ITEM 1. BUSINESS
Introduction
Bonray Drilling Corporation, a Delaware corporation formed in March 1980, is successor to a contract drilling business which has been in operation since 1957. The term "Company" includes Bonray Drilling Corporation and its predecessor corporate and divisional operations unless the context otherwise requires.
The Company is engaged in domestic onshore contract drilling of oil and gas wells. It currently owns and has available for operation fifteen drilling rigs in Oklahoma, having depth capabilities ranging from 7,000 to 25,000 feet. The Company will extend its geographical area of operation if appropriate opportunities are presented.
Industry conditions and utilization rates
The Company's contract drilling revenues depend upon the utilization of, and contract rates for, its drilling rigs. These factors are affected by a number of variables, including competitive conditions in the drilling industry and the amount of exploration and development activity conducted by oil and gas producers.
The level of domestic drilling activity has historically fluctuated widely and cannot be predicted because of the uncertainty of numerous factors affecting the petroleum industry, including oil and gas selling prices and the degree of government regulation of the industry. The demand for rigs has greatly declined since the fourth quarter of 1982 due to the decline in the exploration for and development of oil and gas reserves, which resulted from the decrease in the sales price of oil and gas. Lower rig utilization rates have caused intense price competition in the industry. During the month of July 1996, the Company operated at approximately 49.5% of capacity.
The following table sets forth certain information with respect to the drilling activities of the Company. The utilization rate represents the number of days during which a rig was operating or being made ready to operate in a given period, expressed as a percentage of the number of days that the rig was owned by the Company and available for work during that same period.
(1) Rigs being dismantled, moved and assembled were treated as utilized if the Company was paid by a customer or if the Company allowed for such activity in determining the price under a related drilling contract.
Contracts
The terms and rates of the Company's drilling contracts vary depending upon the location, duration and complexity of the drilling, the equipment and services provided, and other factors. As of August 31, 1996, eight rigs were under contract for the drilling of twelve wells. As of that date, five of the Company's rigs were operating on a daywork basis, pursuant to which the Company is paid monthly a specified amount per day based on the depth capability of the rig. The Company is paid for all days during the term of the contracts except days for which the rigs are not in operation because of repairs or maintenance. Daywork contracts generally specify the type of equipment to be used, the size of the hole and the depth of the well to be drilled, and provide for payment by the customer of certain costs and expenses of transporting, assembling and dismantling the rigs. While working under daywork contracts, the Company bears no part of the costs due to in-hole losses such as time delays for various reasons, including stuck drill strings and blowouts.
The Company also enters into footage and turnkey contracts. Footage and turnkey contracts, as opposed to daywork contracts, shift the risk of loss in drilling from the customer to the drilling contractor and, as a consequence, result in greater variation in profitability. As of August 31, 1996, two rigs were operating under footage contracts. Footage contracts usually provide for payment of an agreed price per foot of hole drilled to a specified depth regardless of the time required or the problems encountered. Turnkey contracts, of which none were in process at August 31, 1996, provide for payment of an agreed price upon the attainment of a specified objective. Turnkey contracts require more services of the contractor and, consequently, result in additional risks, costs and higher revenues which are not inherent in footage or daywork contracts. Turnkey contracts include costs for casing, cementing, drilling mud, and logging services. The Company determines the manner of drilling and type of equipment to be used, subject to customer specifications.
The Company prefers to work on a daywork basis, as it does not believe the potentially higher profit margins of footage and turnkey contracts justify the associated increased risks. However, in periods of lesser demand, the Company is generally required to work on a footage or turnkey basis, particularly with respect to shallow drilling.
The following table indicates the percentage of drilling revenues attributable to the foregoing types of contracts for the periods indicated:
Customers and competition
The Company's customers include major integrated oil companies and independent oil and gas producers. The following table summarizes the Company's sources of contract drilling revenue and wells drilled for each of the three years in the period ended June 30, 1996:
The Company competes with a large number of companies in the marketing of its drilling services, some of which have substantially greater resources available than the Company. The Company believes that competition is based principally on the availability of suitable drilling rigs and related equipment, expertise, price and reputation, and believes that it is able to compete effectively with respect to each of such factors. Competition is primarily regional and may vary from time to time by region. Rigs can be moved, however, from one region to another in response to perceived demand.
Conditions in the industry remain very competitive. Maintenance of on-going customer relationships is extremely important. However, vigorous competition will make it difficult to maintain such relationships.
The Company maintains four trucks in order to move some of its rigs to drill sites on an economic basis but contracts with common carriers and contractors for rig assembly and disassembly. The cost of transportation is usually included in the daywork rate, with some reimbursements generally allowed. Footage and turnkey contracts usually require the Company to absorb these costs.
Regulatory matters
General - The production and sale of crude oil and natural gas are currently subject to extensive regulation and significant taxation by both federal and state authorities. Most states (including Oklahoma) have regulations which pertain to spacing of wells, preventing waste of oil and gas, limiting rates of production, proration of production, prevention and clean-up of pollution and similar matters. These regulations decrease producer profitability which in turn decreases the demand for contract drilling.
Environmental regulation - The Company's operations are subject to numerous federal, state and local laws and regulations controlling the discharge of material into the environment or otherwise relating to the protection of the environment. The Company believes that it complies with those regulations and laws affecting its operations. Such compliance has not had and is not currently expected to have, a material effect upon the Company's capital expenditures, earnings or competitive position.
Operating risks and insurance
Contract drilling by its nature involves numerous operating hazards and risks, including blowouts, craterings, fires and explosions, any of which can cause serious damage to property and equipment and personal injuries or loss of life. There is also a risk that oil spillage, gas leakage or fires could result in serious environmental damage. The Company carries insurance customary for the industry but may not be fully insured against all risks either because they are not fully insurable or because premium costs are prohibitive. The occurrence of an event against which the Company is not fully insured could cause the Company to incur substantial costs and loss of revenue.
The Company insures its rigs for amounts substantially approximating their replacement values (less $25,000 deductible per occurrence). The Company purchases workers' compensation insurance under a loss rating plan. This plan affords the Company the opportunity to pay less than standard premium or the risk of paying more than standard premium depending on losses incurred. The Company limits its exposure within the plan to $100,000 ($250,000 prior to June 1995) per incident.
Employees
As of June 30, 1996, the Company had 24 salaried and approximately 130 hourly employees. The number of hourly employees varies, depending upon the level of rig utilization.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive officers of the Company:
Officers are elected annually by the Board of Directors.
Raymond H. Hefner, Jr., was elected Chairman of the Board of Directors of the Company upon its inception in March 1980. He served as Chief Executive Officer from that time until June 30, 1993. He founded Bonray Energy Corporation ("BEC"), a company engaged in oil and gas exploration and production and the predecessor of the Company's operations, in 1957. He served as Chairman of the Board, Chief Executive Officer and Treasurer of BEC from 1957 until November 1, 1991, when BEC was sold to Ensign Oil & Gas, Inc., and became EOG (Oklahoma) Inc. Mr. Hefner also serves as President of Bonray, Inc., a privately held oil and gas investment company, and President of HBH Holding Corporation, the general partner of HBH Enterprises A Limited Partnership, an Oklahoma limited partnership, a privately held investment company. He previously served as Chairman of the Board of Liberty Bank and Trust Company of Oklahoma City, N.A., a national bank; Vice Chairman of the Board of Liberty Bancorp, Inc., a bank holding company; and currently serves as a director of Liberty Bancorp, Inc., Liberty Bank and Trust Company of Oklahoma City, N.A., Liberty Bank and Trust Company of Tulsa, N.A., Liberty Mutual Insurance Company, Liberty Mutual Life Insurance Company, Liberty Financial Companies, Inc. and is a Southwest advisory director for Liberty Mutual Insurance Company. Mr. Hefner joined the board of directors for Gulf Canada Resources Limited January 25, 1995. He is the father of Richard B. Hefner.
Richard B. Hefner was elected Chief Executive Officer effective June 30, 1993. He has served as President, Chief Operating Officer and Director of the Company since October 1990. Mr. Hefner serves as Vice President of Bonray, Inc., a privately held oil and gas investment company, and Vice President of HBH Holding Company, the general partner of HBH Enterprises A Limited Partnership, an Oklahoma limited partnership, a privately held investment company. He has served as Vice President and General Manager of Canadian Valley Ranch, Inc., a pure-bred livestock production company, since 1982. He is the son of Raymond H. Hefner, Jr.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns approximately forty acres of land located in Oklahoma City, Oklahoma, on which an office building and repair, support and storage facilities for the Company's operations are located. These facilities include a repair shop (8,000 square feet) and three warehouses. The office building (3,600 square feet) was renovated in fiscal year 1992 to be used by office personnel.
The Company presently owns and operates fifteen drilling rigs. Although four of these drilling rigs have been "mothballed", thus requiring major expenditures in order to become productive, the remaining eleven rigs are in good operating condition. Although the rigs with less depth capacity have had greater utilization in recent years, the Company has experienced an increased utilization of the rigs with deeper capacity over the last few months. (See "Item 1. Business" for utilization rates, drilling contracts and customers.) The following table sets forth certain information relating to the Company's drilling rigs presently available for operation:
* Depth capabilities are based upon the use of 4.5 inch or 5 inch drill pipe and normal casing designs. The capabilities may vary as a result of the use of different drill pipe or unusual casing designs. ** Not operating at August 31, 1996.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or any of its property is subject.
There are no material administrative or judicial proceedings arising under any federal, state, or local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. No such proceedings are known to be contemplated by governmental authorities. No material legal proceedings were terminated during the fourth quarter ended June 30, 1996.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders through the solicitation of proxies or otherwise during the fourth quarter of the year ended June 30, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded over-the-counter under the NASDAQ symbol BNRY. The following is the range of prices for the Company's common stock for each of the quarters in the two year period ended June 30, 1996:
* Bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
No dividends have been paid since the inception of the Company. At present, the Company intends to maintain a policy of retaining any earnings for its operations.
At August 30, 1996, Bonray Drilling Corporation had approximately 542 stockholders of record, not including individual stockholders whose shares are held in street name by brokerage, nominee or depository firms.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
No cash dividends were declared or paid during the periods.
* Includes cumulative effect on prior years of $100,000 ($.24 per share) due to change in method of accounting for income taxes.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References to 1996, 1995 and 1994 refer to the Company's fiscal years ended June 30, 1996, June 30, 1995 and June 30, 1994, respectively.
Liquidity and capital resources
The Company reported net working capital on June 30, 1996 of $166,000 and a ratio of current assets to current liabilities of 1.07 to 1. The $342,000 decrease in working capital as compared to June 30, 1995, was largely a result of the increased amount of workers' compensation costs due within the next fiscal year compared to June 30, 1995. This increase is due to the contractual terms of the Company's workers' compensation insurance policies.
Due to the depressed status of the energy industry, some of the Company's customers pay for services on a basis of sixty to ninety days. Due to the delay in collecting receivables, it became necessary to obtain a line of credit with a local bank. The credit agreement provides for a maximum of $750,000 at an interest rate of 1/2% above the national prime lending rate recognized by the bank and is collateralized by accounts receivable. The agreement expires October 31, 1996, unless renewed. At June 30, 1996, the Company had $555,000 of borrowings under this agreement.
The Company expects to be able to continue to maintain its drilling rig fleet in good operating condition and to meet its financing obligations through the use of working capital generated from operations.
In connection with the purchase of drilling equipment, a note payable was issued to the seller for $828,000, payable in monthly installments of principal and interest in the amount of $50,000 until paid in full with interest at a rate of 1% above the national prime lending rate (aggregate rate of 9.25% at June 30, 1996), and is secured by the equipment purchased. The balance of the note is $189,000 at June 30, 1996 and matures October, 1996.
Over the last several years, the Company generated additional net operating losses for tax purposes due primarily to its use of accelerated depreciation which exceeds accumulated book depreciation. The Company was able to utilize a portion of these losses in its current year tax return. The remaining net operating losses are available for use in future periods due to carryover provisions. These carryover provisions will begin to expire in the year 2001.
At the end of the year, the Company had no material commitments for capital expenditures.
Results of operations
Revenues from drilling operations were $10,257,000 in 1996, an increase of 21% from $8,486,000 in 1995 and an increase of 30% from $7,912,000 reported in 1994. The increase from 1995 and 1994 is represented by an increase in the number of operating days. Unstable natural gas prices and fluctuating crude oil prices have continued to depress the drilling industry. Competition for contracts remains strong. However, the Company's attempts to raise rates have been somewhat successful.
The Company's ability to operate on a large percentage of daywork contracts as opposed to footage and turnkey contracts, along with a reduction in workers' compensation expense in 1996, resulted in gross profit on drilling contracts (drilling operations revenue less drilling operations' cost and depreciation) of $784,000 compared to a gross profit of $491,000 reported in 1995 and a gross profit of $51,000 reported in 1994. Gross profit for 1996 was reduced due to a greater amount of depreciation sustained on mothballed rigs due to a change in the estimated salvage value of such equipment. Depreciation expense for this equipment was $269,000 in 1996 compared to $36,000 and $131,000 respectively, in 1995 and 1994. At June 30, 1996, this equipment is carried at its estimated salvage value.
Operations for 1996 resulted in a net loss of $142,000 compared to net income of $866,000 in 1995 and a net loss of $575,000 in 1994. The change in results of 1996 compared to 1995 is principally due to a pre- tax gain of approximately $1,000,000 from the sale of one of the Company's rigs and related equipment in 1995. This gain also accounts for most of the change in the results of operations for 1995 compared to 1994. Although the Company improved its gross profit from contract drilling, its results of operations did not reflect this improvement due to additional general and administrative costs, increased interest expense, and a reduction in interest and other income. The Company is continuing to monitor means for improving its results of operations through improved gross margins and monitoring other applicable costs of its business and operations.
Workers' compensation insurance costs and claims for self-insured risks account for the Company's highest cash expense other than labor. These costs were $597,000 in 1996, $979,000 in 1995 and $876,000 in 1994 or 16%, 25% and 23%, respectively, of payroll expenditures. Of the amount expended in 1995, and 1994 for workers' compensation insurance costs, 4% and 11%, respectively, were due to revisions in estimates of claims from prior fiscal years. Workers' compensation costs in 1996 were reduced by $48,000 due to favorable changes in estimated claims costs from prior years which were settled during 1996. To place greater emphasis on safety, the Company implemented a tenure and drug screening program in 1991 to help reduce these costs. The tenure program was changed to the Safety Award Program in 1994 and the Company began a pre- employment job related physical ability evaluation program in 1995. Because workers' compensation law and insurance coverage allow claims to remain open after a policy year ends, it is difficult to determine the Company's total liability for any given year.
The following table indicates the percentage of the Company's drilling revenues attributable to the various types of contracts for each of the three years ended June 30, 1996:
Gross profit, excluding indirect costs associated with contract drilling operations and depreciation of mothballed drilling rigs, attributable to the various types of contracts for the same three years are as follows:
Inflation
The effect of inflation on the Company's operations has been insignificant because of the low rate of inflation in recent years.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, together with the report thereon of Ernst & Young LLP, are set forth on pages 13 through 22 hereof. (See Item 14 for Index.)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by Item 304 of Regulation S-K is not applicable to the Company.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the identification, business experience, and directorships of each director and nominee for director of the Company required by Item 401 of Regulation S-K and presented in the section entitled "Information Concerning Nominees and Directors" of the Company's Proxy Statement for the annual meeting of Stockholders on November 6, 1996, is hereby incorporated by reference. (See Item 1 for information relating to the identification and business experience of the Company's executive officers). The information required by Item 405 of Regulation S-K does not require disclosure by the Company.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to the remuneration of directors and officers required by Item 402 of Regulation S-K and presented in the section entitled "Executive Compensation" of the Company's Proxy Statement for the annual meeting of Stockholders on November 6, 1996, is hereby incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership required by Item 403 of Regulation S-K and presented in the section entitled "Voting Securities Outstanding, Security Ownership of Management and Principal Stockholders," of the Company's Proxy Statement for the annual meeting of Stockholders on November 6, 1996, is hereby incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to transactions with management and business relationships required by Item 404 of Regulation S-K and presented in the section entitled "Transactions With Management" of the Company's Proxy Statement for the annual meeting of Stockholders on November 6, 1996, is hereby incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report: 1 and 2. Index to Financial Statements and Financial Statement Schedules.
All financial statement schedules are inapplicable or the required information is included in the financial statements or the notes thereto.
3. Exhibits
The following documents are exhibits to this Form 10-K. Each document marked by an asterisk is hereby incorporated herein by reference to same document previously filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the three months ended June 30, 1996.
Report of Independent Auditors
The Board of Directors and Stockholders Bonray Drilling Corporation
We have audited the accompanying balance sheets of Bonray Drilling Corporation as of June 30, 1996 and 1995, and the related statements of operations and accumulated deficit and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bonray Drilling Corporation at June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Ernst & Young LLP
Oklahoma City, Oklahoma August 16, 1996
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
Disclosure of noncash investing and financing activities:
During the year ended June 30, 1995, the Company acquired property, plant and equipment by issuing a note payable of $828,050.
The accompanying notes are an integral part of these financial statements.
BONRAY DRILLING CORPORATION NOTES TO FINANCIAL STATEMENTS Years ended June 30, 1996, 1995 and 1994
1. Basis of financial statements and significant accounting policies
Nature of operations - The Company is engaged in domestic onshore contract drilling of oil and gas wells. It currently owns and has available for operation fifteen drilling rigs located in Oklahoma, having depth capabilities ranging from 7,000 to 25,000 feet.
Cash and cash equivalents - Cash and cash equivalents include cash deposits in banks and short-term investments with original maturities of three months or less from the date of purchase by the Company.
Contract drilling operations - Revenue earned from footage and turnkey contracts is recognized by the completed contract method, while revenue earned from daywork contracts is recognized by the percentage-of-completion method. Provision is made for the entire amount of expected losses on con- tracts, if any, in the period in which such losses are first determined.
Valuation of properties and equipment - Drilling equipment is stated at amounts representing historical cost adjusted by prior year write-downs based on the expected future economic value of such equipment. This value was determined by projecting the estimated future undiscounted cash flows generated by drilling equipment based on the Company's historical utilization rates and profit margins as well as consideration of the economic conditions of the industry. However, due to the uncertainty of such factors it is reasonably possible that the estimated future cash flows may change. Additions to drilling equipment, land, buildings and other equipment are reported at cost.
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under the new rules long-lived assets must be reviewed for impairment and any impairment would be measured based on the fair value of the assets and would be reported in the year in which the statement is initially adopted. The statement is required to be adopted by the Company during the first quarter of fiscal year 1997. The financial statement impact has not yet been determined; however, management does not expect the impact, if any, will be material to the financial position or results of operations of the Company.
Depreciation - Depreciation of drilling equipment is computed on an operating day basis (net of estimated salvage value), except for drilling rigs and related equipment which are "mothballed" or otherwise not expected to be used for an extended period of time. During fiscal year 1996 there was a decrease in the estimated salvage value of these inactive drilling rigs and equipment. As a result, depreciation on this equipment was increased in 1996 to reduce the net book value of these assets to their estimated salvage value. The net book value of such drilling equipment is $457,000 and $733,000 at June 30, 1996 and 1995, respectively. The Company recorded $269,000 of depreciation in 1996, $36,000 in 1995 and $131,000 in 1994 on these inactive rigs and related equipment, or $.64 per share, $.08 per share, and $.31 per share, respectively.
Depreciation of buildings and other equipment is computed by the straight-line method over the estimated useful lives of the assets.
Income (loss) per share - Income (loss) per share is computed on the basis of weighted average number of shares of common stock and dilutive common stock equivalents outstanding.
Credit risk - The Company operates its rigs in the state of Oklahoma and grants credit, which is generally unsecured, to its customers (Note 6). At June 30, 1996 approximately 85% of the Company's accounts receivable were from four customers. The Company has not experienced any significant credit losses in 1996, 1995 or 1994 and is not aware of any significant uncollectible accounts at June 30, 1996.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments - The following methods and assumptions were used by the Company in estimating their fair values of financial instruments: Cash and cash equivalents, accounts receivable, drilling contracts in progress, prepaid expenses, accounts payable, accrued liabilities, and workers' compensation insurance due after one year are each estimated to have a fair value approximating the carrying amount due to the short maturity of those instruments. Notes payable have variable interest rates with carrying values approximating fair values.
2. Income taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of June 30, 1996 and 1995 are as follows (dollars in thousands):
The deferred tax assets and liability are offset and, therefore, no deferred tax asset or liability is reflected in the Company's balance sheets at June 30, 1996 and 1995.
The difference between the amount of the credit for income taxes and the amount which would result from the application of the statutory rate to income (loss) before provision (credit) for income taxes is analyzed as follows (dollars in thousands):
At June 30, 1996, the Company has net operating loss carryforwards for federal tax purposes of approximately $4,800,000 which will expire beginning in the year 2001 if not used. At June 30, 1996, the net operating loss carryforwards for state tax purposes amounted to approximately $12,300,000.
3. Notes Payable
During the year ended June 30, 1995, the Company acquired drilling and other equipment by issuing a note payable of $828,000 to the seller of the equipment. The note is payable in monthly installments of principal and interest in the amount of $50,000 until paid in full with interest at a rate of 1% above the national prime lending rate (aggregate rate of 9.25% at June 30, 1996) and is secured by the equipment purchased. The balance due under the agreement at June 30, 1996 was $189,000, which is due within one year. The balance at June 30, 1995 was $742,000 of which $551,000 was expected to be due within one year. The note also contains a prepayment option for the Company and allows the Company to defer up to four of the monthly payments.
The Company has a revolving line of credit agreement (the "credit agreement") with a bank. Credit availability is subject to a monthly borrowing base determination calculated as 75% of the Company's accounts receivable less than 90 days old, not to exceed $750,000. At June 30, 1996, $555,000 of borrowings were outstanding under the revolving line of credit (none at June 30, 1995). The credit agreement, which expires October 31, 1996 unless renewed, provides for monthly interest payments which accrue at a rate of 1/2 of 1% over the lender's national prime rate (aggregate rate of 8.75% at June 30, 1996). Outstanding advances and accrued interest are due in full upon expiration of the credit agreement. The credit agreement is secured by the Company's accounts receivable.
4. Contingency
Workers' Compensation - The Company is covered by a workers' compensation insurance plan for its employees under which the Company is responsible for claims up to $100,000 ($250,000 prior to June 1995) per incident.
At June 30, 1996 and 1995, the Company has an estimated net liability for accrued workers' compensation costs totaling $521,000 and $513,000 respectively. Under the plan, the Company is to reimburse the administrator for costs as those costs are paid by the administrator, normally over a five year period. Accordingly, at June 30, 1996 and 1995, $75,000 and $447,000 respectively, were classified as due after one year, in the accompanying balance sheets.
Total workers' compensation costs incurred by the Company were $597,000, $979,000 and $876,000 for the years ended June 30, 1996, 1995 and 1994 respectively, and were based on actual and estimated claims incurred. For the year ended June 30, 1996, workers' compensation expense was reduced by $48,000 ($.11 per share) for changes in estimates of claims relating to prior fiscal years. Workers' compensation expense for the years ended June 30, 1995 and 1994 was increased by $40,000 and $99,000 ($.09 and $.23 per share) respectively, for changes in the estimated costs of claims that occurred in prior fiscal years.
The Company accrues losses for workers' compensation based on management's estimate of the expected cost of claims incurred. The estimates are based upon known information, historical experiences and consideration of risk reduction techniques, when applicable, such as stop loss insurance on individual claims. Due to uncertainties inherent in the estimation process, it is reasonably possible that these estimates will be revised in the future; however, management does not expect that such changes will be material to the financial position or results of operations of the Company.
5. Incentive stock option plan
In September 1981, the Company established the 1981 Incentive Stock Option Plan under which the Company was authorized to award options on up to 5,000 shares of common stock to certain officers and key employees of the Company. The 1981 Incentive Stock Option Plan expired in September 1991, and was not renewed, however outstanding options may be exercised any time through June 1999. There has been no activity in outstanding options during the past three fiscal years. At June 30, 1996, options for 1,000 shares (at an exercise price of $14.875) were outstanding.
6. Major customers
Contract drilling operations revenues include revenues from certain customers which individually account for 10% or more of these contract drilling operations revenues as follows:
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, on September 27, 1996.
BONRAY DRILLING CORPORATION
BY: RICHARD B. HEFNER Richard B. Hefner President, Chief Executive Officer and Director
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 indicated on September 27, 1996.
RAYMOND H. HEFNER, JR. Chairman of the Board of Directors Raymond H. Hefner, Jr.
RICHARD B. HEFNER President, Chief Executive Officer Richard B. Hefner and Director
PHILIP C. DAY Treasurer and Chief Financial Officer Philip C. Day
JOANNE BELCHER Controller and Chief Accounting Officer Joanne Belcher
WILLIAM B. CLEARY Director William B. Cleary
HOBART A. SMITH Director Hobart A. Smith
JAMES R. TOLBERT III Director James R. Tolbert III