding such application, and the Guarantee shall continue to be effective or be reinstated, as the case may be, as though such application had not been made. (e) The Guarantor shall be subrogated to all rights of the Holders and the Trustee against the Company in respect of any amounts paid by the Guarantor pursuant to the provisions of this Indenture; PROVIDED, HOWEVER, that the Guarantor shall not be entitled to enforce or to receive any payments arising out of, or based upon, such right of subrogation with respect to any of the Securities until all of the Securities and the Guarantee thereof shall have been paid in full or discharged. 50 (f) A director, officer, employee or stockholder, as such, of the Guarantor shall not have any liability for any obligations of the Guarantor under this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. (g) No failure to exercise and no delay in exercising, on the part of the Trustee or the Holders, any right, power, privilege or remedy under this Article 10 and the Guarantee shall operate as a waiver thereof, nor shall any single or partial exercise of any rights, power, privilege or remedy preclude any other or further exercise thereof, or the exercise of any other rights, powers, privileges or remedies. The rights and remedies herein provided for are cumulative and not exclusive of any rights or remedies provided in law or equity. Nothing contained in this Article 10 shall limit the right of the Trustee or the Holders to take any action to accelerate the maturity of the Securities pursuant to Article 6 or to pursue any rights or remedies hereunder or under applicable law. SECTION 10.02. EXECUTION AND DELIVERY OF NOTATION OF GUARANTEE. To further evidence the Guarantee, the Guarantor hereby agrees that on the date of this Indenture a notation of the Guarantee may be endorsed on each Security authenticated and delivered by the Trustee and executed by either manual or facsimile signature of an Officer of the Guarantor. The Guarantor hereby agrees that the Guarantee shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation relating to the Guarantee thereof. If an Officer of a Guarantor whose signature is on this Indenture or a Security no longer holds that office, or if any other or additional Person shall have become a "Guarantor" hereunder in accordance with Section 5.01 hereof, at the time the Trustee authenticates such Security or at any time thereafter, the 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 the Guarantee set forth in this Indenture on behalf of the Guarantor and each other Person which may at such time constitute the "Guarantor" hereunder. ARTICLE 11. EXCHANGE SECTION 11.01. EXCHANGE PRIVILEGE. A Holder of a Security may exchange, in accordance with this Article 11, such Security for cash and, if applicable, Common Shares prior to the close of business on the Business Day immediately preceding June 15, 2023 (unless earlier redeemed or repurchased), but only upon the occurrence of one of the events set forth in this Section 11.01. Upon such exchange, a Holder will be entitled to receive the consideration set forth in this Article 11 based upon the exchange rate (the "EXCHANGE RATE") set forth in paragraph 9 in the Securities, subject to adjustment as herein set forth. The "EXCHANGE PRICE" in effect at any time shall be equal to $1,000 divided by the Exchange Rate. 51 A Holder may exchange a portion of the Principal Amount of a Security if the portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to exchange of all of a Security also apply to exchange of a portion of a Security. The Securities shall be exchangeable only during the period specified in paragraph 9 of the Securities and only: (i) (A) during any calendar quarter of the Company ending prior to July 1, 2008, for which the Sale Price of the Common Shares exceeded 120% of the Exchange Price for at least 20 Trading Days in the 30 consecutive Trading Day period ending on the last Trading Day of the preceding calendar quarter or (B) during any calendar quarter of the Company beginning on or after July 1, 2008, for which the Sale Price of the Common Shares exceeded 110% of the Exchange Price for at least 20 Trading Days in the 30 consecutive Trading Day period ending on the last Trading Day of the preceding calendar quarter (it being understood for purposes of this Section 11.01 that the Exchange Price in effect at the close of business on each of the 30 consecutive Trading Days shall be used); (ii) as described below after the occurrence of the 95% Trading Exception; (iii) if such Security has been called for redemption, at any time on or after the date the notice of redemption has been given until the close of business on the Business Day immediately preceding the Redemption Date; or (iv) as described below after the occurrence of any of the specified corporate transactions described below. The Company shall, within the first five Business Days of each calendar quarter, determine whether the Securities shall be exchangeable during such calendar quarter as a result of the occurrence of an event specified in clause (i) above, and, if the Securities shall be so exchangeable, the Company shall promptly deliver to the Trustee written notice thereof. Whenever the Securities shall become exchangeable pursuant to this Section 11.01, the Company or, at the Company's request, the Trustee in the name and at the expense of the Company, shall notify the Holders of the event triggering such exchangeability in the manner provided in Section 13.02. If the Issue Date occurs during a calendar quarter in which the Original Securities are exchangeable pursuant to the first clause (i)(A) in Section 11.01 of the Original Indenture, then the Securities shall be exchangeable pursuant to clause (i)(A) above for the remainder of such calendar quarter. If the Issue Date occurs during the 30 consecutive Trading Day period ending on the last Trading Day of any calendar quarter, each Trading Day occurring during such 30 Trading Day period and on or prior to the Issue Date shall be considered in determining whether the condition for exchangeability set forth in clause (i)(A) above has been met. Exchange after the Occurrence of the 95% Trading Exception. Securities may be surrendered for exchange during the five Business Day period (but only to the extent such five Business Day period occurs during the period specified in paragraph 9 of the Securities) immediately after any ten consecutive Trading Day period in which the 52 Trading Price per $1,000 Principal Amount of Securities, as determined following a request by a Holder according to the procedures described below, for each day of such ten Trading Day period was less than 95% of the product of the Sale Price of the Common Shares and the Exchange Rate as of such Trading Day (the "95% TRADING EXCEPTION"); PROVIDED, HOWEVER, Securities may not be surrendered for exchange pursuant to the 95% Trading Exception and such exchange privilege shall not apply if the average of the Sale Prices of the Common Shares for such ten consecutive Trading Day period is greater than (x) the then applicable Exchange Price but less than (y) (i) 120% of such Exchange Price until June 15, 2008, or (ii) 110% of such Exchange Price from and after June 15, 2008. If the Issue Date occurs during a period in which the Original Securities are exchangeable into pursuant to the paragraph following the heading "Exchange after the Occurrence of the 95% Trading Exception" in Section 11.01 of the Original Indenture, then the Securities shall be exchangeable pursuant to the preceding paragraph for the remainder of the five Business Day period during which the Original Securities would have been exchangeable pursuant to the paragraph following the heading "Exchange after the Occurrence of the 95% Trading Exception" in Section 11.01 of the Original Indenture had they not been exchanged for Securities on the Issue Date. If the Trading Price per $ 1,000 Principal Amount of Original Securities on the Trading Day prior to the Issue Date (the "LAST ORIGINAL SECURITY MEASUREMENT DAY") was less than ninety-five percent (95%) of the product of Sale Price and the Exchange Rate in effect on such Trading Day, then the Last Original Security Measurement Day, and any of the four previous Trading Days on which the Trading Price per $1,000 Principal Amount of Original Securities was less than ninety-five percent (95%) of the product of Sale Price and the Exchange Rate in effect on such Trading Day, will be deemed to be Trading Days on which the Trading Price per $1,000 principal amount of the Securities was less than ninety-five percent (95%) of the product of the Sale Price and the then current Exchange Rate for purposes of determining whether the condition for exchangeability set forth in the preceding paragraph has been met. In connection with any exchange pursuant to the 95% Trading Exception, the Trustee shall not have any obligation to determine the Trading Price unless the Company has requested such determination, and the Company shall have no obligation to make such request unless a Holder provides the Company with reasonable evidence that the 95% Trading Exception will apply. At such time, the Company shall instruct the Trustee to determine the Trading Price beginning on the next Trading Day and on each successive Trading Day until the Trading Price per $1,000 Principal Amount of Securities is greater than or equal to 95% of the product of the Sale Price of a Common Share and the Exchange Rate as of such Trading Day. Exchange after the Occurrence of Specified Corporation Transactions. If: (i) (A) the Guarantor distributes to all holders of its Common Shares rights or warrants entitling them (for a period expiring within 45 days after the record date for the determination of the stockholders entitled to receive such distribution) to subscribe for or purchase Common Shares at a price per share less than the Sale Price of the Common Shares on the Trading Day immediately preceding the date such distribution is first publicly announced by 53 the Guarantor, or (B) the Guarantor distributes to all holders of its Common Shares, assets, debt securities or rights to purchase its securities, where the value of such distribution per Common Share, as determined by the Board of Directors of the Guarantor, exceeds 15% of the Sale Price of the Common Shares on the Trading Day immediately preceding the date such distribution is first publicly announced by the Guarantor, then, in either case, the Securities may be surrendered for exchange at any time on or after the date that the Company gives notice of such distribution to the Holders, which shall be not less than 20 Business Days prior to the Ex-Dividend Date for such distribution, until the earlier of the close of business on the Business Day immediately preceding, but not including, the Ex-Dividend Date or the date the Company publicly announces that such distribution will not take place (but only to the extent such period occurs during the period specified in paragraph 9 of the Securities); PROVIDED that the Holder of a Security may not exchange such Security pursuant to this provision if the Holder will otherwise participate in such distribution without exchange; or (ii) the Guarantor proposes to engage in a transaction described in clause (ii) of the first sentence of Section 11.14 hereof that is not a Fundamental Change, then the Securities may be surrendered for exchange, if during the period specified in paragraph 9 of the Securities, at any time from and after the date 15 days prior to the announced anticipated effective date of the transaction and ending on and including the date five days after the consummation of the transaction. The Guarantor's Board of Directors shall determine the anticipated effective date of any transaction described in clause (ii) of the first sentence of Section 11.14 hereof and such determination shall be conclusive and binding on the Holders and shall be publicly announced by the Guarantor and posted on its web site or notified to the Holders by the Guarantor or, at the Guarantor's request, the Trustee in the name and at the expense of the Guarantor, in either case, not later than two Business Days prior to such 15th day; or (iii) a Fundamental Change occurs, then the Securities may be surrendered for exchange at any time during the period beginning on and including the date on which the Company issued the Fundamental Change Repurchase Notice pursuant to Section 3.09(b) hereof and ending on and including the Fundamental Change Repurchase Date for such Fundamental Change. SECTION 11.02. EXCHANGE PROCEDURE. To exchange a Security a Holder must satisfy the requirements in paragraph 9 of the Securities. As soon as practicable following the date (the "EXCHANGE DATE") on which the Holder satisfies all such requirements, the Company shall deliver to the Holder through the Exchange Agent (i) cash in the amount of Principal Return (as hereinafter provided), (ii) at the Company's option (A) cash in the Net Share Amount, if any, (B) certificate(s) for the number of Net Shares issuable upon exchange, as provided in paragraph 9 of the Securities, if any, or (C) as provided pursuant to Section 11.05(a)(2), a combination of cash and certificate(s) for the number of Net Shares issuable upon exchange, as provided in paragraph 9 of the Securities, if any, and (iii) that amount of cash payable, if any, in lieu of any fractional share. A Holder of Securities is not entitled to any rights of a holder of Common Shares until such Holder has exchanged its Securities, and then only if Common Shares are issuable upon such exchange. Upon exchange of a Security, such Holder shall no longer be a Holder of such Security. 54 No payment on the Securities or adjustment of the Exchange Rate will be made for dividends on or other distributions with respect to any Common Shares except as provided in this Article 11. On exchange of a Security, that portion of accrued and unpaid Contingent Interest, if any, and Additional Amounts, if any, to the Exchange Date with respect to the exchanged Security shall be deemed to be canceled, extinguished and forfeited, through delivery of the Principal Return and, if applicable, cash in the Net Share Amount or Net Shares (together with the cash payment, if any, in lieu of fractional shares) in exchange for the Security being exchanged pursuant to the provisions hereof. If a Holder exchanges more than one Security at the same time, the Principal Return and, if applicable, cash in the Net Share Amount or Net Shares issuable upon such exchange shall be based on the total Principal Amount of the Securities exchanged. Upon surrender of a Security that is exchanged in part, the Company shall execute, and the Trustee shall authenticate and deliver to the Holder, a new Security in an authorized denomination equal in Principal Amount to the unexchanged portion of the Security surrendered. If the last day on which a Security may be exchanged is a Legal Holiday in a place where an Exchange Agent is located, the Security may be surrendered to that Exchange Agent on the next succeeding day that it is not a Legal Holiday. SECTION 11.03. FRACTIONAL SHARES. The Guarantor will not issue a fractional Common Share upon exchange of a Security or in connection with payment of the Make-Whole Premium. Instead the Company will deliver cash for the current market value of the fractional share. The current market value of a fractional share shall be determined to the nearest 1/10,000th of a share by multiplying the last reported Sale Price of the Common Shares on the last Trading Day prior to the Exchange Date (or the Trading Day immediately preceding the relevant Fundamental Change Repurchase Date in the case of the Make-Whole Premium) by the fractional amount and rounding the product to the nearest whole cent. SECTION 11.04. TAXES ON EXCHANGE. If a Holder exchanges a Security, the Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of any Common Shares upon the exchange. However, the Holder shall pay any such tax which is due because the Holder requests the shares to be issued in a name other than the Holder's name. The Exchange Agent may refuse to deliver the certificates representing the Common Shares being issued in a name other than the Holder's name until the Exchange Agent receives a sum sufficient to pay any tax which will be due because the shares are to be issued in a name other than the Holder's name. Nothing herein shall preclude any tax withholding required by law or regulations. SECTION 11.05. PAYMENT UPON EXCHANGE. (a) Subject to certain exceptions described in Section 11.05(b) and except as provided below, Holders surrendering Securities for exchange will be entitled to receive, per 55 $1,000 principal amount of Securities, cash and, if applicable, Common Shares, the aggregate value of which (the "EXCHANGE VALUE") will be equal to the product of: (i) the Exchange Rate then in effect; and (ii) the average of the daily Volume Weighted Average Price (as defined below) of Common Shares for each of the ten consecutive Trading Days (appropriately adjusted to take into account the occurrence during such period of stock splits, stock dividends and similar events) beginning on the second Trading Day immediately following the day the Securities are surrendered for exchange (the "Ten Day Weighted Average Price"). The "Volume Weighted Average Price" per Common Share on any Trading Day will be the volume weighted average price on the AMEX or, if the Common Shares are not listed on the AMEX, on the principal exchange or over-the-counter market on which the Common Shares are then listed or traded, from 9:30 a.m. to 4:00 p.m. (New York City time) on that Trading Day as displayed by Bloomberg (or if such volume weighted average price is not available, the market value of one share on such Trading Day as the Company determines in good faith using a volume weighted method). The Exchange Value of the Securities exchanged will be paid and delivered to the exchanging Holders as follows: (1) a cash amount (the "Principal Return") equal to the lesser of (i) the aggregate Exchange Value of the Securities to be exchanged or (ii) the aggregate Principal Amount of the Securities to be exchanged; (2) if the aggregate Exchange Value of the Securities to be exchanged is greater than the Principal Return, an amount, payable at the option of the Company in (i) cash, (ii) whole shares ("Net Shares"), determined as set forth below, or (iii) a combination of cash and Net Shares, determined as set forth below, equal to such aggregate Exchange Value less the Principal Return (the "Net Share amount"); and (3) if the Company elects to pay any portion of the Net Share Amount in Net Shares pursuant to Section 11.05(a)(2), an amount in cash in lieu of any fractional Common Shares determined as provided in Section 11.03 hereof. The number of Net Shares to be paid will be determined by dividing (x) the Net Share Amount, minus any cash paid in respect of the Net Share Amount, by (y) the relevant Ten Day Weighted Average Price. The Exchange Value, Principal Return, Net Share Amount and the number of Net Shares will be determined by the Company at the end of the ten consecutive Trading Day period beginning on the second Trading Day immediately following the day the Securities are surrendered for exchange (the "Determination Date"). (b) In the event a Fundamental Change occurs prior to June 15, 2008, and a Holder surrenders the Securities for exchange pursuant to Section 11.01 hereof during the period 56 beginning on the date on which the Company issued the Fundamental Change Repurchase Notice pursuant to Section 3.09(b) hereof and ending on the Fundamental Change Repurchase Date in connection with such Fundamental Change, to the extent required pursuant to this Article 11, the Holder will receive, in addition to the payment of the Exchange Value of the Securities as provided in Section 11.05(a), a Make-Whole Premium, if any, as described below. The Make-Whole Premium payable to a Holder may be paid, at the Company's option, in (i) cash, (ii) Common Shares, or (iii) the same form of consideration which the Common Shares are exchanged for, converted into, acquired for or constitutes solely the right to receive, as a result of the transaction or transactions constituting the Fundamental Change, assuming that the holder of such Common Shares would not have exercised any rights of election that such would have as a holder of Common Shares to select a particular form of consideration (the "ALTERNATIVE CONSIDERATION"), or in any combination of cash, Common Shares or Alternative Consideration. The Make-Whole Premium shall be paid on the Business Day immediately following the relevant Fundamental Change Repurchase Date. If the Company elects to pay the Make-Whole Premium in whole or in part in Common Shares, the value of its Common Shares to be delivered in respect of the Make-Whole Premium shall be deemed to be equal to 98% of the average Sale Price of the Common Shares over the ten Trading Day period ending on the Trading Day immediately preceding the Fundamental Change Repurchase Date. Notwithstanding the foregoing, in no event shall the value of each Common Share be deemed to be equal to less than 50% of the Applicable Price used to determine the amount of the Make-Whole Premium. If the Company elects to pay the Make-Whole Premium in whole or in part in Common Shares, the Company shall not issue any fractional shares but shall instead pay an amount in cash in lieu of any fractional Common Share determined as provided in Section 11.03 hereof. If the Company elects to pay the Make-Whole Premium in whole or in part in Alternative Consideration, such Alternative Consideration shall be valued as follows: (i) if all or a portion of such Alternative Consideration consists of securities that are traded on a U.S. national securities exchange or approved for quotation on the Nasdaq National Market or any similar system of automated dissemination of quotations of securities prices, such securities shall have a value equal to the average of the closing price or last sale price, as applicable, for the 10 consecutive Trading Days ending on, and excluding, the Trading Day immediately preceding the Fundamental Change Repurchase Date; (ii) if all or a portion of such Alternative Consideration consists of securities (other than securities referred to in the immediately preceding clause (i)), assets or property (other than cash), such securities, assets or property shall be valued based on 98.0% of the average of the fair market value of such securities, assets or property, as determined by two independent, nationally recognized investment banks selected by the Trustee; and (iii) if all or a portion of such Alternative Consideration consists of cash, 100% of such cash. 57 The make-whole premium (the "MAKE-WHOLE PREMIUM") will be equal to an amount that is derived by multiplying each $1,000 Principal Amount of Securities by a specified percentage. Such percentage will be determined by reference to the table below and will be based on the date on which the Fundamental Change becomes effective (the "EFFECTIVE DATE") and the price (the "APPLICABLE PRICE") paid per Common Share in the transaction constituting the Fundamental Change. If holders of Common Shares receive only cash in the Fundamental Change, the Applicable Price shall be the cash amount paid per share. In all other cases, the Applicable Price shall be the average of the Sale Price of Common Shares for the five Trading Days up to but not including the Effective Date. The following table sets forth the percentages to be used to determine the Make-Whole Premium to be paid by the Company. The Applicable Prices set forth in the first column of the table below, the Stock Price Threshold (as hereinafter defined) and the Stock Price Cap (as hereinafter defined) will be adjusted as of any date on which the Exchange Rate is adjusted. The adjusted Applicable Prices, Stock Price Threshold and Stock Price Cap will equal the Applicable Prices, Stock Price Threshold and Stock Price Cap, respectively, applicable immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the Exchange Rate immediately prior to the adjustment giving rise to the adjustment and the denominator of which is the Exchange Rate as so adjusted. MAKE-WHOLE PREMIUM (% OF THE PRINCIPAL AMOUNT)
================================================++=================================================================== EFFECTIVE DATE - --------------------------------------------------------------------------------------------------------------------- APPLICABLE PRICE DECEMBER 13, 2004 JUNE 15, 2005 JUNE 15, 2006 JUNE 15, 2007 JUNE 15, 2008 - --------------------------------------------------------------------------------------------------------------------- $ 50.00 26.02% 25.85% 25.85% 26.24% 28.67% - --------------------------------------------------------------------------------------------------------------------- $ 55.00 22.36% 22.00% 21.45% 20.85% 21.54% - --------------------------------------------------------------------------------------------------------------------- $ 60.00 19.18% 18.66% 17.65% 16.21% 14.41% - --------------------------------------------------------------------------------------------------------------------- $ 65.00 16.41% 15.78% 14.43% 12.35% 7.28% - --------------------------------------------------------------------------------------------------------------------- $ 70.00 14.02% 13.30% 11.71% 9.24% 0.14% - --------------------------------------------------------------------------------------------------------------------- $ 75.00 11.96% 11.19% 9.46% 6.78% 0.00% - --------------------------------------------------------------------------------------------------------------------- $ 80.00 10.18% 9.38% 7.59% 4.90% 0.00% - --------------------------------------------------------------------------------------------------------------------- $ 85.00 8.64% 7.85% 6.05% 3.48% 0.00% - --------------------------------------------------------------------------------------------------------------------- $ 90.00 7.32% 6.54% 4.80% 2.43% 0.00% - --------------------------------------------------------------------------------------------------------------------- $ 95.00 6.19% 5.43% 3.78% 1.66% 0.00% - --------------------------------------------------------------------------------------------------------------------- $100.00 5.22% 4.50% 2.95% 1.10% 0.00% - --------------------------------------------------------------------------------------------------------------------- $105.00 4.38% 3.70% 2.28% 0.71% 0.00% - --------------------------------------------------------------------------------------------------------------------- $110.00 3.66% 3.03% 1.74% 0.44% 0.00% - --------------------------------------------------------------------------------------------------------------------- $115.00 3.04% 2.46% 1.31% 0.25% 0.00% - --------------------------------------------------------------------------------------------------------------------- $120.00 2.52% 1.99% 0.97% 0.13% 0.00% - --------------------------------------------------------------------------------------------------------------------- $125.00 2.06% 1.59% 0.70% 0.05% 0.00% - --------------------------------------------------------------------------------------------------------------------- $130.00 1.68% 1.25% 0.49% 0.01% 0.00% ================================================++===================================================================
The exact Applicable Price and Effective Dates may not be as set forth in the table, in which case, if the Applicable Price is between two Applicable Prices in the table or the Effective Date is between two Effective Dates on the table (or both), the relevant percentages will be determined by straight line interpolation between the percentages set forth for the higher and lower 58 Applicable Prices and the two Effective Dates based on a three hundred sixty five (365) day year (or both). If the Applicable Price is greater than $130.00 per share (the "STOCK PRICE CAP") (subject to adjustment), no Make-Whole Premium will be paid. If the Applicable Price is less than or equal to $50.00 per share (the "STOCK PRICE THRESHOLD") (subject to adjustment), no Make-Whole Premium will be paid. If a Fundamental Change has occurred, a calculation agent, (who may be the trustee) appointed from time to time by the Company, shall, on behalf of and on request by the Company, calculate (A) the Applicable Price, and (B) the Make-Whole Premium with respect to such Applicable Price, based on the Effective Date specified by the Company, and shall deliver its calculation of the Applicable Price and Make-Whole Premium to the Company and the Trustee within three Business Days of the request by the Company or the Trustee. In addition, the calculation agent shall, on behalf of and upon request by the Company or the Trustee make the determinations described above in this Section 11.05(b) above and deliver its calculations to the Company or the Trustee by 9:00 p.m., New York City time, on the day prior to the Fundamental Change Repurchase Date. The Company, or at the Company's request, the Trustee in the name and at the expense of the Company, (X) shall notify the Holders of the Applicable Price and Make-Whole Premium per $1,000 principal amount of Securities with respect to a Fundamental Change as part of the Fundamental Change Repurchase Notice and (Y) shall notify the Holders, by registered first-class mail, sent promptly upon the opening of business on the Fundamental Change Repurchase Date of the number of Common Shares or the amount of cash or Alternative Consideration, as the case may be, to be paid in respect of the Make-Whole Premium in connection with such Fundamental Change, in the manner provided in this Indenture, and the Company shall also publicly announce such information. Any notice so given shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. The Company shall verify, in writing, all calculations made by the calculation agent pursuant to this Section 11.05. On or prior to the Business Day immediately following the Fundamental Change Repurchase Date, the Company shall deposit with the Trustee or with one or more paying agents a number of Common Shares or the amount of cash or Alternative Consideration, or a combination thereof, as the case may be, sufficient to pay the Make-Whole Premium with respect to all Securities to be exchanged in connection with such Fundamental Change; PROVIDED that if such deposit is made on the Business Day immediately following the Fundamental Change Repurchase Date it must be received by the Trustee or paying agent, as the case may be, by 12:00 p.m., New York City time, on such date. Payment of the Make-Whole Premium for Securities surrendered for exchange within the period described in the first paragraph of this Section 11.05(b), shall be made promptly following the Fundamental Change Repurchase Date by mailing checks in respect of cash (or if the Securities are represented by a Global Security, by wire transfer of immediately available funds to the Depositary or its nominee) and otherwise delivering entitlements to securities, other assets or property for the amount payable to the Holders of such Securities entitled thereto as they shall appear in the register kept by the Registrar. 59 SECTION 11.06. ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. In case the Guarantor shall (i) pay a dividend, or make a distribution, in Common Shares, on its Common Shares, (ii) subdivide its outstanding Common Shares into a greater number of shares, or (iii) combine its outstanding Common Shares into a smaller number of shares, the Exchange Rate in effect immediately prior thereto shall be adjusted so that the same shall equal the Exchange Rate determined by multiplying the Exchange Rate in effect immediately prior to the occurrence of such event by a fraction of which the numerator shall be the number of Common Shares outstanding immediately after such event and the denominator shall be the number of Common Shares outstanding immediately prior to such event. If any dividend or distribution of the type described in clause (i) above is not so paid or made, the Exchange Rate shall again be adjusted to the Exchange Rate which would then be in effect if such dividend as distribution had not been declared. An adjustment made pursuant to this Section 11.06 shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision or combination. SECTION 11.07. ADJUSTMENT FOR RIGHTS OR WARRANTS. In case the Guarantor shall issue rights or warrants to all holders of its Common Shares entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for or purchase Common Shares at a price per share less than the Market Price per Common Share at the record date for the determination of shareholders entitled to receive such rights or warrants, the Exchange Rate in effect immediately prior thereto shall be adjusted so that the same shall equal the Exchange Rate determined by multiplying the Exchange Rate in effect immediately prior to the date of issuance of such rights or warrants by a fraction of which the numerator shall be the number of Common Shares outstanding on the date of issuance of such rights or warrants plus the number of additional Common Shares offered to holders of Common Shares for subscription or purchase, and of which the denominator shall be the number of Common Shares outstanding on the date of issuance of such rights or warrants plus the number of Common Shares which the aggregate offering price of the total number of shares so offered would purchase at such Market Price. Such adjustment shall be made successively whenever any such rights or warrants are issued, and shall become effective immediately after the opening of business on the day following the record date for the determination of the shareholders entitled to receive such rights or warrants. To the extent that Common Shares are not delivered after the expiration of such rights or warrants, the Exchange Rate shall be readjusted to the Exchange Rate which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of Common Shares actually delivered. If such rights or warrants are not so issued, the Exchange Rate shall again be adjusted to be the Exchange Rate which would then be in effect if such record date for the determination of shareholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase Common Shares at less than such Market Price of such Common Shares, and in determining the aggregate offering price of such Common Shares, there shall be taken into account any consideration received by the Guarantor for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Guarantor's Board of Directors. 60 SECTION 11.08. ADJUSTMENT FOR OTHER DISTRIBUTIONS. (a) In case the Guarantor shall distribute to all holders of its Common Shares (excluding any distribution in connection with the liquidation, dissolution or winding up of the Guarantor, whether voluntary or involuntary) any shares of any class of capital stock of the Guarantor (other than Common Shares), or evidences of indebtedness of the Guarantor or of assets (other than cash and other than dividends, distributions or rights or warrants to subscribe for or purchase any of its securities referred to in Section 11.07 hereof) (any of the foregoing hereinafter in this Section 11.08(a) called the "DISTRIBUTED SECURITIES"), then, the Exchange Rate shall be adjusted so that the same shall equal the Exchange Rate determined by multiplying the Exchange Rate in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the Market Price per Common Share on the record date mentioned below, and the denominator shall be the Market Price per Common Share on such record date less the fair market value on such record date (as determined by the Guarantor's Board of Directors, whose determination shall be conclusive, and described in a certificate filed with the Trustee) of the Distributed Securities so distributed applicable to one Common Share. Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. Notwithstanding the foregoing, in the event that the then fair market value (as so determined) of the portion of the Distributed Securities so distributed applicable to one Common Share is equal to or greater than the Market Price of the Common Shares on the record date, in lieu of the foregoing adjustment, upon exchange of any Securities thereafter the provisions of Section 11.14 shall apply to such exchange mutatis mutandis; PROVIDED that for such application, any references in such provisions to the "Exchange Property" shall be deemed references to a unit composed of (a) the number of Common Shares equal to the Exchange Rate immediately prior to the relevant distribution and (b) the amount of Distributed Securities such Holder would have received had such Holder held a number of Common Shares equal to the Exchange Rate immediately prior to the relevant distribution. In the event that such distribution is not so paid or made, the Exchange Rate shall again be adjusted to the Exchange Rate which would then be in effect if such distribution had not been declared. If the Guarantor's Board of Directors determines the fair market value of any distribution for purposes of this Section 11.08(a) by reference to the actual or when issued trading market for any securities, it must in doing so consider the prices in such market over the same period used in computing the Market Price of the Common Shares. (b) In case the Guarantor shall, by dividend or otherwise, distribute to all holders of its Common Shares cash (excluding any dividend or distribution in connection with the liquidation, dissolution or winding up of the Guarantor, whether voluntary or involuntary), then, in such case, the Exchange Rate shall be increased so that the same shall equal the Exchange Rate determined by multiplying the Exchange Rate in effect immediately prior to the record date by a fraction of which the numerator shall be such Market Price of the Common Shares and the denominator shall be the Market Price of the Common Shares on the record date less the amount of cash so distributed (and not excluded as provided above) applicable to one Common Share, such increase to be effective immediately prior to the opening of business on the day following the record date; PROVIDED, HOWEVER, that in the event that the portion of the cash so distributed applicable to one Common Share is equal to or greater than the Market Price of the Common Shares on the record date, in lieu of the foregoing adjustment, upon exchange of any Securities thereafter, the provisions of Section 11.14 shall apply to such exchange mutatis 61 mutandis; PROVIDED, FURTHER, that for such application, any references in such provisions to the "Exchange Property" shall be deemed references to a unit composed of (a) the number of Common Shares equal to the Exchange Rate immediately prior to the relevant distribution and (b) the amount of cash such holder would have received had such holder held a number of common shares equal to the Exchange Rate immediately prior to the relevant distribution. If such dividend or distribution is not so paid or made, the Exchange Rate shall again be adjusted to be the Exchange Rate which would then be in effect if such dividend or distribution had not been declared. (c) In case a tender or exchange offer made by the Guarantor or any subsidiary of the Guarantor shall expire and such tender or exchange offer (as amended as of the expiration thereof) shall require the payment to common shareholders of consideration per Common Share, expressed as an amount per Common Share validly tendered or exchanged, and not withdrawn, pursuant to such tender offer or exchange offer (the "OFFER CONSIDERATION") having a fair market value (as determined by the Guarantor's Board of Directors, whose determination shall be conclusive and set forth in a certificate filed with the Trustee) that as of the last time (the "EXPIRATION TIME") tenders or exchanges may be made pursuant to such tender or exchange offer exceeds the Market Price per Common Share, then the Exchange Rate shall be increased so that the same shall equal the Exchange Rate determined by multiplying the Exchange Rate in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be the sum of (i) the product of (A) the Offer Consideration and (B) the number of Common Shares validly tendered or exchanged (and not withdrawn), and accepted for purchase, pursuant to such tender offer or exchange offer (such Common Shares the "PURCHASED SHARES") and (ii) the product of (A) the Market Price per Common Share as of the Expiration Time and (B) an amount equal to (i) the number of Common Shares outstanding as of the Expiration Time (including all Purchased Shares) less (ii) the Purchased Shares, and the denominator shall be the product of (i) the number of Common Shares outstanding as of the Expiration Time (including all Purchased Shares) and (ii) the Market Price per Common Share as of the Expiration Time. The adjustment to the Exchange Rate set forth above shall become effective immediately prior to the opening for business on the day following the Expiration Time. If the Guarantor or such subsidiary making such tender or exchange offer is obligated to purchase shares pursuant to any such tender or exchange offer, but the Guarantor or such subsidiary is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Exchange Rate shall again be adjusted to be the Exchange Rate that would then be in effect if the tender or exchange offer had not been made. (d) Notwithstanding Sections 11.08(b) and (c), in no event shall the Exchange Rate as adjusted pursuant to Sections 11.08(b) and (c) exceed 22.3964 per $1,000 Principal Amount of Securities (as such Exchange Rate may be adjusted on a proportional basis for any adjustment made pursuant to Sections 11.06, 11.07 or 11.08 (a)). SECTION 11.09. [RESERVED] SECTION 11.10. WHEN NO ADJUSTMENT REQUIRED. No adjustment need be made for rights to purchase Common Shares pursuant to a Guarantor plan for reinvestment of dividends or interest. 62 No adjustment need be made for a change in the par value or no par value of the Common Shares. To the extent the Securities become exchangeable for cash, assets, property or securities (other than capital stock of the Guarantor), no adjustment need be made thereafter as to the cash, assets, property or such securities. Interest will not accrue on the cash. SECTION 11.11. NOTICE OF ADJUSTMENT. Whenever the Exchange Rate is adjusted, the Company shall promptly mail to Holders a notice of the adjustment. The Company shall file with the Trustee and the Exchange Agent such notice. The certificate shall, absent manifest error, be conclusive evidence that the adjustment is correct. Neither the Trustee nor any Exchange Agent shall be under any duty or responsibility with respect to any such certificate except to exhibit the same to any Holder desiring inspection thereof. SECTION 11.12. VOLUNTARY CHANGE. The Guarantor may make such increases or decreases, in one or more increments, in the Exchange Rate, in addition to those required by Sections 11.06, 11.07 and 11.08 hereof, as the Guarantor's Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Shares or rights to purchase Common Shares resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Guarantor may from time to time increase, in one or more increments, the Exchange Rate by any amount for any period of time if the period is at least 20 Business Days, the increase is irrevocable during the period and the Guarantor's Board of Directors shall have made a determination that such increase would be in the best interests of the Guarantor, which determination shall be conclusive. Subsequent to any such increase, the Guarantor may from time to time lower the Exchange Rate to any rate that is not lower than the Exchange Rate that would have been applicable had any such increase not occurred, if the Guarantor's Board of Directors has determined that the decrease would be in the Guarantor's best interests. Whenever the Exchange Rate is changed pursuant to this Section 11.12, the Company shall mail to Holders and file with the Trustee and the Exchange Agent a notice of such increase. The Company shall mail such notice at least seven days before the date the increased or decreased Exchange Rate takes effect. The notice shall state the increased or decreased Exchange Rate and the period it will be in effect. SECTION 11.13. NOTICE OF CERTAIN TRANSACTIONS. If: (1) the Guarantor makes any distribution or dividend that would require an adjustment in the Exchange Rate pursuant to Section 11.06, 11.07 or 11.08 hereof; or (2) the Guarantor takes any action that would require a supplemental indenture pursuant to Section 11.14 hereof; or (3) there is a liquidation, dissolution or winding-up of the Guarantor; 63 then the Company shall mail to Holders and file with the Trustee and the Exchange Agent a notice stating the proposed record date for a dividend or distribution or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, conveyance , transfer, lease, dissolution, liquidation or winding-up. The Company shall file and mail the notice at least ten days before such date. Failure to file or mail the notice or any defect in it shall not affect the validity of the transaction. SECTION 11.14. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR TRANSFER. If any of the following events occur, namely (i) any reclassification or change of the outstanding Common Shares (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a split, subdivision or combination), (ii) any consolidation, merger or combination of the Guarantor with another Person as a result of which holders of Common Shares shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Shares, or (iii) any conveyance, transfer or lease of the properties and assets of the Guarantor as, or substantially as, an entirety to any other Person as a result of which holders of Common Shares shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Shares, then: (a) the Company and the Guarantor or the successor or purchasing Person, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture if such supplemental indenture is then required to so comply) providing for the exchange and settlement of the Securities as set forth in this Indenture. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. If, in the case of any such reclassification, change, consolidation, merger, combination, conveyance, transfer or lease, the Exchange Property includes shares of stock or other securities and assets of a Person other than the successor or purchasing Person, as the case may be, in such reclassification, change, consolidation, merger, combination, conveyance, transfer or lease, then such supplemental indenture shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holders of the Securities as the Company's Board of Directors shall reasonably consider necessary by reason of the foregoing, including to the extent required by the Company's Board of Directors and practicable the provisions providing for the repurchase rights set forth in Article 3 herein. (b) Notwithstanding the provisions of Section 11.05(a), the Exchange Value with respect to each $1,000 principal amount of Securities exchanged following the effective date of any such transaction, shall be calculated (as provided in clause (d) below) based on the kind and amount of shares of stock and other securities or property or assets (including cash) received upon such reclassification, change, consolidation, merger, combination, conveyance, transfer or lease by a holder of Common Shares holding, immediately prior to the transaction, a number of Common Shares equal to the Exchange Rate immediately prior to such transaction (the "EXCHANGE PROPERTY") assuming such holder of Common Shares did not exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, conveyance, transfer or lease. 64 (c) The Exchange Value in respect of any Securities exchanged following the effective date of any such transaction shall be equal to the average of the daily values of the Exchange Property pertaining to such Securities as determined in the next sentence (the "EXCHANGE PROPERTY VALUE") for each of the ten consecutive Trading Days (appropriately adjusted to take into account the occurrence during such period of stock splits and similar events) beginning on the later of (A) the second Trading Day immediately following the day the Securities are tendered for exchange and (B) the effective date of such transaction (the "EXCHANGE PROPERTY WEIGHTED AVERAGE PRICE"). For the purpose of determining the value of any Exchange Property: (i) Any shares of common stock of the successor or purchasing Person or any other Person that are included in the Exchange Property shall be valued as set forth in Section 11.05 as if such shares were "Common Shares"; and (ii) Any other property (other than cash) included in the Exchange Property shall be valued in good faith by the Company's Board of Directors or by a AMEX member firm selected by the Company's Board of Directors. (d) The Company shall deliver such Exchange Value to Holders of Securities so exchanged as follows: (i) An amount equal to the Principal Return, determined as set forth in Section 11.05(a)(ii)(1); and (ii) If the Exchange Value of the Securities so exchanged is greater than the Principal Return, an amount of Exchange Property, cash or any combination thereof, determined as set forth below, equal to such aggregate Exchange Value less the Principal Return (the "NET EXCHANGE PROPERTY AMOUNT"). The amount of Exchange Property to be delivered shall be determined by dividing the Net Exchange Property Amount, minus any cash paid by the Company in respect of the Net Exchange Property Amount, by the Exchange Property Weighted Average Price. If the Exchange Property includes more than one kind of property, the amount of Exchange Property of each kind to be delivered shall be in the proportion that the Exchange Property Value of such kind of Exchange Property bears to the Exchange Property Value of all the Exchange Property. If the foregoing calculations would require the Company to deliver a fractional share or unit of Exchange Property to a Holder of Securities being exchanged, the Company shall deliver cash in lieu of such fractional share or unit based on its Exchange Property Weighted Average Price. (e) Notwithstanding clauses (b), (c) and (d) above, if the Securities are tendered for exchange prior to the effective date of any such transaction pursuant to Section 11.05(b) above, and the Principal Return and Net Shares, if any, have been determined as of the effective date of such transaction, then the Company shall (i) pay the Principal Return in cash and (ii) instead of delivering Net Shares, if applicable, deliver an amount of Exchange Property that a holder of Common Shares, holding, immediately prior to the transaction, a number of Common Shares equal to the Net Shares, would receive, assuming such holder of Common Shares did not exercise his rights of election, if any, as to the kind or amount of securities, cash or other 65 property receivable upon such consolidation, merger, statutory exchange, conveyance, transfer or lease, cash, or a combination thereof at the Company's option. If the foregoing calculation would require the Company to deliver a fractional share or unit of Exchange Property to a Holder of Securities being exchanged, the Company shall deliver cash in lieu of such fractional share or unit based on the Exchange Property Value (as so determined). (f) [Reserved]. (g) The Company shall cause notice of the execution of such supplemental indenture to be mailed to each Holder of Securities, at his address appearing on the Securities register provided for in this Indenture, within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. (h) The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. (i) If this Section applies, none of Sections 11.06, 11.07 nor 11.08 hereof apply. SECTION 11.15. COMPANY DETERMINATION FINAL. Any determination that the Company or its Board of Directors or the Guarantor or its Board of Directors must make pursuant to Section 11.03, 11.06, 11.07, 11.08, 11.09, 11.10, 11.12, 11.14 or 11.17 hereof shall be conclusive in the absence of manifest error. SECTION 11.16. TRUSTEE'S ADJUSTMENT DISCLAIMER. The Trustee has no duty to determine when an adjustment under this Article 11 should be made, how it should be made or what it should be. The Trustee has no duty to determine whether a supplemental indenture under Section 11.14 hereof need be entered into or whether any provisions of any supplemental indenture are correct. The Trustee shall not be accountable for and makes no representation as to the validity or value of any securities or assets issued upon exchange of Securities. The Trustee shall not be responsible for the Company's or the Guarantor's failure to comply with this Article 11, and shall not be deemed to have knowledge of any adjustment unless and until it shall have received a notice of adjustment pursuant to Section 11.11 hereof. Each Exchange Agent (other than the Company or one of its Affiliates) shall have the same protection under this Section 11.16 as the Trustee. SECTION 11.17. SIMULTANEOUS ADJUSTMENTS. In the event that this Article 11 requires adjustments to the Exchange Rate under more than one of Section 11.06, 11.07, 11.08(a) or 11.08(b) hereof, and the record dates for the distributions giving rise to such adjustments shall occur on the same date, then such adjustments shall be made by applying, first, the provisions of Section 11.08(a) hereof, second, the provisions of Section 11.08(b) hereof, third, the provisions of Section 11.06 hereof and, fourth, the provisions of Section 11.07 hereof, PROVIDED that no adjustment shall be made more than once pursuant to any such individual Section. 66 SECTION 11.18. SUCCESSIVE ADJUSTMENTS. After an adjustment to the Exchange Rate under this Article 11, any subsequent event requiring an adjustment under this Article 11 shall cause an adjustment to the Exchange Rate as so adjusted. SECTION 11.19. RIGHTS ISSUED IN RESPECT OF COMMON SHARES ISSUED UPON EXCHANGE. Notwithstanding any other provision hereof, in the event that the Guarantor implements a shareholders' rights plan, such rights plan shall provide that upon exchange of the Securities the Holders will receive, in addition to the Common Shares issuable upon such exchange, if any, such rights, whether or not such rights have separated from the Common Shares at the time of such exchange. Rights or warrants distributed by the Guarantor to all holders of Common Shares entitling the holders thereof to subscribe for or purchase shares of the Guarantor's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("TRIGGER EVENT"): (i) are deemed to be transferred with such Common Shares, (ii) are not exercisable, and (iii) are also issued in respect of future issuances of Common Shares, shall not be deemed distributed for purposes of Section 11.08(a) hereof until the occurrence of the earliest Trigger Event. In addition, in the event of any distribution of rights or warrants, or any Trigger Event with respect thereto, that shall have resulted in an adjustment to the Exchange Rate under Section 11.08(a) hereof, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Exchange Rate shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder of Common Shares with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Shares as of the date of such redemption or repurchase, and (2) in the case of any such rights or warrants all of which shall have expired without exercise by any holder thereof, the Exchange Rate shall be readjusted as if such issuance had not occurred. SECTION 11.20. GENERAL CONSIDERATIONS. Whenever successive adjustments to the Exchange Rate are called for pursuant to this Article 11, such adjustments shall be made to the Market Price as may be necessary or appropriate to effectuate the intent of this Article 11 and to avoid unjust or inequitable results as determined in good faith by the Guarantor's Board of Directors. 67 ARTICLE 12. CONTINGENT INTEREST SECTION 12.01. GENERAL. (a) The Securities shall provide for payment of Contingent Interest in certain circumstances as specified in paragraph 10 of the Securities. (b) Holders of Securities at the close of business on a Contingent Interest Record Date will receive payment of Contingent Interest, payable on the corresponding Contingent Interest Payment Date notwithstanding the exchange of such Securities at any time after the close of business on such Contingent Interest Record Date. Securities surrendered for exchange by a Holder during the period from the close of business on any Contingent Interest Record Date to the opening of business on the immediately following Contingent Interest Payment Date must be accompanied by payment of an amount equal to the Contingent Interest that the Holder is to receive on the Securities; PROVIDED, HOWEVER, that no such payment need be made if (1) the Company has specified a Redemption Date that is after a Contingent Interest Record Date and on or prior to the immediately following Contingent Interest Payment Date, (2) the Company has specified a Fundamental Change Repurchase Date following a Fundamental Change that is during such period or (3) any overdue Contingent Interest exists at the time of exchange with respect to such Securities to the extent of such overdue Contingent Interest. (c) In the event that any date on which Contingent Interest or any other amount is payable on a Security is not a Business Day, then a payment of the amount payable on such date will be made on the next succeeding day which is a Business Day and (without any interest or other payment in respect of any such delay) with the same force and effect as if made on the date the payment was originally payable. SECTION 12.02. DEFAULTED CONTINGENT INTEREST; INTEREST RIGHTS PRESERVED. Except as otherwise specified with respect to the Securities, any Contingent Interest on any Security that is payable, but is not punctually paid or duly provided for, within 30 days following any Contingent Interest Payment Date (herein called "DEFAULTED CONTINGENT INTEREST") shall forthwith cease to be payable to the registered Holder thereof on the relevant Contingent Interest Record Date by virtue of having been such Holder, and such Defaulted Contingent Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Contingent Interest to the Persons in whose names the Securities are registered at the close of business on a special record date (herein called "SPECIAL CONTINGENT INTEREST RECORD DATE") for the payment of such Defaulted Contingent 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 each Security and the date of the proposed payment (which shall not be less than 20 days 68 after such notice is received by the Trustee), 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 Contingent Interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Contingent Interest as in this clause provided. Thereupon the Trustee shall fix a Special Contingent Interest Record Date for the payment of such Defaulted Contingent 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 Contingent Interest Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Contingent Interest and the Special Contingent Interest Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Securities at his address as it appears on the list of Holders maintained pursuant to Section 2.05 hereof not less than ten days prior to such Special Contingent Interest Record Date. The Trustee may, in its discretion, in the name and at the expense of the Company, cause a similar notice to be published at least once in an Authorized Newspaper in each place of payment, but such publications shall not be a condition precedent to the establishment of such Special Contingent Interest Record Date. Notice of the proposed payment of such Defaulted Contingent Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Contingent Interest shall be paid to the persons in whose names the Securities are registered at the close of business on such Special Contingent Interest Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Contingent Interest on the Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such 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 and Section 2.07 hereof, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to Contingent Interest accrued and unpaid, and to accrue, which were carried by such other Security. ARTICLE 13. MISCELLANEOUS SECTION 13.01. TRUST INDENTURE ACT. This Indenture is hereby made subject to, and shall be governed by, the provisions of the TIA required to be part of and to govern indentures qualified under the TIA; PROVIDED, HOWEVER that this Section 13.01 shall not require this Indenture or the Trustee to be qualified under the TIA prior to the time such qualification is in fact required under the terms of the TIA, nor shall it constitute any admission or acknowledgment by any party that any such qualification 69 is required prior to the time such qualification is in fact required under the terms of the TIA. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in an indenture qualified under the TIA, such required provision shall control. SECTION 13.02. NOTICES. Any request, demand, authorization, notice, waiver, consent or communication shall be in writing in the English language and delivered in Person or mailed by first class mail, postage prepaid, addressed as follows or transmitted by facsimile transmission (confirmed by overnight courier) to the following facsimile numbers: if to the Company: Nabors Industries, Inc. c/o Nabors Corporate Services, Inc. 515 West Greens Road, Suite 1200 Houston, Texas 77067 Attn: General Counsel Telephone Number: (281) 874-0035 Facsimile Number: (281) 775-8431 if to the Guarantor: Nabors Industries Ltd. 2nd Fl., International Trading Centre P.O. Box 905E Warrens St. Michael, Barbados Attn: Vice President-Administration Telephone Number: (246) 421-9471 Facsimile Number: (246) 421-9472 if to the Trustee: J.P. Morgan Trust Company, National Association Institutional Trust Services 600 Travis Street, Suite 1150 Houston, Texas 77002-3009 Telephone Number: (713) 216-5651 Facsimile Number: (713) 216-6590 Each of the Company, the Guarantor or the Trustee by notice to the others may designate additional or different addresses for subsequent notices or communications. Notices to the Trustee shall be effective only upon receipt. 70 Any notice or communication given to a Holder shall be mailed to the Holder, by first class mail, postage prepaid, at the Holder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not received by the addressee. If the Company or the Guarantor mails a notice or communication to the Holders, it shall mail a copy to the Trustee and each Registrar, Paying Agent, Exchange Agent or co-registrar. SECTION 13.03. 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 Guarantor, the Trustee, the Registrar, the Paying Agent, the Exchange Agent and anyone else shall have the protection of TIA Section 312(c). SECTION 13.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company or the Guarantor to the Trustee to take any action under this Indenture, the Company or the Guarantor shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 13.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each Officers' Certificate or Opinion of Counsel with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that each individual making such Officers' Certificate or Opinion of Counsel has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Officers' Certificate or Opinion of Counsel are based; (3) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable 71 him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement that, in the opinion of such individual, such covenant or condition has been complied with. SECTION 13.06. SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 13.07. RULES BY TRUSTEE, PAYING AGENT, EXCHANGE AGENT AND REGISTRAR. The Trustee may make reasonable rules for action by or a meeting of Holders. The Registrar, Exchange Agent and the Paying Agent may make reasonable rules for their functions. SECTION 13.08. GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE SECURITIES. SECTION 13.09. NO RECOURSE AGAINST OTHERS. A director, officer, employee or stockholder, as such, of the Company or the Guarantor shall not have any liability for any obligations of the Company or the Guarantor under the Securities, the Guarantee or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 13.10. RECORD DATE FOR VOTE OR CONSENT OF SECURITYHOLDERS. The Company may set a record date for purposes of determining the identity of Holders entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture, which record date shall be the later of ten days prior to the first solicitation of such vote or consent or the date of the most recent list of Holders furnished to the Trustee pursuant to Section 2.05 prior to such solicitation. If a record date is fixed, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to take such action by vote or consent or to revoke any vote or consent previously given, whether or not such Persons continue to be Holders after such record date. SECTION 13.11. [RESERVED] 72 SECTION 13.12. SUCCESSORS. All agreements of the Company and the Guarantor in this Indenture and the Securities shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 13.13. MULTIPLE ORIGINALS. The parties may sign any number of copies (including by facsimile) 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. (SIGNATURE PAGE FOLLOWS) 73 IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Indenture on behalf of the respective parties hereto as of the date first written above. NABORS INDUSTRIES, INC. By: /s/ Bruce P. Koch ------------------------------------- Name: Title: NABORS INDUSTRIES LTD. By: /s/ Daniel McLachlin ------------------------------------- Name: Daniel McLachlin Title: Vice President Administration and Secretary J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee By: /s/ Mary Jane Henson ------------------------------------- Name: Title: Vice President 74 EXHIBIT A [FORM OF FACE OF SECURITY] FOR PURPOSES OF SECTIONS 1273 AND 1275 OF THE INTERNAL REVENUE CODE, THIS SECURITY IS A CONTINGENT PAYMENT DEBT INSTRUMENT AND WILL ACCRUE ORIGINAL ISSUE DISCOUNT AT THE ISSUER'S "COMPARABLE YIELD" FOR UNITED STATES FEDERAL INCOME TAX PURPOSES. PURSUANT TO SECTION 4.10 OF THE INDENTURE, THE COMPANY AGREES, AND BY ACCEPTANCE OF A BENEFICIAL OWNERSHIP INTEREST IN THE SECURITY, EACH BENEFICIAL HOLDER OF THE SECURITIES WILL BE DEEMED TO HAVE AGREED, FOR UNITED STATES FEDERAL INCOME TAX PURPOSES, (i) TO TREAT THE SECURITIES AS INDEBTEDNESS THAT IS SUBJECT TO THE CONTINGENT PAYMENT DEBT INSTRUMENT REGULATIONS UNDER SECTION 1.1275-4 OF THE UNITED STATES TREASURY REGULATIONS (THE "CPDI REGULATIONS"), AND, FOR PURPOSES OF THE CPDI REGULATIONS, TO TREAT THE FAIR MARKET VALUE OF COMMON SHARES RECEIVED BY A BENEFICIAL HOLDER UPON ANY EXCHANGE OF THE SECURITIES AS A CONTINGENT PAYMENT AND (ii) TO BE BOUND BY THE COMPANY'S DETERMINATION OF THE "COMPARABLE YIELD" AND "PROJECTED PAYMENT SCHEDULE" WITHIN THE MEANING OF THE CPDI REGULATIONS, WITH RESPECT TO THE SECURITIES AND TO ACCRUE ORIGINAL ISSUE DISCOUNT AT THE COMPARABLE YIELD AS DETERMINED BY THE COMPANY. THE COMPANY'S DETERMINATION OF THE "COMPARABLE YIELD" IS 5.53% PER ANNUM, COMPOUNDED SEMIANNUALLY. THE PROJECTED PAYMENT SCHEDULE, DETERMINED BY THE COMPANY, IS ATTACHED TO THE INDENTURE AS ANNEX 1. YOU MAY OBTAIN THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE, COMPARABLE YIELD AND PROJECTED PAYMENT SCHEDULE FOR THE SECURITY BY TELEPHONING THE COMPANY'S TREASURY DEPARTMENT AT (281) 874-0035 OR SUBMITTING A WRITTEN REQUEST FOR SUCH INFORMATION TO: NABORS INDUSTRIES, INC., 515 W. GREENS ROAD, SUITE 1200, HOUSTON, TEXAS 77067, ATTENTION: TREASURY DEPARTMENT. [FORM OF LEGEND FOR GLOBAL SECURITY] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFERS, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN 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. A-1 TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFER IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [RESTRICTED SECURITY LEGEND] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U. S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. THE HOLDER HEREOF AGREES THAT UNTIL THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THIS NOTE UNDER RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), (1) IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OF, U. S. PERSONS EXCEPT (A) TO NABORS INDUSTRIES LTD. OR TO NABORS INDUSTRIES, INC. OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (C) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a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k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION). AS USED HEREIN, THE TERMS "UNITED STATES" AND "U. S. PERSON" HAVE THE MEANING GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. A-3 NABORS INDUSTRIES, INC. SERIES B ZERO COUPON SENIOR EXCHANGEABLE NOTE DUE 2023 No. Issue Date: December [ ], 2004 Principal Amount: $ CUSIP: [ ] Nabors Industries, Inc., a Delaware corporation, promises to pay to ______________________ or registered assigns, on June 15, 2023 the Principal Amount of __________________________________ Dollars ($________________) [or such greater or lesser Principal Amount as may be shown on Schedule A hereto].(1) This Security shall not bear interest except as specified on the other side of this Security. This Security is exchangeable as specified on the other side of this Security. Additional provisions of this Security are set forth on the other side of this Security. Unless the certificate of authentication hereon has been 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 purpose. IN WITNESS WHEREOF, Nabors Industries, Inc. has caused this instrument to be duly executed. NABORS INDUSTRIES, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Dated: ----------------- - ----------------------- (1) For inclusion in the global Security only. A-4 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within-mentioned Indenture. J.P. Morgan Trust Company, National Association, as Trustee By: ------------------------------------- Authorized Signatory Date of authentication: ----------------- A-5 [FORM OF REVERSE SIDE OF SECURITY] NABORS INDUSTRIES, INC. SERIES B ZERO COUPON SENIOR EXCHANGEABLE NOTE DUE 2023 1. INTEREST This Security shall not bear interest except as specified in this paragraph or in paragraph 10 hereof. If the Principal Amount hereof or any portion of such Principal Amount is not paid when due (whether upon acceleration pursuant to Section 6.02 of the Indenture, upon the date set for payment of the Redemption Price pursuant to paragraph 5 hereof, upon the date set for payment of a Purchase Price or Fundamental Change Purchase Price pursuant to paragraph 6 hereof or upon the Stated Maturity of this Security), or if Contingent Interest, if any, due hereon is not paid when due in accordance with paragraph 10 hereof, then in each such case the overdue amount shall bear interest at the rate of 1.0% per annum, compounded semiannually (to the extent that the payment of such interest shall be legally enforceable), which interest shall accrue from the date such overdue amount was due to the date payment of such amount, including interest thereon, has been made or duly provided for. All such interest shall be payable on demand. 2. METHOD OF PAYMENT Subject to the terms and conditions of the Indenture, the Company will make payments in respect of the Securities to the Persons entitled thereto. Holders must surrender Securities to the Paying Agent to collect payments in respect of the Principal Amount of the Securities. The Company will make all cash payments due on the Securities (i) by wire transfer of immediately available funds with respect to Securities held in book-entry form or Securities held in certificated form with an aggregate Principal Amount in excess of $2,000,000 whose Holder has requested such method of payment and provided wire transfer instructions to the Paying Agent or (ii) by check payable in such money mailed to a Holder's registered address with respect to any other certificated Securities. The Company will pay cash amounts due on the Securities in money of the United States that at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT, EXCHANGE AGENT AND REGISTRAR Initially, J.P. Morgan Trust Company, National Association, a national banking association (the "TRUSTEE"), will act as Paying Agent, Exchange Agent and Registrar. The Company may appoint and change any Paying Agent, Exchange Agent, Registrar or co-registrar without notice, other than notice to the Trustee. The Company, the Guarantor or any of their Subsidiaries or Affiliates may act as Paying Agent, Exchange Agent, Registrar or co-registrar. 4. INDENTURE The Company issued the Securities under an Indenture (the "INDENTURE"), dated as of December 13, 2004, among the Company, the Guarantor and the Trustee. Capitalized terms used A-6 herein 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 for a statement of those terms. The Securities are general unsecured obligations of the Company, and are fully and unconditionally guaranteed as to payment by the Guarantor as provided in Article 10 of the Indenture and as evidenced by the notation of Guarantee endorsed hereon. The Indenture does not limit the indebtedness issued thereunder or other indebtedness of the Company or the Guarantor, whether secured or unsecured. 5. REDEMPTION AT THE OPTION OF THE COMPANY No sinking fund is provided for the Securities. The Securities are redeemable as a whole, or from time to time in part, at any time at the option of the Company at the Principal Amount plus accrued and unpaid Contingent Interest, if any, and Additional Amounts, if any, and overdue interest, if any, provided that the Securities are not redeemable prior to June 15, 2008. The Company may, upon at least 30 days' notice to the Holders, on one or more occasions, elect to extend the period in which it cannot redeem the Securities. 6. REPURCHASE BY THE COMPANY AT THE OPTION OF THE HOLDER; REPURCHASE AT THE OPTION OF THE HOLDER UPON A FUNDAMENTAL CHANGE (a) Subject to the terms and conditions of the Indenture, the Company shall become obligated to repurchase, at the option of the Holder, all or any portion of the Securities held by such Holder on June 15, 2008, June 15, 2013 and June 15, 2018 at a Purchase Price equal to the Principal Amount thereof, together with accrued and unpaid Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any, upon delivery of a Repurchase Notice containing the information set forth in the Indenture, at any time during the period from the opening of business on the date that is 20 Business Days prior to such Repurchase Date until the close of business on such Repurchase Date and upon delivery of the Securities to the Paying Agent by the Holder as set forth in the Indenture. Securities in denominations larger than $1,000 of Principal Amount may be repurchased in part, but only in integral multiples of $1,000 of Principal Amount. (b) Subject to the terms and conditions of the Indenture, in the event any Fundamental Change shall occur, each Holder of Securities shall have the right, at the Holder's option, to require the Company to repurchase any or all of such Holder's Securities (or portions thereof that are integral multiples of $1,000 of Principal Amount), on a date selected by the Company (the "Fundamental Change Repurchase Date"), which date is no later than 35 Trading Days and no earlier than 20 Trading Days after the date notice of the Fundamental Change is mailed in accordance with the Indenture and in no event prior to the date on which the Fundamental Change occurs, at a price, payable in cash equal to the Principal Amount plus accrued and unpaid Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any to, but excluding, the Fundamental Change Repurchase Date. A-7 Within 30 days after the occurrence of a Fundamental Change, the Company shall mail, or cause to be mailed, notice of the occurrence of such Fundamental Change to each Holder. Such notice shall include, among other things, a description of the procedures which a Holder must follow to exercise its Fundamental Change Repurchase Right. For a Security to be so repurchased at the option of the Holder, the Paying Agent must receive such Security with the form entitled "Option to Elect Repurchase Upon a Fundamental Change" on the reverse thereof duly completed, together with such Security duly endorsed for transfer, no later than the close of business on the Business Day immediately preceding the Fundamental Chance Repurchase Date. All questions as to the validity, eligibility (including time of receipt) and acceptance of any Security for repurchase shall be determined by the Company, whose determination shall be final and binding. (c) If cash sufficient to pay a Purchase Price or Fundamental Change Purchase Price, as the case may be, of all Securities or portions thereof to be repurchased as of the Repurchase Date or the Fundamental Change Repurchase Date, as the case may be, is deposited with the Paying Agent by 10:00 a.m., New York City time, on the Business Day following the Repurchase Date or the Fundamental Change Repurchase Date, as the case may be, Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any, cease to accrue on such Securities (or portions thereof) on and after such date, and the Holder thereof shall have no other rights as such (other than the right to receive the Purchase Price or Fundamental Change Purchase Price, as the case may be, upon surrender of such Security). 7. NOTICE OF REDEMPTION AT THE OPTION OF THE COMPANY Notice of redemption at the option of the Company will be mailed at least 15 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at the Holder's registered address. If money sufficient to pay the Redemption Price of all Securities (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent by 10:00 a.m., New York City time, on the Redemption Date, on and after such date Contingent Interest, if any, Additional Amounts, if any, and overdue interest, if any, cease to accrue on such Securities or portions thereof. Securities in denominations larger than $1,000 of Principal Amount may be redeemed in part but only in multiples of $1,000 of Principal Amount. 8. RANKING The Securities and the Guarantee rank equally in contractual right of payment with all of the other existing and future unsubordinated indebtedness of the Company and the Guarantor, respectively. 9. EXCHANGE Subject to the next two succeeding sentences, a Holder of a Security may exchange this Security for cash and, if applicable, Common Shares prior to the close of business on the Business Day immediately preceding June 15, 2023 (unless earlier redeemed or repurchased), but only upon the occurrence of one of the four events set forth in Section 11.01 of the Indenture. If this Security is called for redemption, the Holder may exchange it at any time before the close of the last Trading Day prior to the Redemption Date. A Security in respect of which a Holder A-8 has delivered a notice of exercise of the option to require the Company to repurchase such Security or to repurchase such Security in the event of a Fundamental Change may be exchanged only if the notice of exercise is withdrawn in accordance with the terms of the Indenture. In the event a Fundamental Change occurs prior to June 15, 2008, and a Holder surrenders the Securities for exchange pursuant to Section 11.01 of the Indenture during the period beginning on (and including) the date on which the Company issued the Fundamental Change Repurchase Notice pursuant to Section 3.09(b) of the Indenture and ending on (and including) the Fundamental Change Repurchase Date in connection with such Fundamental Change, to the extent required pursuant to Article 11 of the Indenture, the Holder will receive, in addition to the payment of the Exchange Value of the Securities as provided in Section 11.05(a) of the Indenture, a Make-Whole Premium, if any, as described in the Indenture. The Make-Whole Premium payable to a Holder may be paid, at the Company's option, in (i) cash, (ii) Common Shares, or (iii) the same form of consideration which the Common Shares are exchanged for, converted into, acquired for or constitutes solely the right to receive, as a result of the transaction or transactions constituting the Fundamental Change, assuming that the holder of such Common Shares would not have exercised any rights of election that such would have as a holder of Common Shares to select a particular form of consideration (the "ALTERNATIVE CONSIDERATION"), or in any combination of cash, Common Shares or Alternative Consideration. If the Company elects to pay the Make-Whole Premium in whole or in part in Common Shares or Alternative Consideration, such Common Shares and Alternative Consideration shall be valued as provided in the Indenture. The make-whole premium (the "MAKE-WHOLE PREMIUM") will be equal to an amount that is derived by multiplying each $1,000 Principal Amount of Securities by a specified percentage. Such percentage will be determined by reference to the table in Section 11.05 of the Indenture and subject to the terms and conditions set forth in the Indenture. The initial Exchange Rate is 14.2653 Common Shares per $1,000 Principal Amount, subject to adjustment in certain events described in the Indenture. The Company will deliver cash or a check in lieu of any fractional Common Share if Common Shares are issued upon such exchange. To exchange this Security a Holder must (1) complete and manually sign the exchange notice on the back of this Security (or complete and manually sign a facsimile of such notice) and deliver such notice to the Exchange Agent, (2) complete and manually sign the exchange notice to the Company on the back of this Security (or complete and manually sign a facsimile of such notice) and deliver such notice to the Company, (3) surrender this Security to the Exchange Agent, (4) furnish appropriate endorsements and transfer documents if required by the Exchange Agent, the Company or the Trustee, (5) pay any transfer or similar tax, if required, and (6) if required by Section 12.01 of the Indenture, pay funds equal to the Contingent Interest payable on the next Contingent Interest Payment Date. A Holder may exchange a portion of this Security if the Principal Amount of such portion is $1,000 or an integral multiple of $1,000. No payment or adjustment will be made for dividends on the Common Shares except as provided in the Indenture. Except as provided in Section 12.01 of the Indenture, on exchange of this Security, that portion of accrued but unpaid A-9 Contingent Interest, if any, and Additional Amounts, if any, to the Exchange Date with respect to the exchanged portion of this Security shall be deemed canceled, extinguished and forfeited through the delivery of the Principal Return and, if applicable, cash in the Net Share Amount or Net Shares (together with any cash payment, if any, in lieu of fractional shares) in exchange for the portion of this Security being exchanged pursuant to the terms hereof. 10. CONTINGENT INTEREST (a) The Company will pay Contingent Interest ("CONTINGENT INTEREST") to the Holders of the Securities in respect of any six-month interest period from June 15 to December 14 or December 15 to June 14 commencing on or after June 15, 2008 for which the average Trading Price of a Security for the applicable five Trading Day reference period equals or exceeds 120% of $1,000 per $1,000 Principal Amount of Securities as of the day immediately preceding the first day of the applicable six-month interest period. The "five Trading Day reference period" means the five Trading Days ending on the second Trading Day immediately preceding the relevant six-month interest period. For any six-month interest period in respect of which Contingent Interest is payable, the Contingent Interest payable on each Security shall equal 0.185% of the Principal Amount of the Security. Any Contingent Interest will be payable on the June 15 or December 15 (each a "CONTINGENT INTEREST PAYMENT DATE") immediately following the relevant six-month interest period to the Persons in whose names the Securities are registered at the close of business on the June 1 or December 1 (each a "CONTINGENT INTEREST RECORD DATE") immediately preceding the applicable Contingent Interest Payment Date, except that Contingent Interest payable upon redemption or repurchase will be paid to the Person to whom the Principal Amount is payable unless the Redemption Date or Repurchase Date or Fundamental Change Repurchase Date, as the case may be, is a Contingent Interest Payment Date. Contingent Interest will be computed on the basis of a 360-day year composed of twelve 30-day months. Upon determination that Holders will be entitled to receive Contingent Interest which may become payable, the Company shall notify the Holders. In connection with providing such notice, the Company will issue a press release and publish a notice containing information regarding the Contingent Interest determination in a newspaper of general circulation in The City of New York or publish such information on the Company's then existing Web site or through such other public medium as the Company shall determine. (b) Except as otherwise specified with respect to the Securities, any Contingent Interest on any Security that is payable, but is not punctually paid or duly provided for, on any Contingent Interest Payment Date (herein called "DEFAULTED CONTINGENT INTEREST") shall forthwith cease to be payable to the Holder thereof on the relevant Contingent Interest Record Date by virtue of having been such Holder, and such Defaulted Contingent Interest may be paid by the Company as provided for in Section 12.02 of the Indenture. (c) Contingent Interest shall cease to accrue on the Securities after declaration of acceleration of the Securities as provided in Section 6.02 of the Indenture. A-10 11. [RESERVED] 12. DENOMINATIONS; TRANSFER; EXCHANGE The Securities are in registered form, without coupons, in denominations of $1,000 of Principal Amount and integral multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities in respect of which a Repurchase Notice or Fundamental Change Repurchase Notice has been given and not withdrawn (except, in the case of a Security to be purchased in part, the portion of the Security not to be purchased) or any Securities for a period of 15 days before the mailing of notice of Securities to be redeemed. 13. PERSONS DEEMED OWNERS The registered holder of this Security may be treated as the owner of this Security for all purposes. 14. UNCLAIMED MONEY OR SECURITIES The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Securities that remains unclaimed for six months, provided, however, that the Trustee or such Paying Agent, before being required to make any such return, shall in the event that the Securities are no longer held in global form, at the expense of the Company cause to be published once in a newspaper of general circulation in The City of New York or mail to each such Holder notice that such money or securities remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication or mailing, any unclaimed money or securities then remaining will be returned to the Company. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person. 15. 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 aggregate Principal Amount of the Securities at the time outstanding and (ii) certain Defaults and Events of Defaults may be waived with the consent of the Holders of a majority in aggregate Principal Amount of the Securities at the time outstanding. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Company, the Guarantor and the Trustee may amend the Indenture or the Securities to cure any ambiguity, defect or inconsistency, or to provide for the assumption of the Company's or the Guarantor's obligations to the Holders of the Securities in case of a merger or consolidation or sale of all or substantially all of the Company's or the Guarantor's assets; to provide for uncertificated Securities in addition to or in place of A-11 certificated Securities; or to make any change that does not adversely affect the rights of any Holder or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA. 16. DEFAULTS AND REMEDIES Under the Indenture, Events of Default include (i) the Company defaults in the payment of the Principal Amount, Redemption Price, Purchase Price or a Fundamental Change Purchase Price on any Security when the same becomes due and payable at its Stated Maturity, upon redemption, upon declaration, when due for repurchase by the Company or otherwise, and such default continues for ten days; (ii) the Company defaults in the payment of Contingent Interest, if any, Additional Amounts, if any, or a Make-Whole Premium, if any, and such default continues for 30 days; (iii) failure of the Company or the Guarantor to perform or comply with the provisions of Section 11.02 of the Indenture, and such failure continues for a period of 20 days; (iv) the Company or the Guarantor fails to comply with any of its agreements or covenants in this Security or the Indenture (other than those referred to in clauses (i) through (iii) above and those set forth in Section 4.08 of the Indenture and Annex I to the Indenture) and such failure continues for 90 days after receipt by the Company of a Notice of Default; (v) certain events of bankruptcy or insolvency as set forth in the Indenture; and (vi) the failure to keep the Guarantee in place. If an Event of Default occurs and is continuing, the Trustee, or the Holders of at least 25% in aggregate Principal Amount of the Securities at the time outstanding, may declare all the Securities to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities being declared due and payable immediately upon the occurrence of such Events of Default. 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 aggregate Principal Amount of the Securities at the time outstanding 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 amounts specified in clause (i) and (ii) above) if it determines that withholding notice is in their interests. 17. TRUSTEE DEALINGS WITH THE COMPANY 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, the Guarantor or their Affiliates and may otherwise deal with the Company, the Guarantor or their Affiliates with the same rights it would have if it were not Trustee. 18. NO RECOURSE AGAINST OTHERS A director, officer, employee or stockholder, as such, of the Company or the Guarantor shall not have any liability for any obligations of the Company or the Guarantor under the Securities, the Guarantee or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. A-12 19. AUTHENTICATION This Security shall not be valid until an authorized signatory of the Trustee manually signs the Trustee's Certificate of Authentication on the other side of this Security. 20. ABBREVIATIONS Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TENANT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 21. REGISTRATION RIGHTS The Holders of Restricted Securities are entitled to the benefits set forth in ANNEX I to the Indenture relative to registration of the Securities. 22. GOVERNING LAW THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THIS SECURITY. 23. INDENTURE TO CONTROL In case of any conflict between the provisions of this Security and the Indenture, the provisions of the Indenture shall control. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Nabors Industries, Inc. 515 West Greens Road, Suite 1200 Houston, Texas 77067 Attention: Legal Department A-13 [FORM OF NOTATION ON SECURITY RELATING TO GUARANTEE] Guarantor (which term includes any successor Person in such capacity under the Indenture), has fully, unconditionally and absolutely guaranteed, to the extent set forth in the Indenture and subject to the provisions in the Indenture, the due and punctual payment of the Principal Amount, Contingent Interest, if any, and Additional Amounts, if any, on these Securities and all other amounts due and payable under the Indenture and these Securities by the Company. The obligations of the Guarantor to the Holders of Securities and to the Trustee pursuant to the Guarantee and the Indenture are expressly set forth in Article 10 of the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee. Guarantor: NABORS INDUSTRIES LTD. By: ----------------------------------------- Name: Title: A-14 [FORM OF EXCHANGE NOTICE] EXCHANGE NOTICE TO THE EXCHANGE AGENT To: Nabors Industries, Inc. Nabors Industries Ltd. c/o Exchange Agent The undersigned registered holder of this Security hereby irrevocably exercises the option to exchange this Security, or portion hereof (which is $1,000 Principal Amount (as defined in the Indenture to which this Security is subject) or an integral multiple thereof) below designated, in accordance with the terms of the Indenture referred to in this Security, and directs that the consideration issuable and deliverable upon such exchange, together with any check in payment for fractional shares, if any, and any Securities representing any unexchanged Principal Amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of this Security not exchanged are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: -------------------------------------- -------------------------------------- Signature(s) Fill in for payment of cash or other property, registration of shares if to be delivered, and Securities if to be issued other than to and in the name of the registered holder: - -------------------------------------------- (Name) - -------------------------------------------- (Street Address) - -------------------------------------------- (City, State and Zip Code) Please print name and address Principal Amount to be exchanged (if less than all): $_________,000 Social Security or Other Taxpayer Identification Number: ------------ A-15 [FORM OF EXCHANGE NOTICE] CONFIRMING EXCHANGE NOTICE TO BE SENT TO THE COMPANY To: Nabors Industries, Inc. Nabors Industries Ltd. The undersigned registered holder of this Security hereby irrevocably exercises the option to exchange this Security, or portion hereof (which is $1,000 Principal Amount (as defined in the Indenture to which this Security is subject) or an integral multiple thereof) below designated in accordance with the terms of the Indenture referred to in this Security, and directs that the consideration issuable and deliverable upon such exchange, together with any check in payment for fractional shares, if any, and any Securities representing any unexchanged Principal Amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of this Security not exchanged are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. -------------------------------------- -------------------------------------- Signature(s) Fill in for payment of cash or other property, registration of shares if to be delivered, and Securities if to be issued other than to and in the name of the registered holder: - -------------------------------------------- (Name) - -------------------------------------------- (Street Address) - -------------------------------------------- (City, State and Zip Code) Please print name and address Principal Amount to be exchanged (if less than all): $_________,000 Social Security or Other Taxpayer Identification Number: ------------ A-16 [FORM OF OPTION TO ELECT REPURCHASE UPON A FUNDAMENTAL CHANGE] To: Nabors Industries, Inc. The undersigned registered holder of this Security hereby acknowledges receipt of a notice from Nabors Industries, Inc. (the "COMPANY") as to the occurrence of a Fundamental Change with respect to the Company and requests and instructs the Company to repurchase this Security, or the portion hereof (which is $1,000 Principal Amount (as defined in the Indenture to which this Security is subject) or an integral multiple thereof) below designated, in accordance with the terms of the Indenture referred to in this Security. Dated: ----------------------------------------------- Signature(s) Principal Amount to be repurchased (if less than all): $_________,000 Social Security or Other Taxpayer Identification Number: ----------------- A-17 TRANSFER NOTICE This Transfer Notice relates to $__________ Principal Amount (as defined in the Indenture to which the referenced Securities are subject) of the Series B Zero Coupon Senior Exchangeable Notes Due 2023 of Nabors Industries, Inc., a Delaware corporation, held by ____________ (the "TRANSFEROR"). (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. Your Signature: ---------------------------------------------------------------- (Sign exactly as your name appears on the other side of this Security) Date: ----------------------------------------------------------------- Signature Guarantee:(2) ----------------------------------------------- In connection with any transfer of any of the Securities evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Securities and the last date, if any, on which such Securities were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Securities are being transferred: CHECK ONE BOX BELOW - -------------- 2 Signature must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar which requirements include membership or participation in the Security Transfer Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-18 (1) [ ] to Nabors Industries Ltd., Nabors Industries, Inc. or any subsidiary thereof; or (2) [ ] pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (3) [ ] pursuant to and in compliance with Regulation S under the Securities Act of 1933; or (4) [ ] pursuant to another available exemption from the registration requirements of the Securities Act of 1933 provided by Rule 144 thereunder; or (5) [ ] pursuant to an effective registration statement under the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (3) or (4) is checked, the Trustee may require, prior to registering any such transfer of the Securities such legal opinions, certifications and other information as it has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933. -------------------------------------------- Signature -------------------------------------------- Date -------------------------------------------- Signature Guarantee(3) - -------------- (3) Signature must be guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. A-19 TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ---------------------------------------------- [Signature of executive officer of purchaser] Name: ---------------------------------------- Title: --------------------------------------- A-20 [FORM OF SCHEDULE FOR ENDORSEMENTS ON GLOBAL SECURITY TO REFLECT CHANGES IN PRINCIPAL AMOUNT] SCHEDULE A Changes to Principal Amount of Global Security
PRINCIPAL AMOUNT OF SECURITIES BY WHICH THIS GLOBAL SECURITY IS TO BE REDUCED OR INCREASED, AND REASON FOR REDUCTION OR REMAINING PRINCIPAL AMOUNT DATE INCREASES OF THIS GLOBAL SECURITY NOTATION MADE BY - ----------------------------------------------------------------------------------------------------------------------
A-21 ANNEX I REGISTRATION RIGHTS OF HOLDERS 1. Definitions Capitalized terms used and not defined in this ANNEX I shall have the meanings ascribed to such terms in the Indenture. In addition, for the purposes of this ANNEX I only, the following terms shall have the following meanings: Amendment Effectiveness Deadline Date: See Section 2(d)(i). Amount of Registrable Securities: (a) With respect to Securities constituting Registrable Securities, the aggregate principal amount of all such Securities outstanding, (b) with respect to Underlying Shares constituting Registrable Securities, the aggregate number of such Underlying Shares that may be issuable from time to time pursuant to the terms of the Indenture and (c) with respect to combinations thereof, the sum of (a) and (b) for the relevant Registrable Securities. Board: The Board of Directors of the Guarantor. Business Day: Any day that is not a Saturday, Sunday or a day on which banking institutions in New York, Texas or Bermuda are authorized or required by law to be closed. Deferral Period: See Section 2(d). Depositary: The Depository Trust Company until a successor is appointed by the Company. Effectiveness Date: The 180th day after the Issue Date. Effectiveness Period: The period commencing on the date that the Initial Shelf Registration Statement is declared effective under the Securities Act and ending on the date that all Securities, related Guarantees and Underlying Shares have ceased to be Registrable Securities. Exchange Act: The Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder and any successor act, rules and regulations. Filing Date: The 90th day after the Issue Date. Holder: Any holder or owner of a beneficial interest in Registrable Securities. Indemnified Holder: See Section 6 hereof. Indemnified Person: See Section 6 hereof. Indemnifying Person: See Section 6 hereof. I-1 Initial Shelf Registration: See Section 2(a) hereof. NASD: The National Association of Securities Dealers, Inc. Notice and Questionnaire: A written notice delivered to the Company requesting the information necessary for the Company and the Guarantor to prepare a Registration Statement, as such notice may be amended by the Company to the extent necessary to ensure compliance with applicable law. Notice Holder: On any date, any Holder that has delivered a Notice and Questionnaire to the Company on or prior to such date. Prospectus: The prospectus included in any Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. Registrable Securities: All Securities and all Underlying Shares upon original issuance thereof and at all times subsequent thereto until the earliest to occur of (i) a Registration Statement or Registration Statements covering such Securities and Underlying Shares having been declared effective by the SEC and remaining effective until such Securities and Underlying Shares having been disposed of or issued and sold, as the case may be, in accordance with such effective Registration Statement, (ii) such Securities and Underlying Shares having been sold in compliance with Rule 144 or (except with respect to affiliates of the Company within the meaning of the Securities Act) are eligible for sale in compliance with Rule 144(k), or (iii) such Securities and any Underlying Shares ceasing to be outstanding. Registration Statement: Any registration statement of the Company or the Guarantor that covers the Registrable Securities filed with the SEC pursuant to the provisions of this ANNEX I, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. Rule 144: Rule 144 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act. Rule 144A: Rule 144A promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the SEC. Rule 415: Rule 415 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. I-2 SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder and any successor act, rules and regulations. Shelf Registration: See Section 2(b) hereof. Shelf Registration Statement: See Section 2(b) hereof. Subsequent Shelf Registration: See Section 2(b) hereof. TIA: The Trust Indenture Act of 1939, as amended, and the rules and regulations of the SEC promulgated thereunder and any successor act, rules and regulations. Trustee: Has the meaning given such term in the Recitals. Underlying Shares: Means common shares of the Guarantor, par value $0.001 per share. 2. Shelf Registration (a) Shelf Registration. To the extent not prohibited by any applicable law or applicable interpretation of the staff of the SEC, the Company and the Guarantor shall use their respective reasonable best efforts to file with the SEC a Registration Statement or Registration Statements for an offering to be made on a continuous basis pursuant to Rule 415 (or, in the event Rule 415 shall not be available for any of the Registrable Securities for an offering to be made as permitted under the terms of the Securities and this Agreement, including the offering of the Underlying Shares upon the exchange of the Securities) for an offering covering all of the Registrable Securities (the "INITIAL SHELF REGISTRATION") on or prior to the Filing Date. The Initial Shelf Registration shall be on Form S-3 or another appropriate form permitting registration of such Registrable Securities for (i) in the case of the Securities constituting Registrable Securities, resale by Holders, and (ii) in the case of Underlying Shares constituting Registrable Securities, (x) the issuance and sale by the Guarantor, or (y) the resale by Holders, as the case may be, in each case in the manner or manners set forth in such Registration Statement and in Rule 415 (if such rule is available for the Initial Shelf Registration). The Company and the Guarantor shall use their respective reasonable best efforts to cause the Initial Shelf Registration to be declared effective under the Securities Act on or prior to the Effectiveness Date and to keep such Initial Shelf Registration continuously effective under the Securities Act until the expiration of the Effectiveness Period. To the extent permitted by applicable law and the interpretations of the staff of the SEC, the Initial Registration Statement may be terminated with respect to either the Securities or the Underlying Securities, as the case may be, on the date the Effectiveness Period expires. At the time the Initial Shelf Registration is declared effective, each Holder that became a Notice Holder on or prior to the date five (5) Business Days prior to such time of effectiveness shall be named as a selling securityholder in the Initial Shelf Registration Statement and the related Prospectus in such a manner as to permit such Holder to deliver such Prospectus to purchasers of Registrable Securities in accordance with applicable law. I-3 (b) Subsequent Shelf Registrations. If the Initial Shelf Registration or any Subsequent Shelf Registration ceases to be effective for any reason at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder), the Company and the Guarantor shall use their respective reasonable best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof, and in any event shall within 15 days of such cessation of effectiveness amend the Initial Shelf Registration in a manner to obtain the withdrawal of the order suspending the effectiveness thereof, or file an additional "shelf" Registration Statement pursuant to Rule 415 covering all of the Registrable Securities (or, in the event Rule 415 shall not be available for any of the Registrable Securities, covering an offering to be made as permitted under the terms of the Securities and this Agreement, including the offering of the Underlying Shares upon exchange, repurchase or redemption of the Securities) (each, a "SUBSEQUENT SHELF REGISTRATION"). If a Subsequent Shelf Registration is filed, the Company and the Guarantor shall use their respective reasonable best efforts to cause the Subsequent Shelf Registration to be declared effective under the Securities Act as soon as practicable after such filing and to keep such Registration Statement continuously effective until the termination of the Effectiveness Period. As used herein the term "SHELF REGISTRATION" means the Initial Shelf Registration and any Subsequent Shelf Registration and the term "SHELF REGISTRATION STATEMENT" means any Registration Statement or Registration Statements filed in connection with a Shelf Registration. (c) Supplements and Amendments. The Company and the Guarantor shall promptly use their respective reasonable best efforts to supplement and amend the Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration, if required by the Securities Act, or if reasonably requested by the Holders of the majority in Amount of Registrable Securities covered by such Registration Statement. (d) Notice Holders. Each Holder agrees that if such Holder wishes to sell Registrable Securities pursuant to a Shelf Registration Statement and related Prospectus, it will do so only in accordance with this Section 2(d) and Section 4. Following the date that the Initial Shelf Registration Statement is declared effective, each Holder wishing to sell Registrable Securities pursuant to a Shelf Registration Statement and related Prospectus agrees to deliver a Notice and Questionnaire to the Company at least three (3) Business Days prior to any intended distribution of Registrable Securities under the Shelf Registration Statement. The Guarantor shall promptly provide a Notice and Questionnaire to any Holder requesting the same; provided that neither the Guarantor nor the Company shall be under any obligation to circulate Notice and Questionnaires generally to Holders. Each Holder who elects to sell Registrable Securities pursuant to a Shelf Registration Statement agrees by submitting a Notice and Questionnaire to the person specified therein, it will be bound by the terms and conditions of the Notice and Questionnaire and the terms of the Indenture set forth in this ANNEX I. From and after the date the Initial Shelf Registration Statement is declared effective, the Company shall, as promptly as practicable after the date a Notice and Questionnaire is delivered to the address specified in the Notice and Questionnaire, and in any event upon the later of (x) ten (10) Business Days after such date or (y) ten (10) Business Days after the expiration of any period in which the Guarantor and the Company shall have suspended the effectiveness of the Shelf Registration Statement pursuant to Section 3(b) hereof (each, a "DEFERRAL Period") in effect when the Notice and Questionnaire is delivered or put into effect within ten (10) Business Days of such delivery date: I-4 (i) if required by applicable law, file with the SEC a post-effective amendment to the Shelf Registration Statement or prepare and, if required by applicable law, file a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that the Holder delivering such Notice and Questionnaire is named as a selling securityholder in the Shelf Registration Statement and the related Prospectus in such a manner as to permit such Holder to deliver such Prospectus to purchasers of the Registrable Securities in accordance with applicable law and, if the Company and the Guarantor shall file a post-effective amendment to the Shelf Registration Statement, use its best efforts to cause such post-effective amendment to be declared effective under the Securities Act as promptly as is practicable, but in any event by the date (the "AMENDMENT EFFECTIVENESS DEADLINE DATE") that is forty-five (45) days after the date such post-effective amendment is required by this clause to be filed; (ii) provide such Holder copies of any documents filed pursuant to Section 2(d)(i); and (iii) notify such Holder as promptly as practicable after the effectiveness under the Securities Act of any post-effective amendment filed pursuant to Section 2(d)(i); provided, that if such Notice and Questionnaire is delivered during a Deferral Period, the Company shall so inform the Holder delivering such Notice and Questionnaire and shall take the actions set forth in clauses (i), (ii) and (iii) above upon expiration of the Deferral Period in accordance with Section 3(b). Notwithstanding anything contained herein to the contrary, (i) neither the Company nor the Guarantor shall be under any obligation to name any Holder that is not a Notice Holder as a selling securityholder in any Registration Statement or related Prospectus and (ii) the Amendment Effectiveness Deadline Date shall be extended by up to ten (10) Business Days from the expiration of a Deferral Period if such Deferral Period shall be in effect on the Amendment Effectiveness Deadline Date. 3. Registration Procedures In connection with the filing of any Registration Statement or Registration Statements pursuant to Section 2 hereof, the Company and the Guarantor shall effect such registrations to permit the sale of the securities covered thereby in accordance with the intended method or methods of disposition thereof, and pursuant thereto and in connection with any Registration Statement filed by the Company or the Guarantor hereunder the Company and the Guarantor shall: (a) Prepare and file with the SEC on or prior to the Filing Date, a Registration Statement or Registration Statements as prescribed by Section 2 hereof, and use their reasonable best efforts to cause each such Registration Statement(s) to become effective and remain effective as provided herein. Neither the Company nor the Guarantor shall file any Registration Statement or Prospectus or any amendments or supplements thereto if the Notice Holders of a majority in Amount of Registrable Securities covered by such Registration Statement or, in the case of the Initial Shelf Registration Statement, the Initial Purchaser, shall reasonably object. I-5 (b) Prepare and file with the SEC such amendments and post-effective amendments to each Shelf Registration, as may be necessary to keep such Registration Statement continuously effective for its Effectiveness Period; cause the related Prospectus to be supplemented by any Prospectus supplement required by applicable law, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the provisions of the Securities Act and the Exchange Act applicable to it with respect to the disposition of all securities covered by such Registration Statement as so amended or in such Prospectus as so supplemented except as provided in Section 3(b). (c) Notify the Notice Holders promptly (but in any event within two Business Days), (i) when a Prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective under the Securities Act (including in such notice a written statement that any Notice Holder may, upon request, obtain, at the sole expense of the Company, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules, documents incorporated or deemed to be incorporated by reference and exhibits), (ii) of the issuance by the SEC of any stop order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of any preliminary Prospectus or the initiation of any proceedings for that purpose, (iii) of the happening of any event, the existence of any condition or any information becoming known that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in or amendments or supplements to such Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (iv) of the Company's determination that a post-effective amendment to a Registration Statement would be appropriate, or (v) that the effectiveness of the Shelf Registration Statement is suspended pursuant to Section 3(b) hereof. (d) Use their reasonable best efforts to prevent the issuance of any order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of a Prospectus and, if any such order is issued, to use its reasonable best efforts to obtain the withdrawal of any such order at the earliest possible moment. (e) If requested, furnish to each Notice Holder, at the sole expense of the Company, one conformed copy of the Registration Statement or Registration Statements and each post-effective amendment thereto, including financial statements and schedules, and, if requested, all documents incorporated or deemed to be incorporated therein by reference and all exhibits. (f) Deliver to each Holder, at the sole expense of the Company, as many copies of the Prospectus (including each form of preliminary Prospectus) and each amendment or I-6 supplement thereto and any documents incorporated by reference therein as such Persons may reasonably request; and, subject to the second paragraph of Section 4 hereof, the Company and the Guarantor hereby consent to the use of such Prospectus and each amendment or supplement thereto by the Notice Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto in the manner set forth therein. (g) Prior to any public offering of Registrable Securities, to use their reasonable best efforts to register or qualify, to the extent required by applicable law, and to cooperate with the Notice Holders in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities or offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Notice Holder may reasonably request in writing; keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things reasonably necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the applicable Registration Statement; provided further, however, that neither the Company nor the Guarantor shall be required to (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) subject itself to taxation in excess of a nominal dollar amount in any such jurisdiction where it is not then so subject. (h) Cooperate with each Notice Holder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall not bear any restrictive legends (unless required by applicable law) and shall be in a form eligible for deposit with the Depositary; and enable such Registrable Securities to be in such denominations and registered in such names as such Notice Holder may reasonably request. (i) Use their reasonable best efforts to cause the Registrable Securities covered by any Shelf Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be reasonably necessary to enable the Notice Holder or Notice Holders thereof to consummate the disposition of such Registrable Securities, except as may be required solely as a consequence of the nature of such Notice Holder's business, in which case the Company and the Guarantor will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals. (j) Upon the occurrence of any event contemplated by Section 3(c)(ii), 3(c)(iii) or 3(c)(iv) hereof, as promptly as practicable prepare and (subject to Section 3(a) hereof) use their reasonable best efforts to file with the SEC, at the expense of the Company and the Guarantor, a supplement or post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, any such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. I-7 (k) Prior to the effective date of the Initial Registration Statement, (i) provide the Trustee with certificates for the Securities in a form eligible for deposit with the Depositary and (ii) provide a CUSIP number for the Securities. (l) Prior to the effective date of the Initial Registration Statement relating to the Underlying Shares, provide a CUSIP number for the Underlying Shares. (m) Comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earning statements (which need not be audited) satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) for a 12-month period commencing on the first day of the first fiscal quarter of the Guarantor commencing after the effective date of a Registration Statement, which statements shall be made available no later than 45 days after the end of any 12-month period or 90 days after the end of any 12-month period if such period is a fiscal year of the Guarantor. (n) Cooperate with each Notice Holder of the Registrable Securities covered by any Registration Statement and their counsel in connection with any filings required to be made with the NASD, including, if the Conduct Rules of the NASD or any successor thereto as amended from time to time so require, engaging a "qualified independent underwriter" ("QIU") as contemplated therein and otherwise applying the provisions of this ANNEX I to such QIU as though it were a participating underwriter. (o) Cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement relating to the Securities; and in connection therewith, cooperate with the Trustee and the Notice Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA; and execute, and use their reasonable best efforts to cause the Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner. (p) Use their reasonable best efforts to take all other steps necessary or advisable to effect the registration of the Registrable Securities covered by a Registration Statement or Registration Statements, as contemplated hereby. 4. Holder's Obligations Each Holder agrees, by acquisition of the Registrable Securities, that no Holder shall be entitled to sell any of such Registrable Securities pursuant to a Registration Statement or to receive a Prospectus relating thereto, unless such Holder has furnished the Company and the Guarantor with a Notice and Questionnaire as required pursuant to Section 2(d) hereof (including the information required to be included in such Notice and Questionnaire) and the information set forth in the next sentence. Each Notice Holder agrees promptly to furnish to the Company all information required to be disclosed in order to make the information previously furnished to the Company and the Guarantor by such Notice Holder not misleading and any other information regarding such Notice Holder and the distribution of such Registrable Securities as the Company and or the Guarantor may from time to time reasonably request. Any sale of any Registrable I-8 Securities by any Holder shall constitute a representation and warranty by such Holder that the information relating to such Holder and its plan of distribution is as set forth in the Prospectus delivered by such Holder in connection with such disposition, that such Prospectus does not as of the time of such sale contain any untrue statement of a material fact relating to or provided by such Holder or its plan of distribution and that such Prospectus does not as of the time of such sale omit to state any material fact relating to or provided by such Holder or its plan of distribution necessary to make the statements in such Prospectus, in the light of the circumstances under which they were made, not misleading. Each Holder agrees by acquisition of its Registrable Securities that, upon actual receipt of any notice from the Company and the Guarantor of the happening of any event of the kind described in Section 3(c)(ii), 3(c)(iii) or 3(c)(iv) hereof, or of a Deferral Period pursuant to Section 2(b) hereof, such Holder will forthwith discontinue disposition of such Registrable Securities covered by such Registration Statement or Prospectus until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(j) hereof, or until it is advised in writing by the Company and the Guarantor that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto. Notwithstanding anything to the contrary contained herein, neither the Company nor the Guarantor shall have any liability for any incremental expenses incurred as a result of an underwritten offering of any Registrable Securities. 5. Registration Expenses (a) All fees and expenses incident to the performance of or compliance with this ANNEX I by the Company and the Guarantor shall be borne by the Company and the Guarantor. Notwithstanding anything in this ANNEX I to the contrary, each Holder shall pay all underwriting discounts and brokerage commissions with respect to any Registrable Securities sold by it and be solely responsible for any and all fees and disbursements of counsel of such Holder with respect to the Registrable Securities and continue with the obligations of Holders set forth in this ANNEX I. 6. Indemnification The Company and the Guarantor, jointly and severally, agree to indemnify and hold harmless (i) each Notice Holder, (ii) each Person, if any, who controls (within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act) any Notice Holder (any of the Persons referred to in this clause (ii) being hereinafter referred to as a "controlling person"), and (iii) the respective officers, directors, partners, employees, representatives and agents of the Notice Holders (including predecessor Notice Holders) or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Holder"), from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, reasonable legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus, or any amendment or supplement thereto or any related preliminary Prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or I-9 necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Indemnified Holder furnished to the Company or the Guarantor in writing by such Indemnified Holder expressly for use in therein; provided, however, neither the Company nor the Guarantor shall be liable to any Indemnified Holder under the indemnity agreement of this paragraph with respect to any preliminary Prospectus to the extent that any such loss, claim, damage, liability, judgment or expense of such Indemnified Holder results from the fact that such Indemnified Holder sold Registrable Securities under a Registration Statement to a Person as to whom it shall be established that there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus (or of the preliminary Prospectus as then amended or supplemented if the Company or the Guarantor shall have furnished such Indemnified Holder with such amendment or supplement thereto on a timely basis), in any case where such delivery is required by applicable law and the loss, claim, damage, liability or expense of such Indemnified Holder results from an untrue statement or omission of a material fact contained in the preliminary Prospectus which was corrected in the Prospectus (or in the preliminary Prospectus as then amended or supplemented if the Company or the Guarantor shall have furnished such Indemnified Holder with such amendment or supplement thereto, as the case may be, on a timely basis). The Company and the Guarantor shall notify such Indemnified Holder promptly of the institution, threat or assertion of any claim, proceeding (including any governmental investigation) or litigation in connection with the matters addressed by this Agreement which involves the Company, the Guarantor or such Indemnified Holder. (a) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantor, each of their respective directors, officers and each Person who controls the Company or the Guarantor within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company and the Guarantor to each Holder, but only with reference to such losses, claims, damages or liabilities which are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to a Holder furnished to the Company or the Guarantor in writing by such Holder expressly for use in any Registration Statement or Prospectus, or any amendment or supplement thereto or any related preliminary Prospectus. If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such Person (the "INDEMNIFIED PERSON") shall promptly notify the Person or Persons against whom such indemnity may be sought (each an "INDEMNIFYING PERSON") in writing, and such Indemnifying Person, upon request of the Indemnified Person, shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others entitled to indemnification pursuant to this Section 6 that the Indemnifying Person may designate in such proceeding and shall pay the fees and expenses of such counsel related to such proceeding. In any such proceeding, the Indemnifying Person shall be able to participate in such proceeding and, to the extent that it so elects, jointly with any other similarly situated Indemnifying Person, to assume the defense thereof, subject to the right of the Indemnified Person to be separately I-10 represented and to direct its own defense if the named parties to any such proceeding include both the Indemnified Person and the Indemnifying Person and the Indemnified Person has been advised by counsel that representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) such Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary or (ii) the named parties in any such proceeding (including any impleaded parties) include an Indemnifying Person and an Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that an Indemnifying Person shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm for the Indemnified Holders shall be designated in writing by the Holders of the majority in Amount of Registrable Securities, and any such separate firm for the Company, its directors, respective officers and such control Persons of the Company shall be designated in writing by the Company, and any such separate firm for the Guarantor, its directors, respective officers and such control Persons of the Guarantor shall be designated in writing by the Guarantor. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, such Indemnifying Person agrees to indemnify any Indemnified Person from and against any loss or liability by reason of such settlement or judgment. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability on claims that are the subject matter of such proceeding. If the indemnification provided for in the first and second paragraphs of this Section 6 is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other hand pursuant to the Purchase Agreement or from the offering of the Registrable Securities pursuant to any Shelf Registration or (ii) if the allocation provided by clause (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 (i) above but also the relative fault of the Indemnifying Person on the one hand and the Indemnified Person on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantor shall be deemed to be equal to the total net proceeds from the initial offering and sale of the Registrable Securities to which such losses, claims, damages or liabilities relate. The relative benefits received by any Holder shall be deemed to be equal to the value of receiving registration rights under this Annex for the Registrable Securities. The relative fault of the parties shall be determined by reference to, I-11 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 Guarantor or such Indemnified Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Each of the Company, the Guarantor and Notice Holders agree that it would not be just and equitable if contribution pursuant to this Section 6 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities 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 Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6, in no event shall any Holder be required to contribute any amount in excess of the amount by which the net proceeds received by such Holder from the sale of the Registrable Securities pursuant to a Shelf Registration Statement exceeds the amount of damages which such Holder would have 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 remedies provided for in this Section 6 are not exclusive and shall not limit any rights or remedies that may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution agreements contained in this Section 6 shall remain operative and in full force and effect regardless of (i) any termination of this ANNEX I or the discharge of the Indenture, (ii) any investigation made by or on behalf of any Holder or any Person controlling any Holder or by or on behalf of the Company or the Guarantor, their respective officers or directors or any other Person controlling any of the Company or the Guarantor and (iii) acceptance of and payment for any of the Registrable Securities. 7. Rules 144 and 144A The Company and the Guarantor covenant that they will file the reports required to be filed by them under the Securities Act and the Exchange Act, if any, in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, for so long as any Registrable Securities remain outstanding, if at any time neither the Company nor the Guarantor are not required to file such reports, they will, upon the request of any Holder, make available such information necessary to permit sales pursuant to Rule 144A. The Company and the Guarantor further covenant that, for so long as any Registrable Securities remain outstanding, they will use their reasonable best efforts to take such further action as any Holder may reasonably request in writing, all to the extent required from time to time to enable such holder to sell Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144(k) and Rule 144A, or (b) any similar rule or regulation hereafter adopted by the SEC. Notwithstanding the foregoing, nothing in this Section 7 shall be I-12 deemed to require the Company or the Guarantor to register any of their securities pursuant to the Exchange Act. 8. Indenture to Control. In the event of any conflict between the terms of this Indenture (excluding this ANNEX I) and this ANNEX I, the terms of the Indenture shall control. I-13 EX-12 3 h22801exv12.txt COMPUTATION OF RATIOS EXHIBIT 12 NABORS INDUSTRIES, LTD. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (In thousands, except ratio amounts)
Year Ended December 31, ------------------------------ 2004 2003 2002 -------- -------- -------- Income before income taxes $335,838 $174,623 $140,774 Less earnings from affiliates, net of dividends (2,057) (919) (4,900) Add amortization of capitalized interest expense 1,017 896 843 Add fixed charges as adjusted (from below) 51,389 74,107 70,341 -------- -------- -------- Earnings $386,187 $248,707 $207,058 -------- -------- -------- Fixed charges: Interest expense: Interest on indebtedness $ 23,055 $ 39,585 $ 31,156 Capitalized 1,887 903 1,125 Amortization of debt related costs (1) 25,452 31,155 35,912 Interest portion of rental expense 2,882 3,367 3,273 -------- -------- -------- Fixed charges before adjustments 53,276 75,010 71,466 Less capitalized interest (1,887) (903) (1,125) -------- -------- -------- Fixed charges as adjusted $ 51,389 $ 74,107 $ 70,341 -------- -------- -------- Ratio (earnings divided by fixed charges before adjustments) 7.25 3.32 2.90 -------- -------- --------
(1) Includes deferred financing, discount and premium amortization. EX-21 4 h22801exv21.txt SIGNIFICANT SUBSIDIARIES . . . EXHIBIT 21 NABORS INDUSTRIES LTD. SIGNIFICANT SUBSIDIARIES AS OF DECEMBER 31, 2004
Subsidiary Jurisdiction - ---------- ------------ Nabors Drilling Canada ULC Nova Scotia Nabors Drilling International Ltd Bermuda Nabors Drilling USA, LP Delaware Nabors Drilling Limited (Canada) Canada Nabors Holding Company Delaware Nabors Industries Inc. Delaware Nabors International Finance Inc Delaware Nabors International Holdings Ltd Bermuda Nabors International Inc Delaware Nabors Management Ltd Bermuda Nabors Canada LP Alberta Nabors Offshore Americas S.a.r.L. Luxembourg Nabors Offshore Netherlands B.V. Netherlands Nabors Perforaciones de Mexico S. de R.L. de C.V. Mexico Nabors Drilling International II Ltd Bermuda Ryan Energy Technologies Inc. Alberta Oak Leaf Investments Inc Delaware Pool Company Delaware Sundowner Offshore International Ltd Bermuda Yellow Deer Investments Corp Nevada
EX-23 5 h22801exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Numbers 333-96699, 333-92483-99, 333-91829-99, 333-91743-99, 333-87069-99, 333-86289-99, 333-76-77099, 333-45446-99, 333-11313-99 and 333-121908) of Nabors Industries Ltd., on Form S-3 (Registration Numbers 333-85228-99 and 333-99267) of Nabors Industries Ltd., on Form S-3 (Registration Numbers 333-107806-01 and 333-91296) of Nabors Industries Ltd. and Nabors Industries, Inc., and on Form S-3 (Registration Number 333-102246) of Nabors Industries Ltd., Nabors Industries, Inc., Nabors Holdings 1 ULC, Nabors Holdings Ltd. and Nabors International Finance Inc. of our report dated March 7, 2005 relating to the financial statements, financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Houston, Texas March 7, 2005 EX-31.1 6 h22801exv31w1.txt CERTIFICATION OF EUGENE M. ISENBERG PURSUANT TO RULE 13A-14(A)15D-14(A) EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) OR 15d-14(a) I, Eugene M. Isenberg, Chairman and Chief Executive Officer of Nabors Industries Ltd., certify that: 1. I have reviewed this annual report on Form 10-K of Nabors Industries Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 7, 2005 /s/ Eugene M. Isenberg ---------------------- Eugene M. Isenberg Chairman and Chief Executive Officer EX-31.2 7 h22801exv31w2.txt CERTIFICATION OF BRUCE P. KOCH PURSUANT TO RULE 13A-14(A)15D-14(A) EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) OR 15d-14(a) I, Bruce P. Koch, Vice President and Chief Financial Officer of Nabors Industries Ltd., certify that: 1. I have reviewed this annual report on Form 10-K of Nabors Industries Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 7, 2005 /s/ Bruce P. Koch ----------------- Bruce P. Koch Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EX-32.1 8 h22801exv32w1.txt CERTIFICATIONS PURSUANT TO SECTION 1350 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Nabors Industries Ltd. (the "Company") for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eugene M. Isenberg, Chairman and Chief Executive Officer of the Company, and I, Bruce P. Koch, Vice President and Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Eugene M. Isenberg ---------------------- Eugene M. Isenberg Chairman and Chief Executive Officer March 7, 2005 /s/ Bruce P. Koch ----------------- Bruce P. Koch Vice President and Chief Financial Officer March 7, 2005 -----END PRIVACY-ENHANCED MESSAGE-----