<PAGE> 1
Prospectus filed pursuant to Rule 424(b)(1)
Registration No. 333-08273
PROSPECTUS
CLIFFS DRILLING COMPANY
OFFER TO EXCHANGE
10.25% SENIOR NOTES DUE 2003, SERIES B
FOR ALL OUTSTANDING 10.25% SENIOR NOTES DUE 2003, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON AUGUST 30, 1996, UNLESS EXTENDED
---------------------
Cliffs Drilling Company, a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal," and together with this Prospectus, the "Exchange Offer"), to
exchange $1,000 principal amount of its 10.25% Senior Notes due 2003, Series B
(the "Exchange Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
(as defined herein) of which this Prospectus constitutes a part, for each $1,000
principal amount of its outstanding 10.25% Senior Notes due 2003, Series A (the
"Old Notes"), of which $150,000,000 principal amount is outstanding. The form
and terms of the Exchange Notes are identical in all material respects to the
form and terms of the Old Notes except for certain transfer restrictions and
registration rights relating to the Old Notes. The Exchange Notes will evidence
the same debt as the Old Notes and will be issued under and be entitled to the
benefits of the Indenture (as defined herein). The Exchange Notes and the Old
Notes are collectively referred to herein as the "Notes."
The Notes will be senior unsecured obligations of the Company, ranking pari
passu in right of payment with all senior Indebtedness (as defined) of the
Company and senior to all Subordinated Indebtedness (as defined) of the Company.
The Notes will be unconditionally guaranteed (the "Subsidiary Guarantees") on a
senior unsecured basis by the Company's principal subsidiaries (the "Subsidiary
Guarantors"), and the Subsidiary Guarantees will rank pari passu in right of
payment with all senior Indebtedness of the Subsidiary Guarantors and senior to
all Subordinated Indebtedness of the Subsidiary Guarantors. The Subsidiary
Guarantees may be released under certain circumstances. The Notes and Subsidiary
Guarantees will be effectively subordinated to secured Indebtedness of the
Company and the Subsidiary Guarantors, respectively, with respect to the assets
securing such Indebtedness, including any Indebtedness under the Revolving
Credit Facility (as defined), which is secured by liens on substantially all of
the assets of the Company and the Subsidiary Guarantors. At June 30, 1996, the
Company and the Subsidiary Guarantors had no Indebtedness outstanding under the
Revolving Credit Facility. The Indenture governing the Exchange Notes will
permit the Company and its subsidiaries to incur additional Indebtedness in the
future, subject to certain limitations. See "Description of the Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered on or prior to 5:00 p.m., New York City time, on the date the Exchange
Offer expires, which will be August 30, 1996, unless the Exchange Offer is
extended. See "The Exchange Offer -- Expiration Date; Extensions; Amendment."
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the business day prior to the Expiration Date (as defined herein),
unless previously accepted for exchange. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being tendered for exchange.
However, the Exchange Offer is subject to certain conditions which may be waived
by the Company and to the terms and provisions of the Registration Rights
Agreement (as defined herein). Old Notes may be tendered only in denominations
of $1,000 principal amount and integral multiples thereof. The Company has
agreed to pay the expenses of the Exchange Offer. See "The Exchange Offer."
(Cover continued on next page)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN
INVESTMENT IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 31, 1996
<PAGE> 2
The Exchange Notes will bear interest at the rate of 10.25% per annum,
payable semi-annually on May 15 and November 15 of each year, commencing
November 15, 1996. Holders of Exchange Notes of record on November 1, 1996 will
receive interest on November 15, 1996 from the date of issuance of the Exchange
Notes, plus an amount equal to the accrued interest on the Old Notes from the
date of issuance of the Old Notes, May 23, 1996, to the date of exchange
thereof. Interest on the Old Notes accepted for exchange will cease to accrue
upon issuance of the Exchange Notes.
The Old Notes were sold by the Company on May 23, 1996 to the Initial
Purchasers (as defined herein) in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The Old
Notes were thereupon offered and sold by the Initial Purchasers only to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) and to a limited number of institutional "accredited investors" (as defined
in Rule 501(a)(1),(2),(3) or (7) under the Securities Act), each of whom agreed
to comply with certain transfer restrictions and other conditions. Accordingly,
the Old Notes may not be offered, resold or otherwise transferred in the United
States unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Exchange Notes are being offered hereunder in order to satisfy the
obligations of the Company under the Registration Rights Agreement entered into
with the Initial Purchasers in connection with the offering of the Old Notes.
See "The Exchange Offer" and "Registration Rights Agreement."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission" or "SEC") to third parties, including
Exxon Capital Holdings Corporation, SEC No-Action Letter (available April 13,
1989), Morgan Stanley & Co. Inc., SEC No-Action Letter (available June 5, 1991)
(the "Morgan Stanley Letter") and Mary Kay Cosmetics, Inc., SEC No-Action Letter
(available June 5, 1991), the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by the respective holders thereof (other than a "Restricted Holder,"
being (i) a broker-dealer who purchased Old Notes exchanged for such Exchange
Notes directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business and such holder is not
participating in, and has no arrangement with any person to participate in, the
distribution (within the meaning of the Securities Act) of such Exchange Notes.
Eligible holders wishing to accept the Exchange Offer must represent to the
Company that such conditions have been met. Holders who tender Old Notes in the
Exchange Offer with the intention to participate in a distribution of the
Exchange Notes may not rely upon the Morgan Stanley Letter or similar no-action
letters. See "The Exchange Offer -- General." Each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. A broker-dealer that delivers such a prospectus to
purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations). This Prospectus, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that it will make
this Prospectus and any amendment or supplement to this Prospectus available to
any broker-dealer for use in connection with any such resale for a period of up
to 180 days after consummation of the Exchange Offer. See "Plan of
Distribution."
The Company will not receive any proceeds from the Exchange Offer.
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity of
any markets that may develop for the Exchange Notes or as to the ability of or
price at which the holders of Exchange Notes would be able to sell their
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including, among others, prevailing interest rates, the Company's
operating results and the market for similar securities. The Company does not
intend to apply for listing of the Exchange Notes on any securities exchange.
Jefferies & Company, Inc. and
2
<PAGE> 3
ING Baring (U.S.) Securities, Inc. (together, the "Initial Purchasers") have
informed the Company that they currently intend to make a market for the
Exchange Notes. However, they are not so obligated, and any such market making
may be discontinued at any time without notice. Accordingly, no assurance can be
given that an active public or other market will develop for the Exchange Notes
or as to the liquidity of or the trading market for the Exchange Notes.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Note (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company (the "Depositary"
or "DTC") and registered in its name or in the name of Cede & Co., its nominee.
Beneficial interests in the Global Note representing the Exchange Notes will be
shown on, and transfers thereof will be effected through, records maintained by
the Depositary and its participants. After the initial issuance of the Global
Note, Exchange Notes in certificated form will be issued in exchange for the
Global Note only on the terms set forth in the Indenture. See "Description of
the Notes -- Book-Entry; Delivery and Form."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Available Information.............................................. 4
Incorporation of Certain Documents by Reference.................... 4
Disclosure Regarding Forward-Looking Information................... 5
Prospectus Summary................................................. 6
Risk Factors....................................................... 15
The Company........................................................ 20
Private Placement.................................................. 21
Use of Proceeds.................................................... 21
Capitalization..................................................... 21
Pro Forma Condensed Consolidated Financial Information............. 22
Selected Consolidated Financial Information........................ 24
The Exchange Offer................................................. 26
Description of Existing Indebtedness............................... 32
Description of the Notes........................................... 32
Registration Rights Agreement...................................... 60
Transfer Restrictions on Old Notes................................. 61
Certain Federal Income Tax Considerations.......................... 63
Plan of Distribution............................................... 64
Experts............................................................ 65
</TABLE>
3
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549; and at the following regional offices of the Commission:
7 World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549,
at prescribed rates. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Company's Common Stock is traded on the
over-the-counter market and is listed on Nasdaq. The Company's reports, proxy
statements and other information concerning the Company can be inspected and
copied at the offices of The National Association of Securities Dealers, 1735 K
Street N.W., Washington, D.C. 20006. While any Notes that are "restricted
securities" within the meaning of Rule 144(a)(3) under the Exchange Act remain
outstanding, the Company will make available, upon request, to any holder and
any prospective purchaser of Notes, the information required pursuant to Rule
144A(d)(4) under the Securities Act during any period in which the Company is
not subject to Section 13 or 15(d) of the Exchange Act. Any such request should
be directed to the Secretary of the Company, 1200 Smith Street, Suite 300,
Houston, Texas 77002, telephone number (713) 651-9426.
This Prospectus constitutes part of a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act. This Prospectus omits certain of the information set forth in
the Registration Statement. Reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the securities offered hereby. Statements contained
herein concerning the provisions of contracts or other documents are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the copy of the applicable contract or other document filed with
the Commission. Copies of the Registration Statement and the exhibits thereto
are on file at the offices of the Commission and may be obtained upon payment of
the fee prescribed by the Commission, or may be examined without charge at the
public reference facilities of the Commission described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
pursuant to the Exchange Act (File No. 0-16703) and are incorporated herein by
reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995;
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996;
(3) The Company's Proxy Statement for the Annual Meeting of
Stockholders held on May 22, 1996; and
(4) The Company's Current Report on Form 8-K filed June 6, 1996 (the
"Form 8-K").
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made by this Prospectus shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
thereof. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
4
<PAGE> 5
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of such person, a copy of any or all
of the information that has been incorporated by reference in this Prospectus
(not including exhibits to the information that is incorporated by reference
herein unless such exhibits are specifically incorporated by reference in such
information). Requests for such copies should be directed to the Company at 1200
Smith Street, Suite 300, Houston, Texas 77002, Attention: James E. Mitchell Jr.,
Secretary (telephone number (713) 651-9426). In order to ensure timely delivery
of such documents prior to the Expiration Date, any request should be made by
August 14, 1996.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH
TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including without limitation, statements regarding the Company's
financial position, business strategy, budgets, plans and objectives of
management for future operations are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements") are
disclosed under "Risk Factors" and elsewhere in this Prospectus. All subsequent
written and oral forward-looking statements attributable to the Company, or
persons acting on its behalf, are expressly qualified in their entirety by the
Cautionary Statements.
5
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
consolidated financial statements (including the notes thereto) incorporated by
reference into this Prospectus. Unless the context otherwise requires, "Company"
refers to Cliffs Drilling Company and its consolidated subsidiaries.
THE COMPANY
Cliffs Drilling Company is an international contract drilling and
engineering company. The Company is primarily engaged in daywork drilling,
engineering services, and to a lesser extent, the development and operation of
mobile offshore production units ("MOPUs"). The Company has historically
deployed its assets in areas where it can achieve long-term growth and generate
stable cash flows and net income. This strategy has led to four consecutive
years of positive net income, while many other offshore drilling contractors
have experienced significant losses over the comparable period. The Company's
domestic operations are concentrated in the Texas/Louisiana Gulf Coast region
and its foreign operations are concentrated in Venezuela. The Company owns 12
jack-up drilling rigs, 6 land rigs, 5 MOPUs and a 50% interest in a joint
venture which owns one jack-up drilling rig.
The Company and its predecessors have been in the contract drilling
business since 1978. The Company entered the turnkey drilling business in 1982
in an effort to more fully utilize its existing fleet of rigs and complement its
daywork drilling operations. In response to the economic conditions which
adversely affected the domestic contract drilling business during the 1980s, the
Company undertook a strategic plan in 1989 to further diversify its scope of
operations and geographic concentration beyond the traditional domestic daywork
drilling market. The Company's management implemented a proactive approach to
identify, develop and exploit several market segments which provided higher
margins and more reliable operating income and cash flow. To achieve its
strategic objectives, the Company continued to emphasize its turnkey drilling
operations, expanded its well engineering and management services, became a
leader in the development and operation of MOPUs and deployed its drilling rigs
into selected international markets. With the implementation of this strategy,
the Company has positioned itself to benefit from increases in drilling and
production activities in several markets worldwide.
INDUSTRY CONDITIONS
Activity in the contract drilling industry and related oil service
businesses has shown signs of improvement over the last two years due to
increased worldwide demand for oil and natural gas. Over the past several years,
the supply of offshore drilling rigs has declined while the demand for such rigs
has increased, resulting in higher utilization rates. In addition, oil and gas
companies have experienced decreases in exploration and production costs from
technological advances such as increased use of 3-D seismic surveys, advances in
drill bits and completion technologies and use of new production techniques such
as MOPUs and subsea completions. In an effort to more quickly realize the
significant gas revenues attainable from shallow water drilling in the Gulf of
Mexico, oil and gas companies are producing reserves at faster rates. These
enhanced production methods increase the net present value of the reserves
produced and significantly shorten the reserve life in the Gulf of Mexico,
thereby necessitating additional drilling. In addition, the U.S. natural gas
market, which had experienced weak market conditions throughout the early 1990s,
has substantially improved in recent months. All of these factors have resulted
in increased demand for offshore rigs in the Gulf of Mexico and an increase in
both utilization and dayrates for jack-up drilling rigs. Management believes the
current market dynamics in the Gulf of Mexico will result in greater utilization
of the Company's rigs and services.
RECENT DEVELOPMENTS
As part of its business strategy, the Company has sought to identify
business opportunities that would expand its asset base, increase profitability
and enhance shareholder value. The Company's acquisition criteria, among others,
are to increase operating leverage and diversify geographically.
6
<PAGE> 7
On May 23, 1996, the Company completed the acquisition of 9 jack-up
drilling rigs and a 50% interest in a joint venture which owns an additional
jack-up drilling rig, and their related assets (collectively referred to as the
"Southwestern Rigs") operated by Southwestern Offshore Corporation, a Delaware
corporation ("Southwestern"). Pursuant to an Acquisition Agreement dated May 13,
1996 (the "Acquisition Agreement"), the Southwestern Rigs were acquired as
follows: (a) Cliffs Drilling Asset Acquisition Company (now known as
Southwestern Offshore Corporation), a newly formed Delaware corporation and
wholly-owned subsidiary of the Company ("Newco"), acquired 6 rigs from Viking
Supply Ships A.S. ("Viking"), (b) Newco acquired one rig from Ocean Master III
Inc., a corporation organized under the laws of Liberia ("Ocean"), (c) Newco
acquired one rig from Production Partner Inc., a corporation organized under the
laws of Liberia ("Partner"), (d) Newco acquired a partial indirect interest in
one rig owned by West Indies Drilling Joint Venture (the "Joint Venture")
through the purchase by Newco of the outstanding capital stock of Viking
Trinidad Limited, a corporation organized under the laws of the Republic of
Trinidad and Tobago ("Trinidad") and a partner in the Joint Venture, and (e)
Cliffs Drilling Merger Company, a newly formed Delaware corporation and
wholly-owned subsidiary of the Company ("Merger Sub"), acquired one rig through
the merger of Trivium Investments Limited, a corporation organized under the
laws of the British Virgin Islands ("Trivium"), with and into Merger Sub. As
used herein, the term "Sellers" shall mean Southwestern, Viking, Ocean, Partner
and Trivium.
The purchase price of the Southwestern Rigs was (a) $103.8 million in cash
(after reductions of $6.2 million for required refurbishments of certain
Southwestern Rigs not made prior to closing) plus (b) issuance of 1.2 million
shares of the Company's Common Stock, $.01 par value per share (the "Shares")
and (c) assumption of certain contractual liabilities, including the Company's
guarantee of $4.25 million in indebtedness of the Joint Venture to Citibank N.A.
related to the refurbishment of the jack-up drilling rig owned by the Joint
Venture (together with accrued but unpaid interest thereon and costs of
collection). Pursuant to the Acquisition Agreement, the Company has registered
resale of the Shares.
In part to finance the acquisition of the Southwestern Rigs, the Company
sold the Old Notes on May 23, 1996 to the Initial Purchasers. Of the $144.8
million net proceeds received by the Company in connection with the sale of the
Old Notes, $103.8 million was used to fund the cash portion of the purchase
price for the Southwestern Rigs and $6.2 million was reserved to complete
refurbishments of 2 rigs not completed by Sellers prior to closing. The
Subsidiary Guarantors each guarantee the Old Notes to the extent it is legally
able to do so. See "Private Placement" and "Capitalization."
The acquisition of the Southwestern Rigs significantly expanded the
Company's jack-up fleet and broadened its areas of operation, particularly in
the active Gulf of Mexico. Of the 10 Southwestern Rigs acquired, 7 rigs have
been refurbished by the Sellers in the past four years, and the Company
completed the refurbishment of one rig and expects to commence refurbishment
activities on another rig during July, 1996. Upon completion of the current
upgrade and refurbishment, management believes capital expenditures over the
next several years will be minimal. Eight of these rigs are currently operating
or are expected to operate in the Gulf of Mexico and the other 2 rigs are
operating in Qatar and Trinidad, respectively.
In addition, on May 10, 1996, the Company acquired the jack-up drilling rig
OCEAN MAGALLANES (the "Diamond Rig") from Diamond Offshore Southern Company
("Diamond") for $4.5 million. The Company has renamed this unit CLIFFS DRILLING
NO. 155. The Company has mobilized the Diamond Rig to Venezuela where it is
currently being refurbished and upgraded prior to commencing operations in
Venezuela. The Company has allocated $12 million of the net proceeds from the
sale of the Old Notes for the acquisition, mobilization and refurbishment of the
Diamond Rig. The Company signed a letter of intent with Maraven S.A. ("Maraven")
for the Diamond Rig and expects to sign an initial eight-month contract with
Maraven for use of the Diamond Rig in Lake Maracaibo, Venezuela.
The acquisitions of the Southwestern Rigs and the Diamond Rig are
collectively referred to herein as the "Rig Acquisitions." Newco has changed its
name to "Southwestern Offshore Corporation" and has acquired the jack-up
drilling rig and related assets from Merger Sub which were acquired from
Trivium.
7
<PAGE> 8
On June 27, 1996, the Company and International Nederlanden (U.S.) Capital
Corporation ("ING") modified and amended the Revolving Credit Facility to, among
other things, increase the amount available under such facility to $35 million.
See "Description of Existing Indebtedness."
RIG FLEET INFORMATION
The following table provides the status of and information about the
drilling rigs and MOPUs owned and operated by the Company, including those
recently acquired in the Rig Acquisitions, as of July 15, 1996:
<TABLE>
<CAPTION>
YEAR RATED DEPTH
DELIVERED/ ---------------- TYPE OF EXPIRATION
EQUIPMENT TYPE(1) REFURBISHED WATER DRILLING LOCATION(1) CONTRACT DATE
- -------------------------------- ------- ----------- ----- -------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
JACK-UP DRILLING RIGS
LASALLE......................... IC 1982/1996 150' 25,000' Colombia Term Daywork December, 1996
Cliffs Drilling No. 12.......... MC 1980/1994 200' 20,000' GOM Workover N/A
Cliffs Drilling No. 155(2)...... IC 1980/1996 150' 22,000' Venezuela Term Daywork March, 1997
Southwestern 100................ MC 1983/1993 100' 25,000' GOM Well-to-Well September, 1996
Southwestern Marine IV(3)....... MC 1980/1996 110' 25,000' Trinidad Term Daywork June, 1997
Southwestern 150................ IC 1979/1994 150' 20,000' GOM Well-to-Well August, 1996
Southwestern 151................ IC 1981/1993 150' 25,000' GOM Well-to-Well August, 1996
Southwestern 152................ MC 1980/1993 150' 25,000' GOM Well-to-Well September, 1996
Southwestern 153................ MC 1980/1994 150' 25,000' GOM Well-to-Well October, 1996
Southwestern 154................ IC 1979/1996 150' 20,000' GOM Well-to-Well July, 1996
Southwestern 160................ IC 1980/1996 160' 20,000' Qatar Term Daywork August, 1998
Southwestern 180................ MS 1978/1996 184' 25,000' Shipyard N/A N/A
Southwestern 200................ MC 1979/1992 200' 25,000' GOM Well-to-Well September, 1996
LAND DRILLING RIGS
28....................................... 1977/1994 -- 25,000' Venezuela Term Turnkey February, 1997
40....................................... 1980/1991 -- 25,000' Venezuela Term Daywork September, 1996
41....................................... 1981/1994 -- 25,000' Venezuela Term Turnkey February, 1997
42....................................... 1981/1994 -- 25,000' Venezuela Term Daywork February, 1997
43....................................... 1981/1991 -- 25,000' Venezuela Term Daywork September, 1996
54....................................... 1981/1995 -- 30,000' Venezuela Term Daywork August, 1997
MOBILE OFFSHORE PRODUCTION UNITS
Cliffs Drilling No. 4.................... 1967/1995 150' -- GOM Month-to-Month N/A
Cliffs Drilling No. 8.................... 1977/1993 250' -- GOM N/A N/A
Cliffs Drilling No. 10................... 1979/1993 250' -- GOM N/A N/A
Cliffs Drilling No. 14................... 1980 200' -- GOM N/A N/A
LANGLEY.................................. 1965/1996 150' -- Nigeria Term Daywork October, 2001
</TABLE>
- ---------------
(1) Abbreviations:
MC = mat supported cantilever jack-up mobile offshore drilling unit
IC = independent leg cantilever jack-up mobile offshore drilling unit
MS = mat supported slot jack-up mobile offshore drilling unit
GOM = Gulf of Mexico
(2) Formerly the OCEAN MAGALLANES and defined herein as the Diamond Rig.
(3) Formerly the Southwestern 110, this unit is owned by the Joint Venture in
which the Company has an indirect ownership interest.
OPERATIONS
The Company's three major business segments are daywork drilling,
engineering services and MOPU operations.
Daywork Drilling. The Company began operations as a daywork contract
driller in the Gulf of Mexico and the Texas/Louisiana Gulf Coast region. Because
of depressed conditions in the domestic oil and gas industry during the 1980s
and early 1990s, the Company sold certain drilling rigs and deployed its
remaining
8
<PAGE> 9
rigs into selected international markets. These strategic decisions were made to
enable the Company to stabilize cash flows during an extended market downturn.
The Company currently has an established base of term contracts in both drilling
and production operations, a strong cash position and no debt. Upon completion
of all planned rig refurbishments, the Company will operate 6 land rigs in
Venezuela, 9 jack-up rigs in the Gulf of Mexico and one jack-up rig in each of
Venezuela, Colombia, Qatar and Trinidad. Of the 13 jack-up drilling rigs owned
by the Company or in which the Company has an interest, 12 are cantilevered, 5
have top drives and substantially all have been refurbished in the last five
years or are currently in the process of being refurbished as described above.
Engineering Services. Turnkey drilling has been a key element in the
Company's long-term strategy since 1982. The Company believes that its downhole
engineering expertise, extensive operating experience, veteran personnel and
risk management capabilities have allowed the Company to reduce the risks
inherent in turnkey drilling operations. The Company also began providing well
engineering and management services during 1993 as an expansion of this business
segment. Under these arrangements, the Company is responsible for well design
and well site supervision.
MOPU Operations. Since 1989, the Company has pioneered the development and
operation of MOPUs, which allow the Company to participate in the more stable
oil and gas production market. MOPUs are offshore production systems, usually
converted jack-up rigs, from which the drilling equipment is removed and
production equipment is installed. MOPUs generally are contracted on a term
basis for several years and are characterized by relatively high operating
margins, with most of the costs assumed by the customer.
THE PRIVATE PLACEMENT AND USE OF PROCEEDS
The Old Notes were sold by the Company on May 23, 1996 to the Initial
Purchasers and were thereupon offered and sold by the Initial Purchasers only to
certain qualified buyers. Of the $144.8 million net proceeds received by the
Company in connection with the sale of the Old Notes, $103.8 million was used to
fund the cash portion of the purchase price for the Southwestern Rigs and $6.2
million was reserved to complete refurbishments of 2 rigs not completed by
Sellers prior to closing. In addition, the Company allocated $12 million of such
net proceeds for the acquisition, mobilization and refurbishment of the Diamond
Rig. See "Private Placement" and "Capitalization."
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $150,000,000 principal
amount of Exchange Notes for up to $150,000,000 principal amount of Old Notes.
The form and terms of the Exchange Notes are identical in all material respects
to the form and terms of the Old Notes except that the Exchange Notes have been
registered under the Securities Act and will not contain certain transfer
restrictions and hence are not entitled to the benefits of the Registration
Rights Agreement relating to the contingent increases in the interest rate
provided for pursuant thereto. The Exchange Notes will evidence the same debt as
the Old Notes and will be issued under and be entitled to the benefits of the
Indenture governing the Old Notes. See "Description of Exchange Notes."
The Exchange Offer......... Each $1,000 principal amount of Exchange Notes will
be issued in exchange for each $1,000 principal
amount of outstanding Old Notes. As of the date
hereof, $150,000,000 principal amount of Old
Notes are issued and outstanding. The Company
will issue the Exchange Notes to tendering
holders of Old Notes on or promptly after the
Expiration Date.
Resale..................... The Company believes that the Exchange Notes issued
pursuant to the Exchange Offer generally will be
freely transferable by the holders thereof
without registration or any prospectus delivery
requirement under the Securities Act, except for
certain Restricted Holders who may be required to
deliver copies of this Prospectus in connection
with
9
<PAGE> 10
any resale of the Exchange Notes issued in
exchange for such Old Notes. See "The Exchange
Offer -- General" and "Plan of Distribution."
Expiration Date............ 5:00 p.m., New York City time, on August 30, 1996,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date to which the Exchange Offer is extended. See
"The Exchange Offer -- Expiration Date;
Extensions; Amendments."
Interest on the Notes...... The Exchange Notes will bear interest payable
semi-annually on May 15 and November 15 of each
year, commencing November 15, 1996. Holders of
Exchange Notes of record on November 1, 1996 will
receive interest on November 15, 1996 from the
date of issuance of the Exchange Notes, plus an
amount equal to the accrued interest on the Old
Notes from the date of issuance of the Old Notes,
May 23, 1996, to the date of exchange thereof.
Consequently, assuming the Exchange Offer is
consummated prior to the record date in respect
of the November 15, 1996 interest payment for the
Old Notes, holders who exchange their Old Notes
for Exchange Notes will receive the same interest
payment on November 15, 1996 that they would have
received had they not accepted the Exchange
Offer. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of
the Exchange Notes. See "The Exchange
Offer -- Interest on the Exchange Notes."
Procedures for Tendering
Old Notes................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with the Old Notes to be exchanged and
any other required documentation to the Exchange
Agent at the address set forth herein and therein
or effect a tender of Old Notes pursuant to the
procedures for book-entry transfer as provided
for herein. See "The Exchange Offer -- Procedures
for Tendering."
Special Procedures for
Beneficial Holders........ Any beneficial holder whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender in the Exchange Offer
should contact such registered holder promptly
and instruct such registered holder to tender on
the beneficial holder's behalf. If such
beneficial holder wishes to tender directly, such
beneficial holder must, prior to completing and
executing the Letter of Transmittal and
delivering the Old Notes, either make appropriate
arrangements to register ownership of the Old
Notes in such holder's name or obtain a properly
completed bond power from the registered holder.
The transfer of record ownership may take
considerable time. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures............... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes
and a properly completed Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange
10
<PAGE> 11
Agent prior to the Expiration Date, or who cannot
complete the procedure for book-entry transfer on
a timely basis, may tender their Old Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures."
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
business day prior to the Expiration Date, unless
previously accepted for exchange. See "The
Exchange Offer -- Withdrawal of Tenders."
Termination of the Exchange
Offer.................... The Company may terminate the Exchange Offer if it
determines that the Exchange Offer violates any
applicable law or interpretation of the staff of
the SEC. Holders of Old Notes will have certain
rights against the Company under the Registration
Rights Agreement should the Company fail to
consummate the Exchange Offer. See "The Exchange
Offer -- Termination" and "Registration Rights
Agreement."
Acceptance of Old Notes and
Delivery of Exchange
Notes.................... Subject to certain conditions (as summarized above
in "Termination of the Exchange Offer" and
described more fully in "The Exchange
Offer -- Termination"), the Company will accept
for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer -- General."
Exchange Agent............. Fleet National Bank is serving as exchange agent
(the "Exchange Agent") in connection with the
Exchange Offer. The mailing address of the
Exchange Agent is: Fleet National Bank, 777 Main
Street, MSN CT/MO/0224, Hartford, Connecticut
06115, Attention: Corporate Trust Operations.
Hand deliveries and deliveries by overnight
courier should be addressed to Fleet National
Bank, 777 Main Street, MSN CT/MO/0224, Hartford,
Connecticut 06115, Attention: Corporate Trust
Operations. For information with respect to the
Exchange Offer, the telephone number for the
Exchange Agent is (860) 986-1271 and the
facsimile number for the Exchange Agent is (860)
986-7908. See "The Exchange Offer -- Exchange
Agent."
Certain Tax Consequences... The exchange pursuant to the Exchange Offer will
generally not be a taxable event for federal
income tax purposes. See "Certain Federal Income
Tax Considerations."
Use of Proceeds............ There will be no cash proceeds payable to the
Company from the issuance of the Exchange Notes
pursuant to the Exchange Offer. See "Use of
Proceeds." For a discussion of the use of the net
proceeds received by the Company from the sale of
the Old Notes, see "Private Placement."
11
<PAGE> 12
TERMS OF THE OLD NOTES AND THE EXCHANGE NOTES
Securities Offered......... $150 million principal amount of 10.25% Senior
Notes due 2003.
Maturity Date.............. May 15, 2003.
Interest Rate and Payment
Dates.................... The Notes will bear interest at a rate of 10.25%
per annum. Interest on the Notes will accrue from
the date of issuance thereof and will be payable
semi-annually in cash in arrears on May 15 and
November 15 of each year, commencing November 15,
1996.
Optional Redemption........ The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or
after May 15, 2000, at the redemption prices set
forth herein, together with accrued and unpaid
interest to the date of redemption. In the event
the Company consummates a Public Equity Offering
on or prior to May 15, 1999, the Company may at
its option use all or a portion of the proceeds
from such offering to redeem up to $37.5 million
principal amount of the Notes at a redemption
price equal to 110% of the aggregate principal
amount thereof, together with accrued and unpaid
interest to the date of redemption, provided that
at least $112.5 million in aggregate principal
amount of Notes remain outstanding immediately
after such redemption. See "Description of the
Notes -- Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, each
holder of Notes will have the right to require
the Company to purchase all or a portion of such
holder's Notes at a price equal to 101% of the
aggregate principal amount thereof, together with
accrued and unpaid interest to the date of
purchase. See "Description of the
Notes -- Certain Covenants -- Change of Control."
Certain Covenants.......... The Indenture relating to the Notes contains
certain covenants, including covenants which
limit: (i) indebtedness; (ii) restricted
payments; (iii) issuances and sales of capital
stock of restricted subsidiaries; (iv)
sale/leaseback transactions; (v) transactions
with affiliates; (vi) liens; (vii) asset sales;
(viii) dividends and other payment restrictions
affecting restricted subsidiaries; (ix) conduct
of business; and (x) mergers, consolidations and
sales of assets. See "Description of the
Notes -- Certain Covenants" and "-- Merger,
Consolidation and Sale of Assets."
Guarantees................. The Notes will be unconditionally guaranteed on a
senior unsecured basis by each of the Company's
principal subsidiaries, and such Subsidiary
Guarantees will rank pari passu in right of
payment with all senior Indebtedness of the
Subsidiary Guarantors and senior to all
Subordinated Indebtedness of the Subsidiary
Guarantors. At June 30, 1996, the Subsidiary
Guarantors had no outstanding Indebtedness under
the Revolving Credit Facility. The Subsidiary
Guarantees may be released under certain
circumstances. See "Description of the
Notes -- Subsidiary Guarantees of Notes."
Ranking.................... The Notes will be senior unsecured obligations of
the Company, ranking pari passu in right of
payment with all senior Indebtedness of the
Company and senior to all Subordinated
Indebtedness of the Company. The Notes and the
Subsidiary Guarantees, however, will be
effectively subordinated to secured Indebtedness
of the Company and
12
<PAGE> 13
the Subsidiary Guarantors, respectively, with
respect to the assets securing such Indebtedness,
including any Indebtedness under the Revolving
Credit Facility, which is secured by liens on
substantially all of the assets of the Company
and the Subsidiary Guarantors. At June 30, 1996,
the Company and the Subsidiary Guarantors had no
outstanding Indebtedness under the Revolving
Credit Facility. Subject to certain limitations,
the Company and its Subsidiaries may incur
additional Indebtedness in the future. See
"Description of the Notes -- Ranking."
Transfer Restrictions...... The Old Notes have not been registered under the
Securities Act and unless so registered may not
be offered or sold except pursuant to an
exemption from, or in a transaction not subject
to, the registration requirements of the
Securities Act. See "Transfer Restrictions on Old
Notes." The Exchange Notes would in general be
freely tradeable after the Exchange Offer. See
"The Exchange Offer" and "Plan of Distribution."
Exchange Offer............. Pursuant to a registration rights agreement (the
"Registration Rights Agreement") by and among the
Company, the Subsidiary Guarantors and the
Initial Purchasers, the Company agreed (i) to
file a registration statement with the SEC (the
"Exchange Offer Registration Statement") with
respect to the Exchange Offer to exchange Old
Notes for Exchange Notes within 60 days after the
date of original issuance of the Old Notes (which
was May 23, 1996) and (ii) to use its best
efforts to cause such registration statement to
become effective under the Securities Act within
120 days after such issue date. The Registration
Statement of which this Prospectus is a part
constitutes such Exchange Offer Registration
Statement. In the event that applicable law or
interpretations of the staff of the SEC do not
permit the Company to file the Exchange Offer
Registration Statement or to effect the Exchange
Offer, or if certain holders of the Notes notify
the Company that they are not permitted to
participate in, or would not receive freely
tradeable Notes pursuant to, the Exchange Offer,
the Company will use its best efforts to cause to
become effective a registration statement (the
"Shelf Registration Statement") with respect to
the resale of the Notes and to keep the Shelf
Registration Statement effective until three
years after the date of original issuance of the
Notes. The interest rate on the Notes is subject
to increase under certain circumstances if the
Company is not in compliance with its obligations
under the Registration Rights Agreement. See
"Registration Rights Agreement."
RISK FACTORS
An investment in the Notes involves certain risks that a potential investor
should carefully evaluate prior to making an investment in the Notes. See "Risk
Factors."
13
<PAGE> 14
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
The following table sets forth selected historical consolidated financial
information of the Company and should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
and Management's Discussion and Analysis of Financial Condition and Results of
Operations, incorporated by reference herein, and the information under the
captions "Pro Forma Condensed Consolidated Financial Information" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues.................................................. $65,538 $83,693 $83,289 $14,282 $29,078
Costs and Expenses:
Operating Expenses...................................... 35,171 50,907 67,713 9,439 21,846
Depreciation, Depletion and Amortization................ 17,438 14,008 7,271 2,073 1,503
Contract Termination Provision.......................... 577 5,193 -- -- --
General and Administrative Expense ..................... 4,807 5,114 5,289 1,352 1,398
------- ------- ------- ------- -------
Operating Income.......................................... 7,545 8,471 3,016 1,418 4,331
Other Income (Expense)(1)................................. (3,919) (2,415) 2,430 (298) (631)
------- ------- ------- ------- -------
Net Income................................................ 3,626 6,056 5,446 1,120 3,700
Dividends Applicable to Preferred Stock(2)................ (2,659) (2,659) (2,659) (665) (31)
------- ------- ------- ------- -------
Net Income Applicable to Common and Common Equivalent
Shares.................................................. $ 967 $ 3,397 $ 2,787 $ 455 $ 3,669
======= ======= ======= ======= =======
Net Income Per Share...................................... $ 0.21 $ 0.80 $ 0.68 $ 0.11 $ 0.62
======= ======= ======= ======= =======
Weighted Average Number of Common and Common Equivalent
Shares Outstanding(2)................................... 4,514 4,223 4,108 4,092 5,876
OTHER FINANCIAL DATA (UNAUDITED):
EBITDA(3)................................................. $23,682 $26,873 $15,322 $ 3,598 $ 7,221
Capital Expenditures...................................... $12,668 $ 9,100 $13,437 $ 2,881 $ 2,810
Ratio of EBITDA to Total Interest......................... 17.5x 32.5x 77.0x 112.4x 277.7x
Ratio of Earnings to Fixed Charges(4)..................... 4.0x 8.7x 31.8x 33.5x 139.8x
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
---------------------------- -------------------
(UNAUDITED)
<S> <C> <C>
SUMMARY BALANCE SHEET DATA:
Cash and Cash Equivalents................................. $26,405 $ 21,936
Other Working Capital..................................... 7,454 13,333
Property and Equipment, Net............................... 65,950 67,010
Total Assets.............................................. 128,962 128,540
Notes Payable, Long-Term.................................. -- --
Total Shareholders' Equity(2)(5).......................... $74,015 $105,020
</TABLE>
- ---------------
(1) Includes items of other income and expense, interest expense and income
taxes. Includes litigation settlement and expenses of $3.7 million in 1993,
net exchange rate losses of $1.2 million in 1994, net gains on disposition
of assets of $2.7 million and net exchange rate gains of $2.6 million in
1995 and net exchange rate gains of $1.1 million in the first quarter of
1996.
(2) On January 17, 1996, the Company issued 2,113,557 shares of Common Stock
upon conversion of 1,115,988 shares of its 1,150,000 outstanding shares of
$2.3125 Convertible Exchangeable Preferred Stock (the "Preferred Stock").
The remaining 34,012 shares were redeemed for cash in the amount of $25.69
per share plus $0.22 per share in accrued dividends thereon at a cost to the
Company of approximately $.9 million.
(3) EBITDA represents net income before depreciation, depletion, amortization,
contract termination provision, interest expense and income taxes. EBITDA is
frequently used by securities analysts and is presented here to provide
additional information about the Company's operations. EBITDA is not a
measurement presented in accordance with generally accepted accounting
principles ("GAAP") and should not be considered as an alternative to net
income as a measure of operating results or as an alternative to cash flows
as a better measure of liquidity.
(4) For purposes of these calculations, earnings consist of income before income
taxes plus fixed charges, excluding capitalized interest. Fixed charges
consist of interest expense, including capitalized interest, and a portion
of rent considered to represent interest cost.
(5) The Company has not paid any cash dividends on its Common Stock.
14
<PAGE> 15
RISK FACTORS
In addition to the other information set forth elsewhere in this Prospectus
and the documents incorporated herein by reference, the following factors should
be carefully evaluated prior to making an investment in the Notes:
RELIANCE ON OIL AND GAS INDUSTRY
Demand for the Company's services depends primarily upon the level of
spending by oil and gas companies for exploration, development and production
activities. Activity in the contract drilling industry and related oil service
businesses was severely depressed from 1982 until 1992 due to volatility in oil
prices and depressed natural gas prices. As demonstrated during this period, any
prolonged reduction in oil and natural gas prices will depress the level of
exploration, development and production activity and result in a corresponding
decline in the demand for the Company's services and, therefore, have a material
adverse effect on the Company's revenues and profitability. It is not possible
to predict whether contract drilling rig utilization and dayrates will maintain
levels sufficient to ensure acceptable operating results in future periods. The
Company's future success will depend in part upon general economic conditions in
the oil and gas industry, which cannot be predicted with certainty.
COMPETITION
The contract drilling industry is a highly competitive and cyclical
business characterized by high capital and maintenance costs. The Company
competes with numerous other drilling contractors, some of which have
substantially greater financial and other resources than the Company.
Competition for drilling contracts will likely continue to be intense in the
foreseeable future. Competitive factors in the energy service industry include
price, technical and engineering expertise, work force experience, rig
suitability, safety record, efficiency, condition of equipment, reputation and
customer relations. If demand for drilling rigs increases in the future, rig
availability may also become a competitive factor.
SUBSTANTIAL INDEBTEDNESS AND RESTRICTIONS
At June 30, 1996, the Company had $150 million of outstanding indebtedness
(including the Old Notes) and $4.7 million reserved pursuant to existing letters
of credit under the Revolving Credit Facility. The Company's level of
indebtedness will have several important effects on its future operations,
including (i) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on its indebtedness and will not be
available for other purposes, (ii) covenants contained in the Company's
Indenture relating to the Notes (the "Indenture") or the Revolving Credit
Facility will require the Company to meet certain financial tests, and other
restrictions will limit its ability to borrow additional funds or to dispose of
assets and may affect the Company's flexibility in planning for, and reacting
to, changes in its business, including possible acquisition activities, and
(iii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate or other
purposes may be impaired. The Company's ability to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's future performance, which will be subject to general economic
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control. There can be no assurance
that the Company's business will continue to generate cash flow at or above
current levels. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt, it may be required to refinance
all or a portion of its indebtedness, including the Notes, or to obtain
additional financing. There can be no assurance that any such refinancing would
be possible or that any additional financing could be obtained.
EFFECTIVE SUBORDINATION
The Company has established a Revolving Credit Facility pursuant to which
it may currently borrow up to $35 million on a revolving credit basis. The
Revolving Credit Facility is secured by liens on substantially all of the assets
of the Company and the Subsidiary Guarantors. Accordingly, the lender under the
Revolving
15
<PAGE> 16
Credit Facility will have claims with respect to the assets constituting
collateral for any indebtedness thereunder that will be prior to the claims of
holders of the Notes. See "Description of Existing Indebtedness." In the event
of a default on the Notes, or a bankruptcy, liquidation or reorganization of the
Company, such assets will be available to satisfy obligations with respect to
the indebtedness secured thereby before any payment therefrom could be made on
the Notes. Thus, the Notes and the Subsidiary Guarantees will be effectively
subordinated to claims of lender under the Revolving Credit Facility to the
extent of such pledged collateral.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company must offer to
purchase all Notes then outstanding at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
purchase. See "Description of the Notes -- Certain Covenants -- Change of
Control." The occurrence of a Change of Control may result in the lender under
the Revolving Credit Facility having the right to require the Company to repay
all Indebtedness outstanding thereunder. There can be no assurance that the
Company will have available funds sufficient to repay all Indebtedness owing
under the Revolving Credit Facility or to fund the purchase of the Notes upon a
Change of Control. In the event a Change of Control occurs at a time when the
Company does not have available funds sufficient to pay for all of the Notes
delivered by Holders seeking to accept the Company's repurchase offer, an Event
of Default would occur under the Indenture.
OPERATING HISTORY AND WORKING CAPITAL NEEDS
The Company was not profitable from 1988 through 1991 as a result of
depressed economic conditions in the oil and gas and oilfield service
industries. To the extent that cash in excess of cash on hand and cash generated
from operations is needed in the near term for working capital and capital
expenditures, it is expected that the Company would draw on the Revolving Credit
Facility or seek other debt or equity financing in the private or public
markets. Additional liquidity might also be generated through the sale of
operating assets or through the reduction of capital expenditures, although any
such sale or reduction may have an adverse effect on the Company's results of
operations. The ability of the Company to sell debt or equity securities or
assets would depend on conditions then prevailing in the relevant market and, in
the case of any offering of debt or equity securities, the Company's results of
operations, financial condition and business prospects. There can be no
assurance that the Company could, if the need arose, effect any such sale of
debt or equity securities or assets on terms that were acceptable to the
Company. In addition, the Indenture limits the ability of the Company to incur
additional Indebtedness or to enter into mergers, asset sales or consolidations.
See "Description of the Notes -- Certain Covenants" and "-- Merger,
Consolidation and Sale of Assets."
RISKS ASSOCIATED WITH TURNKEY DRILLING
Under a turnkey drilling contract, the Company contracts to drill a well to
a contract depth under specified conditions for a fixed price. In addition, the
Company provides technical expertise and engineering services, as well as most
of the equipment required for the well, and is compensated when the contract
terms have been satisfied. On a turnkey well, the Company from time to time
operates rigs subcontracted from other drilling contractors on a dayrate basis.
The Company also subcontracts substantially all of the related services and
manages the drilling process. The risks to the Company on a turnkey drilling
contract are substantially greater than on a well drilled on a daywork basis
because the Company assumes most of the risks associated with drilling
operations generally assumed by the operator in a daywork contract, including
risk of blowout, loss of hole, stuck drill stem, machinery breakdowns, abnormal
drilling conditions and risks associated with subcontractors' services, supplies
and personnel. The Company has obtained insurance coverage in the past to reduce
these risks inherent in turnkey drilling operations. Should such coverage not be
available in the future, it would have a material adverse effect on the
Company's turnkey drilling operations. See "-- Risks and Insurance."
16
<PAGE> 17
RISKS AND INSURANCE
The Company's operations are subject to the many hazards inherent in the
drilling business, including, for example, blowouts, cratering, fires,
explosions and adverse weather and seas. These hazards could cause personal
injury, suspend drilling operations or seriously damage or destroy the equipment
involved and could cause substantial damage to producing formations and
surrounding areas. Damage to the environment could also result from the
Company's operations, particularly through oil spillage and extensive,
uncontrolled fires. As a protection against operating hazards, the Company
maintains broad insurance coverage, including all risks physical damage,
employer's liability, comprehensive general liability or commercial contract
indemnity and workers' compensation insurance. The Company's third party
liability insurance coverage is approximately $100 million per occurrence. The
Company also maintains insurance coverage on an annual basis to protect against
certain hazards inherent in its turnkey contract drilling and oil and gas
operations. This insurance was most recently renewed on June 1, 1996, and is
scheduled for renewal on October 1, 1997. The Company believes that it is
adequately insured for public liability and property damage to others with
respect to its operations. However, such insurance may not be sufficient to
protect the Company against liability for all consequences of well disasters,
extensive fire damage or damage to the environment. The Company also carries
insurance to cover physical damage to or loss of its drilling rigs and MOPUs. In
view of difficulties that may be encountered in renewing such insurance at
reasonable rates, no assurance can be given that the Company will be able to
maintain the type and amount of coverage that it considers adequate. The
occurrence of a significant event for which the Company is not fully insured
could have a material adverse effect on the Company's financial position and
results of operations.
RISKS INHERENT IN FOREIGN OPERATIONS
A significant percentage of the Company's revenues is derived from foreign
sources or from services performed abroad. For the fiscal year ended December
31, 1995, 63% of the Company's consolidated revenues were derived from foreign
operations, principally in Venezuela. Foreign operations and export sales are
subject in varying degrees to risks inherent in doing business abroad. Such
risks include the possibility of unfavorable changes in tax or other laws;
partial or total expropriation; currency exchange rate fluctuations and
restrictions on currency repatriation; the disruption of operations from labor
and political disturbances, insurrection or war; and the requirements of partial
local ownership of operations in certain countries. Foreign governments may from
time to time suspend or curtail drilling operations or leasing activities when
such operations are considered to be detrimental to the environment or to
jeopardize public safety.
RELIANCE ON SIGNIFICANT CUSTOMERS
The Company's 3 largest customers for the year ended December 31, 1995,
Corpoven, S.A. ("Corpoven"), Maraven and Texaco Exploration & Production, Inc.,
accounted for approximately 66% of the Company's consolidated revenues. The
Company's 4 largest customers for the year ended December 31, 1994, Corpoven,
Maraven, Dresser-Rand Company and Cliffs Neddrill Central Turnkey International,
a joint venture in which the Company has a 1/3 ownership interest, accounted for
approximately 78% of the Company's consolidated revenues. The Company's 3
largest customers for the year ended December 31, 1993, Dresser-Rand Company,
Maraven and Marathon Oil Company, accounted for approximately 63% of the
Company's consolidated revenues. In addition, although during the last 3 years,
Southwestern decreased its dependence on individual customers, reliance on such
customers remains significant. In 1993, a single customer accounted for
approximately 77% of the total revenues of Southwestern and another customer
accounted for 15% of revenues. By 1994, the three largest customers of
Southwestern accounted for 24%, 16% and 10%, respectively, of its total
revenues. During 1995, the 2 largest customers of Southwestern each accounted
for 15% of its total revenues. The loss of any significant customer by the
Company or Newco could, at least on a short term basis, have a material adverse
impact on the Company's results of operations.
17
<PAGE> 18
GOVERNMENT REGULATION
The drilling of oil and gas wells is subject to various federal, state,
local and foreign laws, rules and regulations. The Company, as an owner or
operator of domestic offshore facilities, may be liable for the costs of removal
and damages arising out of a pollution incident to the extent set forth in the
Federal Water Pollution Control Act, as amended by the U.S. Oil Pollution Act of
1990 and the Outer Continental Shelf Lands Act. In addition, the Company may
also be subject to other civil claims arising out of any such incident. Certain
of the Company's facilities are also subject to regulations of the Environmental
Protection Agency ("EPA") that require the preparation and implementation of
spill prevention control and countermeasure plans relating to possible discharge
of oil into navigable waters. The Company supplements its activities in this
regard by membership in the Clean Gulf Association, which provides pollution
control facilities to its members. Other regulations of the EPA may require the
Company to take certain precautions in storing, handling and transporting
certain hazardous wastes. State statutory provisions relating to oil and natural
gas generally include requirements as to well spacing, waste prevention,
production limitations, pollution prevention and clean-up, obtaining drilling
permits and similar matters. The Company believes that it is in compliance in
all material respects with such laws, rules and regulations and that such
compliance has not had any material adverse effect on its operations or
financial condition.
The drilling industry is dependent on the demand for services from the oil
and gas exploration industry and, accordingly, is affected by changing tax laws,
price controls and other laws relating to the energy business. The Company's
business is affected generally by political developments and by federal, state,
local and foreign laws, rules and regulations which may relate directly to the
oil and gas industry. The adoption of laws, rules and regulations, both domestic
and foreign, which curtail exploration and development drilling for oil and gas
for economic, environmental and other policy reasons may adversely affect the
Company's operations by limiting available drilling and production
opportunities.
MOPUs and MOPU operations are subject to certain federal, state, local and
foreign laws, rules and regulations relating to engineering, design, structural,
safety, operational and inspection standards or requirements, and changes in
such standards or requirements could adversely affect the Company's MOPU
operations.
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Subsidiary Guarantors' issuance of the Subsidiary Guarantees.
To the extent that a court were to find that (x) a Subsidiary Guarantee was
incurred by a Subsidiary Guarantor with intent to hinder, delay or defraud any
present or future creditor or the Subsidiary Guarantor contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others or (y) a Subsidiary Guarantor did not receive fair consideration
or reasonably equivalent value for issuing its Subsidiary Guarantee and such
Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of
the issuance of such Subsidiary Guarantee, (iii) was engaged or about to engage
in a business or transaction for which the remaining assets of such Subsidiary
Guarantor constituted unreasonably small capital to carry on its business or
(iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, the court could avoid or subordinate
such Subsidiary Guarantee in favor of the Subsidiary Guarantor's creditors.
Among other things, a legal challenge of a Subsidiary Guarantee on fraudulent
conveyance grounds may focus on the benefits, if any, realized by the Subsidiary
Guarantor as a result of the issuance by the Company of the Notes. The Indenture
will contain a savings clause, which generally will limit the obligations of
each Subsidiary Guarantor under its Subsidiary Guarantee to the maximum amount
as will, after giving effect to all of the liabilities of such Subsidiary
Guarantor, result in such obligations not constituting a fraudulent conveyance.
To the extent a Subsidiary Guarantee of any Subsidiary Guarantor was avoided as
a fraudulent conveyance or held unenforceable for any other reason, holders of
the Notes would cease to have any claim against such Subsidiary Guarantor and
would be creditors solely of the Company and any Subsidiary Guarantor whose
Subsidiary Guarantee was not avoided or held unenforceable. In such event, the
claims of the holders of the Notes against the issuer of an invalid Subsidiary
Guarantee would be subject to the prior payment of all liabilities of such
Subsidiary Guarantor. There can be no assurance that, after providing for all
prior claims,
18
<PAGE> 19
there would be sufficient assets to satisfy the claims of the holders of the
Notes relating to any avoided portions of any of the Subsidiary Guarantees.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Subsidiary Guarantor may be considered insolvent if the sum of its debts,
including contingent liabilities, was greater than the fair marketable value of
all of its assets at a fair valuation or if the present fair marketable value of
its assets was less than the amount that would be required to pay its probable
liability on its existing debts, including contingent liabilities, as they
become absolute and mature.
Based upon financial and other information, the Company and the Subsidiary
Guarantors believe that the Subsidiary Guarantees are being incurred for proper
purposes and in good faith and that the Company and each Subsidiary Guarantor is
solvent and will continue to be solvent after issuing its Subsidiary Guarantee,
will have sufficient capital for carrying on its business after such issuance
and will be able to pay its debts as they mature. There can be no assurance,
however, that a court passing on such standards would agree with the Company.
See "Description of the Notes -- Subsidiary Guarantees of Notes."
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity of
any markets that may develop for the Exchange Notes or, the ability or price at
which the holders of Exchange Notes would be able to sell their Exchange Notes.
Future trading prices of the Exchange Notes will depend on many factors,
including, among others, prevailing interest rates, the Company's operating
results and the market for similar securities. The Company does not intend to
apply for listing of the Exchange Notes on any securities exchange. The Initial
Purchasers have informed the Company that they currently intend to make a market
for the Exchange Notes. However, they are not so obligated, and any such market
making may be discontinued at any time without notice. In addition, such market
making activity will be subject to the limits imposed by the Securities Act and
the Exchange Act and may be limited during the Exchange Offer or the pendency of
the Shelf Registration Statement. Accordingly, no assurance can be given that an
active public or other market will develop for the Exchange Notes or as to the
liquidity of or the trading market for the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Untendered Old Notes not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain subject to the existing restrictions upon transfer of
such Old Notes. See "Transfer Restrictions on Old Notes." Because the Company
anticipates that most holders of Old Notes will elect to exchange such Old Notes
for Exchange Notes due to the general lack of restrictions on the resale of
Exchange Notes under the Securities Act, the Company anticipates that the
liquidity of the market for any Old Notes remaining after the consummation of
the Exchange Offer may be substantially limited. Additionally, holders (other
than Restricted Holders) of any Old Notes not tendered in the Exchange Offer
prior to the Expiration Date will not be entitled to require the Company to file
the Shelf Registration Statement and the stated interest rate on such Old Notes
will remain at its initial level of 10.25%. See "Registration Rights Agreement."
DIFFICULTY TO EFFECT A CHANGE IN CONTROL
The Company's Certificate of Incorporation and Bylaws and the provisions of
the Delaware General Corporation Law limit the liability of directors and make
it more difficult to change control of the Company and replace incumbent
management. Also, the Indenture requires the Company to offer to redeem the
Notes upon a change of control (as defined therein). See "Description of the
Notes -- Certain Covenants -- Change of Control."
19
<PAGE> 20
THE COMPANY
The Company is an international contract drilling and engineering company
primarily engaged in daywork drilling, engineering services, and to a lesser
extent, the development and operation of MOPUs. The Company has historically
deployed its assets in areas where it can achieve long-term growth and generate
stable cash flows and net income. This strategy has led to four consecutive
years of positive net income, while many other offshore drilling contractors
have experienced significant losses over the comparable period. The Company's
domestic operations are concentrated in the Texas/Louisiana Gulf Coast region
and its foreign operations are concentrated in Venezuela. The Company owns 12
jack-up drilling rigs, 6 land rigs, 5 MOPUs and a 50% interest in a joint
venture which owns one jack-up drilling rig.
The Company and its predecessors have been in the contract drilling
business since 1978. The Company entered the turnkey drilling business in 1982
in an effort to more fully utilize its existing fleet of rigs and complement its
daywork drilling operations. In response to the economic conditions which
adversely affected the domestic contract drilling business during the 1980s, the
Company undertook a strategic plan in 1989 to further diversify its scope of
operations and geographic concentration beyond the traditional domestic daywork
drilling market. The Company's management implemented a proactive approach to
identify, develop and exploit several market segments which provided higher
margins and more reliable operating income and cash flow. To achieve its
strategic objectives, the Company continued to emphasize its turnkey drilling
operations, expanded its well engineering and management services, became a
leader in the development and operation of MOPUs and deployed its drilling rigs
into selected international markets. With the implementation of this strategy,
the Company has positioned itself to benefit from increases in drilling and
production activities in several markets worldwide.
As part of its business strategy, the Company has sought to identify
business opportunities that would expand its asset base, increase profitability
and enhance shareholder value. The Company's acquisition criteria, among others,
are to increase operating leverage and diversify geographically.
On May 23, 1996, the Company completed the acquisition of the Southwestern
Rigs from Sellers. The purchase price of the Southwestern Rigs was (a) $103.8
million in cash (after reductions of $6.2 million for required refurbishments of
certain Southwestern Rigs not made prior to closing) financed by the issuance of
the Notes, plus (b) issuance of the Shares and (c) assumption of certain
contractual liabilities, including the Company's guarantee of $4.25 million in
indebtedness of the Joint Venture to Citibank N.A. related to the refurbishment
of the jack-up drilling rig owned by the Joint Venture (together with accrued
but unpaid interest thereon and costs of collection). Pursuant to the
Acquisition Agreement, the Company has registered resale of the Shares.
In addition, on May 10, 1996, the Company acquired the Diamond Rig from
Diamond for $4.5 million. The Company renamed this unit the CLIFFS DRILLING NO.
155 and has mobilized the rig to Venezuela where it is currently being
refurbished and upgraded prior to commencing operations in Venezuela. The
Company has allocated $12 million of the net proceeds from the sale of the Old
Notes for the acquisition, mobilization and refurbishment of the Diamond Rig.
The Company is a Delaware corporation with principal executive offices
located at 1200 Smith Street, Suite 300, Houston, Texas 77002 and its telephone
number is (713) 651-9426.
20
<PAGE> 21
PRIVATE PLACEMENT
On May 23, 1996, the Company completed the private sale to the Initial
Purchasers of $150,000,000 principal amount of the Old Notes at a price of 97%
of the principal amount thereof in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The Initial
Purchasers thereupon offered and resold the Old Notes only to qualified
institutional buyers and a limited number of institutional accredited investors
at an initial price to such purchasers of 100% of the principal amount thereof.
Of the $144.8 million net proceeds received by the Company in connection with
the sale of the Old Notes, $103.8 million was used to fund the cash portion of
the purchase price for the Southwestern Rigs and $6.2 million was reserved to
complete refurbishments of 2 rigs not completed by Sellers prior to closing. In
addition, the Company allocated $12 million of such net proceeds for the
acquisition, mobilization and refurbishment of the Diamond Rig. See
"Capitalization."
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange a like
principal amount of Old Notes, the terms of which are identical in all material
respects to the Exchange Notes. The Old Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any change in capitalization
of the Company.
CAPITALIZATION
The following table sets forth as of March 31, 1996 (i) the capitalization
of the Company and (ii) the as adjusted capitalization of the Company after
giving effect to the Rig Acquisitions and the sale of the Old Notes. The table
should be read in conjunction with the Consolidated Financial Statements of the
Company, including the notes thereto, and Management's Discussion and Analysis
of Financial Condition and Results of Operations, incorporated by reference
herein, and the information under the caption "Pro Forma Condensed Consolidated
Financial Information" included in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
<S> <C> <C>
Current Portion of Long-Term Debt..................................... $ -- $ --
Long-Term Debt
10.25% Senior Notes due 2003........................................ -- 150,000
Shareholders' Equity
Common Stock, $.01 Par Value, 15,000,000 Shares Authorized,
6,631,661 and 7,831,661 Shares Issued and 6,189,930 and 7,389,930
Shares Outstanding for Actual and As Adjusted, Respectively...... 66 78
Paid-in Capital....................................................... 127,085 149,288
Retained Earnings (Deficit)........................................... (16,439) (16,439)
Less: Notes Receivable from Officers for Restricted Stock............. (232) (232)
Restricted Stock................................................ (27) (27)
Treasury Stock, at Cost, 441,731 Shares......................... (5,433) (5,433)
-------- --------
Total Shareholders' Equity.................................. 105,020 127,235
-------- --------
Total Capitalization........................................ $105,020 $ 277,235
======== ========
</TABLE>
21
<PAGE> 22
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE INFORMATION)
The following unaudited pro forma condensed consolidated financial
information is derived from the historical consolidated financial statements of
the Company incorporated herein by reference, data derived from the historical
consolidated financial statements of Southwestern incorporated herein by
reference, and assumptions deemed appropriate by the Company, including the full
principal amount of the Notes and the related interest thereon. The unaudited
Pro Forma Condensed Consolidated Financial Information does not reflect the
Diamond Rig acquisition or any potential land rig acquisitions.
The unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and the three months ended March 31, 1995 and
1996 reflect (i) the Rig Acquisitions and (ii) the sale of the Old Notes,
including interest thereon, and the application of the estimated net proceeds
therefrom, as if such transactions had occurred on January 1, 1995. The
unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996
reflects (i) the Rig Acquisitions (including the issuance of the Shares valued
at an average price of $18.51 per share in connection with the Southwestern Rigs
acquisition) and (ii) the sale of the Old Notes and application of the estimated
net proceeds therefrom, as if such transactions had occurred on March 31, 1996.
The unaudited Pro Forma Condensed Consolidated Financial Information should be
read in conjunction with the notes thereto and the Consolidated Financial
Statements of the Company and Southwestern (including the notes thereto)
incorporated herein by reference.
The unaudited Pro Forma Condensed Consolidated Financial Information do not
purport to be indicative of the financial position or results of operations that
would actually have occurred if the transactions described had occurred as
presented in such statements or that may be obtained in the future. In addition,
future results may vary significantly from the results reflected in such
statements due to general economic conditions, changes in prices received for
crude oil and natural gas, increases in crude oil and natural gas supplies,
increases in rigs available for service, future activity of the Company and
other factors. See "Risk Factors."
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------
1995 1995 1996
------------ ------- -------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues................................................... $108,854 $18,668 $38,504
Costs and Expenses:
Operating Expenses....................................... 89,800 13,827 28,396
Depreciation, Depletion and Amortization................. 12,556 3,263 2,845
General and Administrative Expense....................... 7,089 1,790 1,852
-------- ------- -------
Operating Income (Loss).................................... (591) (212) 5,411
Other Income (Expense)(1).................................. (7,346) (2,541) (3,718)
-------- ------- -------
Net Income (Loss).......................................... (7,937) (2,753) 1,693
Dividends Applicable to Preferred Stock(2)................. (2,659) (665) (31)
-------- ------- -------
Net Income (Loss) Applicable to Common and Common
Equivalent Shares(3)..................................... $(10,596) $(3,418) $ 1,662
======== ======= =======
Net Income (Loss) Per Share(3)............................. $ (2.00) $ (0.65) $ 0.23
======== ======= =======
Weighted Average Number of Common and Common Equivalent
Shares Outstanding(2).................................... 5,308 5,292 7,076
OTHER FINANCIAL DATA:
EBITDA(4).................................................. $ 17,000 $ 3,158 $ 9,643
Ratio of EBITDA to Consolidated Interest Expense(3)(4)..... 1.1x 0.8x 2.4x
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
AT MARCH 31,
1996
------------
<S> <C>
SUMMARY BALANCE SHEET DATA:
Cash and Cash Equivalents(5).................................................... $ 56,536
Other Working Capital........................................................... 13,333
Property and Equipment, Net..................................................... 196,254
Total Assets.................................................................... 300,755
Notes Payable, Long-Term........................................................ 150,000
Total Shareholders' Equity...................................................... $127,235
</TABLE>
- ---------------
(1) Includes items of other income and expense, interest expense and income
taxes. Includes net gains on disposition of assets of $2.7 million and net
exchange rate gains of $2.6 million in 1995 and net exchange rate gains of
$1.1 million in the first quarter of 1996.
(2) On January 17, 1996, the Company issued 2,113,557 shares of Common Stock
upon conversion of 1,115,988 shares of its 1,150,000 shares of Preferred
Stock. The remaining 34,012 shares were redeemed for cash in the amount of
$25.69 per share plus $0.22 per share in accrued dividends thereon at a cost
to the Company of approximately $.9 million.
(3) The historical results of Southwestern include the results of operations of
the rigs that were available for service during the indicated periods.
During the year ended December 31, 1995 and the quarters ended March 31,
1995 and 1996, 40% of the Southwestern Rigs were not available for service
as a result of being cold stacked or refurbished.
(4) EBITDA represents net income before depreciation, depletion, amortization,
interest expense and income taxes. EBITDA is frequently used by securities
analysts and is presented here to provide additional information about the
Company's operations. EBITDA is not a measurement presented in accordance
with GAAP and should not be considered as an alternative to net income as a
measure of operating results or as an alternative to cash flows as a better
measure of liquidity. Consolidated Interest Expense excludes $.7 million for
the year ended December 31, 1995 and $.2 million for the three months ended
March 31, 1995 and 1996, respectively, of non-cash amortization of debt
issue costs. See "Description of the Notes."
(5) Includes cash and cash equivalents from the issuance of the Notes which is
reserved to acquire and refurbish the Diamond Rig and for general corporate
purposes including potential land rig acquisitions.
23
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE INFORMATION)
The historical financial data presented below for and as of the end of the
five years ended December 31, 1995 are derived from the Company's audited
Consolidated Financial Statements. Such financial statements were audited by
Ernst & Young LLP. The information in this table should be read in conjunction
with the Consolidated Financial Statements of the Company, including the notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations, incorporated herein by reference.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues.................................... $84,503 $76,838 $65,538 $83,693 $83,289 $14,282 $29,078
Costs and Expenses:
Operating Expenses........................ 70,725 57,646 35,171 50,907 67,713 9,439 21,846
Depreciation, Depletion and
Amortization............................ 9,369 12,883 17,438 14,008 7,271 2,073 1,503
Contract Termination Provision............ -- -- 577 5,193 -- -- --
Write-down in Carrying Value of Oil and
Gas Properties.......................... 4,000 1,500 -- -- -- -- --
General and Administrative Expense........ 4,352 4,512 4,807 5,114 5,289 1,352 1,398
------- ------- ------- ------- ------- ------- -------
Operating Income (Loss)..................... (3,943) 297 7,545 8,471 3,016 1,418 4,331
Other Income (Expense)(1)................... 61 2,721 (3,919) (2,415) 2,430 (298) (631)
------- ------- ------- ------- ------- ------- -------
Net Income (Loss)........................... (3,882) 3,018 3,626 6,056 5,446 1,120 3,700
Dividends Applicable to Preferred
Stock(2).................................. (2,660) (2,659) (2,659) (2,659) (2,659) (665) (31)
------- ------- ------- ------- ------- ------- -------
Net Income (Loss) Applicable to Common and
Common Equivalent Shares.................. $(6,542) $ 359 $ 967 $ 3,397 $ 2,787 $ 455 $ 3,669
======= ======= ======= ======= ======= ======= =======
Net Income (Loss) per Share................. $ (2.19) $ 0.11 $ 0.21 $ 0.80 $ 0.68 $ 0.11 $ 0.62
======= ======= ======= ======= ======= ======= =======
Weighted Average Number of Common and Common
Equivalent Shares Outstanding(2).......... 2,992 3,257 4,514 4,223 4,108 4,092 5,876
OTHER FINANCIAL DATA (UNAUDITED):
EBITDA(3)................................... $10,834 $18,766 $23,682 $26,873 $15,322 $ 3,598 $ 7,221
Capital Expenditures........................ $33,316 $21,878 $12,668 $ 9,100 $13,437 $ 2,881 $ 2,810
Ratio of EBITDA to Total Interest........... 6.8x 7.1x 17.5x 32.5x 77.0x 112.4x 277.7x
Ratio of Earnings to Fixed Charges(4)....... N/A 1.6x 4.0x 8.7x 31.8x 33.5x 139.8x
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
--------------------------------------------------- 1996
1991 1992 1993 1994 1995 ------------------
------- ------- ------- ------- ------- (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Working Capital............................ $ 5,637 $24,830 $20,402 $19,331 $33,859 $ 35,269
Property and Equipment, Net................ 99,023 101,178 86,506 71,248 65,950 67,010
Total Assets............................... 143,283 150,203 133,523 120,167 128,962 128,540
Notes Payable, Long-Term................... 27,000 28,348 13,108 -- -- --
Total Shareholders' Equity(2)(5)........... $52,229 $71,446 $72,494 $70,881 $74,015 $105,020
</TABLE>
- ---------------
(1) Includes items of other income and expense, interest expense and income
taxes. Includes net gains on disposition of assets of $5.0 million in 1992,
litigation settlement and expenses of $3.7 million in 1993, net exchange
rate losses of $1.2 million in 1994, net gains on disposition of assets of
$2.7 million and net exchange rate gains of $2.6 million in 1995, and net
exchange rate gains of $1.1 million in the first quarter of 1996.
24
<PAGE> 25
(2) On January 17, 1996, the Company issued 2,113,557 shares of Common Stock
upon conversion of 1,115,988 shares of its 1,150,000 outstanding shares of
Preferred Stock. The remaining 34,012 shares were redeemed for cash in the
amount of $25.69 per share plus $0.22 per share in accrued dividends thereon
at a cost to the Company of approximately $.9 million.
(3) EBITDA represents net income before depreciation, depletion, amortization,
contract termination provision, write-down in carrying value of oil and gas
properties, interest expense and income taxes. EBITDA is frequently used by
securities analysts and is presented here to provide additional information
about the Company's operations. EBITDA is not a measurement presented in
accordance with GAAP and should not be considered as an alternative to net
income as a measure of operating results or as an alternative to cash flows
as a better measure of liquidity.
(4) For purposes of these calculations, earnings consist of income before income
taxes plus fixed charges, excluding capitalized interest. Fixed charges
consist of interest expense, including capitalized interest, and a portion
of rent considered to represent interest cost. Earnings were not sufficient
during 1991 to cover fixed charges. The 1991 deficiency totaled $4.1
million.
(5) The Company has not paid any cash dividends on its Common Stock.
25
<PAGE> 26
THE EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Notes, the purchasers thereof became
entitled to the benefits of certain registration rights under the Registration
Rights Agreement. The Exchange Notes are being offered hereunder in order to
satisfy the obligations of the Company under the Registration Rights Agreement.
See "Registration Rights Agreement."
For each $1,000 principal amount of Old Notes surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Notes will receive $1,000
principal amount of Exchange Notes. Upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, the
Company will accept all Old Notes properly tendered prior to 5:00 p.m., New York
City time, on the Expiration Date. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer in integral multiples of $1,000 principal
amount.
Under existing interpretations of the staff of the SEC, including Exxon
Capital Holdings Corporation, SEC No-Action Letter (available April 13, 1989),
the Morgan Stanley Letter and Mary Kay Cosmetics, Inc., SEC No-Action Letter
(available June 5, 1991), the Company believes that the Exchange Notes would in
general be freely transferable after the Exchange Offer without further
registration under the Securities Act by the respective holders thereof (other
than a "Restricted Holder," being (i) a broker-dealer who purchased Old Notes
exchanged for such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and such holder is not
participating in, and has no arrangement with any person to participate in, the
distribution (within the meaning of the Securities Act) of such Exchange Notes.
Eligible holders wishing to accept the Exchange Offer must represent to the
Company that such conditions have been met. Any holder of Old Notes who tenders
in the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes could not rely on the interpretation by the staff of the SEC
enunciated in the Morgan Stanley Letter and similar no-action letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including that (i) it is neither an affiliate of the Company nor a broker-dealer
tendering Old Notes acquired directly from the Company for its own account, (ii)
any Exchange Notes to be received by it are being acquired in the ordinary
course of its business and (iii) it is not participating in, and it has no
arrangement with any person to participate in, the distribution (within the
meaning of the Securities Act) of the Exchange Notes. In addition, in connection
with any resales of Exchange Notes, any broker-dealer (a "Participating
Broker-Dealer") who acquired Old Notes for its own account as a result of
market-making activities or other trading activities must acknowledge that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The staff of the SEC has
taken the position in no-action letters issued to third parties including
Shearman & Sterling, SEC No-Action Letter (available July 2, 1993), that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the Exchange Notes (other than a resale of an unsold allotment
from the original sale of Old Notes) with this Prospectus, as it may be amended
or supplemented from time to time. Under the Registration Rights Agreement, the
Company is required to allow Participating Broker-Dealers to use this
Prospectus, as it may be amended or supplemented from time to time, in
connection with the resale of such Exchange Notes. See "Plan of Distribution."
The Exchange Offer shall be deemed to have been consummated upon the
earlier to occur of (i) the Company having exchanged Exchange Notes for all
outstanding Old Notes (other than Old Notes held by a Restricted Holder)
pursuant to the Exchange Offer and (ii) the Company having exchanged, pursuant
to the Exchange Offer, Exchange Notes for all Old Notes that have been tendered
and not withdrawn on the date that is 30 days following the commencement of the
Exchange Offer. In such event, holders of Old Notes
26
<PAGE> 27
seeking liquidity in their investment would have to rely on exemptions to
registration requirements under the securities laws, including the Securities
Act.
As of the date of this Prospectus, $150,000,000 principal amount of Old
Notes are issued and outstanding. In connection with the issuance of the Old
Notes, the Company arranged for the Old Notes to be eligible for trading in the
Private Offering, Resale and Trading through Automated Linkages (PORTAL) Market,
the National Association of Securities Dealers' screen based, automated market
trading of securities eligible for resale under Rule 144A.
The Company shall be deemed to have accepted for exchange validly tendered
Old Notes when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. See "-- Exchange Agent." The Exchange Agent will act as
agent for the tendering holders of Old Notes for the purpose of receiving
Exchange Notes from the Company and delivering Exchange Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an invalid
tender or the occurrence of certain other events set forth herein, certificates
for any such unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean August 30, 1996 unless the Company,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time. The Company reserves the right
(i) to delay acceptance of any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Old Notes not previously
accepted, if any of the conditions set forth herein under "-- Termination" shall
have occurred and shall not have been waived by the Company (if permitted to be
waived by the Company), by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, and (ii) to amend the terms of
the Exchange Offer in any manner deemed by it to be advantageous to the holders
of the Old Notes. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment. Without limiting the manner in which the Company may
choose to make public announcements of any delay in acceptance, extension,
termination or amendment of the Exchange Offer, the Company shall have no
obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest payable semi-annually on May 15 and
November 15 of each year, commencing November 15, 1996. Holders of Exchange
Notes of record on November 1, 1996 will receive interest on November 15, 1996
from the date of issuance of the Exchange Notes, plus an amount equal to the
accrued interest on the Old Notes from the date of issuance of the Old Notes,
May 23, 1996, to the date of exchange thereof. Consequently, assuming the
Exchange Offer is consummated prior to the record date in respect of the
November 15, 1996 interest payment for the Old Notes, holders who exchange their
Old Notes
27
<PAGE> 28
for Exchange Notes will receive the same interest payment on November 15, 1996
that they would have received had they not accepted the Exchange Offer. Interest
on the Old Notes accepted for exchange will cease to accrue upon issuance of the
Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. The tender by a holder of Old
Notes will constitute an agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal. Delivery of all documents must be made to the
Exchange Agent at its address set forth herein. Holders may also request that
their respective brokers, dealers, commercial banks, trust companies or nominees
effect such tender for such holders. The method of delivery of Old Notes and the
Letter of Transmittal and all other required documents to the Exchange Agent is
at the election and risk of the holders. Instead of delivery by mail, it is
recommended that holders use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or Old Notes should be sent to the Company. Only a holder of Old
Notes may tender such Old Notes in the Exchange Offer. The term "holder" with
respect to the Exchange Offer means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed stock power from the registered holder.
Any beneficial holder whose Old Notes are registered in the name of such
holder's broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on behalf of the registered holder. If such
beneficial holder wishes to tender directly, such beneficial holder must, prior
to completing and executing the Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such holder's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
If the Letter of Transmittal is signed by the record holder(s) of the Old Notes
tendered thereby, the signature must correspond with the name(s) written on the
face of the Old Notes without alteration, enlargement or any change whatsoever.
If the Letter of Transmittal is signed by a participant in DTC, the signature
must correspond with the name as it appears on the security position listing as
the holder of the Old Notes. Signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution")
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder (or by a participant in DTC whose name appears on a security position
listing as the owner) who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
and the Exchange Notes are being issued directly to such registered holder (or
deposited into the participant's account at DTC) or (ii) for the account of an
Eligible Institution. If the Letter of Transmittal is signed by a person other
than the registered holder of any Old Notes listed therein, such Old Notes must
be endorsed or accompanied by appropriate bond powers which authorize such
person to tender the Old Notes on behalf of the registered holder, in either
case signed as the name of the registered holder or holders appears on the Old
Notes. If the Letter of Transmittal or any Old Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Old Notes
(or a timely confirmation received of a book-entry transfer of Old Notes into
the Exchange Agent's account at DTC) or a Notice of Guaranteed Delivery from an
28
<PAGE> 29
Eligible Institution is received by the Exchange Agent. Issuances of Exchange
Notes in exchange for Old Notes tendered pursuant to a Notice of Guaranteed
Delivery by an Eligible Institution will be made only against delivery of the
Letter of Transmittal (and any other required documents) and the tendered Old
Notes (or a timely confirmation received of a book-entry transfer of Old Notes
into the Exchange Agent's account at DTC) with the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of the Company or its counsel, be unlawful. The Company also
reserves the absolute right to waive any conditions of the Exchange Offer or
defects or irregularities in tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Neither the Company, the Exchange Agent nor any other person shall be under any
duty to give notification of defects or irregularities with respect to tenders
of Old Notes nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such Old Notes unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date. In addition, the Company reserves the right in its sole
discretion to (i) purchase or make offers for any Old Notes that remain
outstanding subsequent to the Expiration Date, or, as set forth under
"-- Termination," to terminate the Exchange Offer and (ii) to the extent
permitted by applicable law, purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
may differ from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Old Notes
at DTC within two business days after the date of this Prospectus, and any
financial institution which is a participant in DTC may make book-entry delivery
of the Old Notes by causing DTC to transfer such Old Notes into the Exchange
Agent's account in accordance with DTC's procedure for such transfer. Although
delivery of Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, the Letter of Transmittal, with any required
signature guarantees and any other required documents, must in any case be
transmitted to and received by the Exchange Agent on or prior to the Expiration
Date at one of its addresses set forth below under "-- Exchange Agent", or the
guaranteed delivery procedure described below must be complied with. DELIVERY OF
DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All
references in this Prospectus to deposit or delivery of Old Notes shall be
deemed to include DTC's book-entry delivery method.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or who cannot complete the procedure for book-entry transfer on
a timely basis, may effect a tender if: (i) the tender is made by or through an
Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
registration number or numbers of such Old Notes (if applicable), and the total
principal amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within five business days after the Expiration
Date, the Letter of Transmittal, together with the Old Notes in proper form for
transfer (or a confirmation of a book-entry transfer into the Exchange Agent's
account at DTC) and any other documents required by the Letter of Transmittal,
will be
29
<PAGE> 30
deposited by the Eligible Institution with the Exchange Agent; and (iii) such
properly completed and executed Letter of Transmittal, together with the
certificate(s) representing all tendered Old Notes in proper form for transfer
(or a confirmation of such a book-entry transfer) and all other documents
required by the Letter of Transmittal are received by the Exchange Agent within
five business days after the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Exchange Notes, and that such holder
is not a Restricted Holder.
Old Notes tendered in exchange for Exchange Notes (or a timely confirmation
of a book-entry transfer of such Old Notes into the Exchange Agent's account at
DTC) must be received by the Exchange Agent, with the Letter of Transmittal and
any other required documents, by the Expiration Date or within the time periods
set forth above pursuant to a Notice of Guaranteed Delivery from an Eligible
Institution. Each holder tendering the Old Notes for exchange sells, assigns and
transfers the Old Notes to the Exchange Agent, as agent of the Company, and
irrevocably constitutes and appoints the Exchange Agent as the holder's agent
and attorney-in-fact to cause the Old Notes to be transferred and exchanged. The
holder warrants that it has full power and authority to tender, exchange, sell,
assign and transfer the Old Notes and to acquire the Exchange Notes issuable
upon the exchange of such tendered Old Notes, that the Exchange Agent, as agent
of the Company, will acquire good and unencumbered title to the tendered Old
Notes, free and clear of all liens, restrictions, charges and encumbrances, and
that the Old Notes tendered for exchange are not subject to any adverse claims
when accepted by the Exchange Agent, as agent of the Company. The holder also
warrants and agrees that it will, upon request, execute and deliver any
additional documents deemed by the Company or the Exchange Agent to be necessary
or desirable to complete the exchange, sale, assignment and transfer of the Old
Notes. All authority conferred or agreed to be conferred in the Letter of
Transmittal by the holder will survive the death, incapacity or dissolution of
the holder and any obligation of the holder shall be binding upon the heirs,
personal representatives, successors and assigns of such holder.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior to
the Expiration Date, unless previously accepted for exchange. To withdraw a
tender of Old Notes in the Exchange Offer, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth herein prior to 5:00 p.m., New York City time, on the business day prior
to the Expiration Date and prior to acceptance for exchange thereof by the
Company. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including, if applicable, the registration number
or numbers and total principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
such Old Notes into the name of the Depositor withdrawing the tender, (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor and (v) if applicable because the Old Notes have been
tendered pursuant to the book-entry procedures, specify the name and number of
the participant's account at DTC to be credited, if different than that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such withdrawal notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without
30
<PAGE> 31
cost to such holder as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange any Old Notes not theretofore accepted for
exchange, and may terminate the Exchange Offer if it determines that the
Exchange Offer violates any applicable law or interpretation of the staff of the
SEC.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the Expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
to this Prospectus that will be distributed to each registered holder of Old
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period. Holders of Old Notes will have
certain rights against the Company under the Registration Rights Agreement
should the Company fail to consummate the Exchange Offer. See "Registration
Rights Agreement."
EXCHANGE AGENT
Fleet National Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance and requests for additional copies
of this Prospectus or of the Letter of Transmittal should be directed to the
Exchange Agent addressed as follows:
By Mail, Hand or Overnight Courier:
Fleet National Bank
777 Main Street
MSN CT/MO/0224
Hartford, Connecticut 06115
Attention: Corporate Trust Operations
Facsimile Transmission: (860) 986-7908
Confirm by Telephone: (860) 986-1271
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or telephone. The Company will not make any payments to brokers,
dealers or other persons soliciting acceptances of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse the Exchange Agent for its reasonable out-
of-pocket expenses in connection therewith. The Company may also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for exchange.
The other expenses incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by the Company. The Company will pay all transfer
taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange
Offer. If,
31
<PAGE> 32
however, Exchange Notes or Old Notes not tendered or accepted for exchange are
to be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Notes tendered, or if tendered Old
Notes are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized by the Company over the term of the Exchange Notes under
generally accepted accounting principles.
DESCRIPTION OF EXISTING INDEBTEDNESS
The Company has established a credit facility (the "Revolving Credit
Facility") with ING to fund its working capital requirements and other
obligations and to support the issuance of letters of credit. The Company may
borrow from time to time up to $35 million under the Revolving Credit Facility,
subject to certain borrowing base limitations. All advances to the Company under
the Revolving Credit Facility bear interest at 1/4% per annum plus the greater
of the prevailing Federal Funds Rate plus 1/2% or a referenced average prime
rate; or at the adjusted LlBOR rate plus 2% per annum. The foregoing rates are
subject to an increase of 1/2% in the event certain financial thresholds are
exceeded. The Company is also obligated to pay ING (i) a commitment fee equal to
1/2% per annum on the average daily unadvanced portion of the commitments and
(ii) a letter of credit fee of 2% per annum on the average daily undrawn and
unexpired amount of each letter of credit during the period that sum remains
outstanding. The Revolving Credit Facility expires on May 31, 1998.
The Revolving Credit Facility is secured by the rig fleet, inventory,
equipment, accounts receivable and certain oil and gas properties of the Company
and the Subsidiary Guarantors. The Revolving Credit Facility requires the
Company to comply with various covenants including, but not limited to, the
maintenance of various financial ratios, and restricts the Company from
declaring, making or paying any dividends on its Common Stock.
At June 30, 1996, the Company had no Indebtedness outstanding under the
Revolving Credit Facility.
DESCRIPTION OF THE NOTES
The Exchange Notes will be issued, and the Old Notes were issued, under an
indenture entered into among the Company, as issuer, Cliffs Drilling Asset
Acquisition Company (now known as Southwestern Offshore Corporation), Cliffs
Drilling Merger Company, Cliffs Drilling International, Inc. and Cliffs Oil and
Gas Company, as initial Subsidiary Guarantors, and Fleet National Bank, as
trustee (the "Trustee") dated as of May 15, 1996, as amended and supplemented by
Supplemental Indenture dated as of July 11, 1996 (such indenture, as so amended
and supplemented, the "Indenture"), which added DRL, Inc. as a Subsidiary
Guarantor. Old Notes were issued under the Indenture on May 23, 1996 in an
aggregate principal amount of $150,000,000. References to the Notes include the
Old Notes and the Exchange Notes unless the context otherwise requires. The
Indenture is subject to and governed by the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The following summary of certain provisions
of the Indenture and of the Registration Rights Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all of the provisions of the Indenture, including the definitions of certain
terms contained therein and those terms that are made a part of the Indenture by
reference to the Trust Indenture Act and of the Registration Rights Agreement,
respectively. Copies of the Indenture and the Registration Rights Agreement are
filed as exhibits to the Form 8-K. See "Incorporation of Certain Documents by
Reference."
32
<PAGE> 33
Capitalized terms not otherwise defined below or elsewhere in this Prospectus
have the meanings given to them in the Indenture. The definitions of certain
capitalized terms used in the following summary are set forth below under
"-- Certain Definitions."
GENERAL
The Notes will be senior unsecured obligations of the Company limited to
$150 million aggregate principal amount. The Notes will be issued only in
registered form, without coupons, in denominations of $1,000 and integral
multiples thereof. Principal of, premium, if any, and interest on the Notes will
be payable, and the Notes will be transferable, at the office or agency of the
Company in the City of New York maintained for such purposes, which initially
will be the corporate trust office or agency of the Trustee maintained at
Shawmut Trust Company, c/o First Chicago Trust Company of New York, 14 Wall
Street, 8th Floor, Window -- 2, New York, New York 10005. In addition, in the
event the Notes do not remain in book-entry form, interest may be paid, at the
option of the Company, by check mailed to the registered holders of the Notes at
their respective addresses as shown on the Note Register, subject to the right
of any holder of Notes in the principal amount of $500,000 or more to request
payment by wire transfer. No service charge will be made for any transfer,
exchange or redemption of the Notes, but the Company or the Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be payable in connection therewith.
The obligations of the Company under the Notes will be guaranteed on a
senior unsecured basis by the Subsidiary Guarantors. See "-- Subsidiary
Guarantees of Notes."
Any Old Notes that remain outstanding after the completion of the Exchange
Offer, together with the Exchange Notes issued in connection with the Exchange
Offer, will be treated as a single class of securities under the Indenture.
MATURITY, INTEREST AND PRINCIPAL PAYMENTS
The Notes will mature on May 15, 2003. Interest on the Notes will accrue
from May 23, 1996 at the rate of 10.25% per annum and will be payable
semiannually in cash in arrears on May 15 and November 15, of each year,
commencing November 15, 1996, to the Persons in whose name the Notes are
registered in the Note Register at the close of business on the May 1 or
November 1 next preceding such interest payment date. Holders of Exchange Notes
of record on November 1, 1996 will receive interest on November 15, 1996 from
the date of issuance of the Exchange Notes, plus an amount equal to the accrued
interest on the Old Notes from their date of issuance, May 23, 1996, to the date
of exchange thereof. The interest rate on the Notes is subject to increase if
the Company fails to satisfy certain provisions of the Registration Rights
Agreement. See "-- Exchange Offer; Registration Rights Agreement." Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
REDEMPTION
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after May 15, 2000, upon not
less than 30 or more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below, plus accrued and unpaid
interest, if any, to the date of redemption (subject to the right of Holders of
record on the relevant record date to receive interest due on an interest
payment date that is on or prior to the date of redemption), if redeemed during
the 12-month period beginning on May 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------------------------------------------------------------------ ----------
<S> <C>
2000.............................................................. 105.00%
2001.............................................................. 102.50%
2002 and thereafter............................................... 100.00%
</TABLE>
33
<PAGE> 34
In the event that less than all of the Notes are to be redeemed, the
particular Notes (or any portion thereof that is an integral multiple of $1,000)
to be redeemed shall be selected not less than 30 or more than 60 days prior to
the date of redemption by the Trustee, from the outstanding Notes not previously
called for redemption, pro rata, by lot or by any other method the Trustee shall
deem fair and appropriate.
Notwithstanding the foregoing, at any time on or prior to May 15, 1999, up
to $37.5 million in aggregate principal amount of Notes will be redeemable, at
the option of the Company, upon not less than 30 or more than 60 days' notice,
from the Net Cash Proceeds of a Public Equity Offering, at a redemption price
equal to 110% of the principal amount thereof, together with accrued and unpaid
interest to the date of redemption, provided that at least $112.5 million in
aggregate principal amount of Notes remains outstanding immediately after such
redemption and that such redemption occurs within 60 days following the closing
of such Public Equity Offering.
Offers to Purchase. As described below, (a) upon the occurrence of a Change
of Control, the Company will be obligated to make an offer to purchase all
outstanding Notes at a purchase price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase and (b) upon certain sales or other dispositions of assets, the Company
may be obligated to make offers to purchase Notes with a portion of the Net
Available Proceeds of such sales or other dispositions at a purchase price equal
to 100% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See "-- Certain Covenants -- Change
of Control" and "-- Limitation on Asset Sales."
RANKING
The Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment with all senior Indebtedness of the Company, and
senior in right of payment to all Subordinated Indebtedness of the Company. The
Notes and the Subsidiary Guarantees, however, will be effectively subordinated
to secured Indebtedness of the Company and the Subsidiary Guarantors,
respectively, with respect to the assets securing such Indebtedness, including
any Indebtedness under the Revolving Credit Facility, which is secured by liens
on substantially all of the assets of the Company and the Subsidiary Guarantors.
At June 30, 1996, the Company and the Subsidiary Guarantors had no Indebtedness
outstanding under the Revolving Credit Facility. See "Capitalization." Subject
to certain limitations, the Company and its Subsidiaries may incur additional
Indebtedness in the future. See "-- Certain Covenants -- Limitation on
Indebtedness and Disqualified Capital Stock."
SUBSIDIARY GUARANTEES OF NOTES
Each Subsidiary Guarantor will unconditionally guarantee, jointly and
severally, to each Holder and the Trustee, the full and prompt performance of
the Company's obligations under the Indenture and the Notes, including the
payment of principal of, premium, if any, and interest on the Notes pursuant to
its Subsidiary Guarantee. The five Subsidiary Guarantors are currently the
Company's principal subsidiaries. In addition to current Subsidiary Guarantors,
the Company will cause each Restricted Subsidiary that becomes, or comes into
existence as, a Restricted Subsidiary after the date of the Indenture and has
assets, businesses, divisions, real property or equipment with a fair market
value (as determined in good faith by the Board of Directors of the Company) in
excess of $1 million to execute and deliver a supplement to the Indenture
pursuant to which such Restricted Subsidiary will guarantee the payment of the
Notes on the same terms and conditions as the Subsidiary Guarantees by the
initial Subsidiary Guarantors.
The Subsidiary Guarantees will be senior unsecured obligations of each
respective Subsidiary Guarantor and will rank pari passu in right of payment
with all senior Indebtedness of such Subsidiary Guarantor, and senior in right
of payment to all Subordinated Indebtedness of such Subsidiary Guarantor.
However, the Subsidiary Guarantees will be effectively subordinated to secured
Indebtedness of the Subsidiary Guarantors, with respect to the assets securing
such Indebtedness, including Indebtedness of the Subsidiary Guarantors under the
Revolving Credit Facility, which is secured by liens on substantially all of
their assets. At June 30, 1996, the Subsidiary Guarantors had no Indebtedness
outstanding under the Revolving Credit Facility. See "Capitalization."
34
<PAGE> 35
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Subsidiary Guarantor that makes a
payment or distribution under a Subsidiary Guarantee shall be entitled to a
contribution from each other Subsidiary Guarantor in a pro rata amount based on
the Adjusted Net Assets of each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell or
otherwise dispose of all or substantially all of its properties and assets to
the Company or another Subsidiary Guarantor without limitation, except to the
extent any such transaction is subject to the "Merger, Consolidation and Sale of
Assets" covenant of the Indenture. Each Subsidiary Guarantor may consolidate
with or merge into or sell all or substantially all of its properties and assets
to a Person other than the Company or another Subsidiary Guarantor (whether or
not Affiliated with the Subsidiary Guarantor), provided that (a) if the
surviving Person is not the Subsidiary Guarantor, the surviving Person agrees to
assume such Subsidiary Guarantor's Subsidiary Guarantee and all its obligations
pursuant to the Indenture (except to the extent the following paragraph would
result in the release of such Subsidiary Guarantee) and (b) such transaction
does not (i) violate any of the covenants described below under "-- Certain
Covenants" or (ii) result in a Default or Event of Default immediately
thereafter that is continuing.
Upon the sale or other disposition (by merger or otherwise) of a Subsidiary
Guarantor (or all or substantially all of its properties and assets) to a Person
other than the Company or another Subsidiary Guarantor and pursuant to a
transaction that is otherwise in compliance with the Indenture (including as
described in the foregoing paragraph), such Subsidiary Guarantor shall be deemed
released from its Subsidiary Guarantee and the related obligations set forth in
the Indenture; provided, however, that any such termination shall occur only to
the extent that all obligations of such Subsidiary Guarantor under all of its
guarantees of, and under all of its pledges of assets or other security
interests which secure, other Indebtedness of the Company or any other
Restricted Subsidiary shall also terminate or be released upon such sale or
other disposition. Each Subsidiary Guarantor that is designated as an
Unrestricted Subsidiary in accordance with the Indenture shall be released from
its Subsidiary Guarantee and related obligations set forth in the Indenture for
so long as it remains an Unrestricted Subsidiary.
Separate financial statements of the Subsidiary Guarantors have not been
provided because the Subsidiary Guarantors are jointly and severally liable for
the obligations of the Company under the Notes and the aggregate assets,
earnings and equity of the Subsidiary Guarantors are substantially equivalent to
the consolidated assets, earnings and equity of the Company.
CERTAIN COVENANTS
The Indenture contains, among others, the covenants described below.
Limitation on Indebtedness and Disqualified Capital Stock. (a) The Company
will not, and will not permit any of its Restricted Subsidiaries to, create,
incur, issue, assume, guarantee or in any manner become directly or indirectly
liable for the payment of (collectively, "incur") any Indebtedness (including
any Acquired Indebtedness but excluding any Permitted Indebtedness) or any
Disqualified Capital Stock, unless, on a pro forma basis after giving effect to
such incurrence and the application of the proceeds therefrom, the Consolidated
EBITDA Coverage Ratio for the four full quarters immediately preceding such
event, taken as one period, would have been equal to or greater than 2.25 to
1.0.
(b) The Company will not incur any Indebtedness that is expressly
subordinated to any other Indebtedness of the Company unless such Indebtedness,
by its terms or the terms of any agreement or instrument pursuant to which such
Indebtedness is issued or outstanding, is also expressly made subordinate to the
Notes at least to the extent it is subordinated to such other Indebtedness.
35
<PAGE> 36
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any other distribution to
holders of, any shares of Capital Stock of the Company (other than
dividends or distributions payable solely in shares of Qualified Capital
Stock of the Company or in options, warrants or other rights to purchase
Qualified Capital Stock of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Affiliate thereof (other than any
Restricted Subsidiary) or any options, warrants or other rights to acquire
such Capital Stock;
(iii) make any principal payment on or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or maturity, any Subordinated
Indebtedness, except in any case out of the net cash proceeds of any
Permitted Indebtedness referred to in clause (x) of the definition of
Permitted Indebtedness; or
(iv) make any Restricted Investment;
(such payments or other actions described in clauses (i) through (iv) being
collectively referred to as "Restricted Payments"), unless at the time of and
after giving effect to the proposed Restricted Payment (the amount of any such
Restricted Payment, if other than cash, shall be the amount determined by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution),
(1) no Default or Event of Default shall have occurred and be continuing,
(2) the Company could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in accordance with paragraph (a) of the "-- Limitation
on Indebtedness and Disqualified Capital Stock" covenant, and
(3) the aggregate amount of all Restricted Payments declared or made after
the date of the Indenture shall not exceed the sum (without duplication) of the
following:
(A) 50% of the Consolidated Net Income of the Company accrued on a
cumulative basis during the period beginning on April 1, 1996 and ending on
the last day of the Company's last fiscal quarter ending prior to the date
of such proposed Restricted Payment (or, if such Consolidated Net Income is
a loss, minus 100% of such loss),
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Restricted Subsidiaries) of shares of Qualified Capital Stock of the
Company or any options, warrants or rights to purchase such shares of
Qualified Capital Stock of the Company,
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Restricted
Subsidiaries) upon the exercise of any options, warrants or rights to
purchase shares of Qualified Capital Stock of the Company,
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Restricted Subsidiaries) of Indebtedness or shares of Disqualified
Capital Stock that have been converted into or exchanged for Qualified
Capital Stock of the Company, together with the aggregate cash received by
the Company at the time of such conversion or exchange,
(E) to the extent not otherwise included in Consolidated Net Income,
the net reduction in Investments in Unrestricted Subsidiaries resulting
from dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or a Restricted Subsidiary after the
date of the Indenture from any Unrestricted Subsidiary or from the
redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary
(valued in each case as provided in the definition of Investment), not to
exceed in the case of any Unrestricted Subsidiary the total amount of
Investments (other than Permitted
36
<PAGE> 37
Investments) in such Unrestricted Subsidiary made by the Company and its
Restricted Subsidiaries in such Unrestricted Subsidiary after the date of
the Indenture, and
(F) $10 million.
(b) Notwithstanding paragraph (a) above, the Company and its Restricted
Subsidiaries may take the following actions so long as (in the case of clauses
(ii) and (iii) below) no Default or Event of Default shall have occurred and be
continuing:
(i) the payment of any dividend on any Capital Stock of the Company or
any Restricted Subsidiary within 60 days after the date of declaration
thereof, if at such declaration date such declaration complied with the
provisions of paragraph (a) above (and such payment shall be deemed to have
been paid on such date of declaration for purposes of any calculation
required by the provisions of paragraph (a) above);
(ii) the repurchase, redemption or other acquisition or retirement of
any shares of any class of Capital Stock of the Company or any Restricted
Subsidiary, in exchange for, or out of the aggregate Net Cash Proceeds
from, a substantially concurrent issuance and sale (other than to a
Restricted Subsidiary) of shares of Qualified Capital Stock of the Company;
and
(iii) the repurchase, redemption, repayment, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness in
exchange for, or out of the aggregate Net Cash Proceeds from, a
substantially concurrent issuance and sale (other than to a Restricted
Subsidiary) of shares of Qualified Capital Stock of the Company.
The actions described in clauses (i), (ii) and (iii) of this paragraph (b)
shall be Restricted Payments that shall be permitted to be made in accordance
with this paragraph (b) but shall reduce the amount that would otherwise be
available for Restricted Payments under clause (3) of paragraph (a), provided
that any dividend paid pursuant to clause (i) of this paragraph (b) shall reduce
the amount that would otherwise be available under clause (3) of paragraph (a)
when declared, but not also when subsequently paid pursuant to such clause (i).
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company (i) will not permit any Restricted Subsidiary to issue
or sell any Capital Stock to any Person other than the Company or a Wholly Owned
Restricted Subsidiary and (ii) will not permit any Person other than the Company
or a Wholly Owned Restricted Subsidiary to own any Capital Stock of any
Restricted Subsidiary, in each case except with respect to a Wholly Owned
Restricted Subsidiary as described in clause (i) or (ii) of the definition of
"Wholly Owned Restricted Subsidiary".
Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into,
assume, guarantee or otherwise become liable with respect to any Sale/Leaseback
Transaction unless the Company or such Restricted Subsidiary, as the case may
be, would be able to incur Indebtedness (not including the incurrence of
Permitted Indebtedness) in an amount equal to the Attributable Indebtedness with
respect to such Sale/Leaseback Transaction pursuant to paragraph (a) of the
"Limitation on Indebtedness and Disqualified Capital Stock" covenant, the
Company or such Restricted Subsidiary receives proceeds from such Sale/Leaseback
Transaction at least equal to the fair market value of the property or assets
subject thereto (as determined in good faith by the Company's Board of
Directors, whose determination in good faith and evidenced by a Board Resolution
will be conclusive) and the Company applies an amount in cash equal to the Net
Available Proceeds of the Sale/Leaseback Transaction in accordance with the
provisions of the "Limitation on Asset Sales" covenant as if such Sale/Leaseback
Transaction were an Asset Sale.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets or property
or the rendering of any services) with, or for the benefit of, any Affiliate of
the Company (other than the Company or a
37
<PAGE> 38
Restricted Subsidiary), unless (i) such transaction or series of transactions is
on terms that are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that would be available in a
comparable arm's length transaction with unrelated third parties, (ii) with
respect to any one transaction or series of related transactions involving
aggregate payments in excess of $1 million, the Company delivers an Officers'
Certificate to the Trustee certifying that such transaction or series of related
transactions complies with clause (i) above, (iii) with respect to a transaction
or series of related transactions involving payments in excess of $5 million but
less than $15 million in the aggregate, the Company delivers an Officers'
Certificate to the Trustee certifying that (A) such transaction or series of
related transactions complies with clause (i) above and (B) such transaction or
series of related transactions has been approved by a majority of the
Disinterested Directors of the Company, and (iv) with respect to any one
transaction or series of related transactions involving aggregate payments in
excess of $15 million, the Company delivers an Officers' Certificate to the
Trustee certifying to the two matters referred to in clause (iii) above and that
the Company has obtained a written opinion from an independent nationally
recognized investment banking firm or appraisal firm specializing or having a
specialty in the type and subject matter of the transaction or series of related
transactions at issue, which opinion shall be to the effect set forth in clause
(i) above or shall state that such transaction or series of related transactions
is fair from a financial point of view to the Company or such Restricted
Subsidiary; provided, however, that the foregoing restriction shall not apply to
(w) loans or advances to officers, directors and employees of the Company or any
Restricted Subsidiary made in the ordinary course of business and consistent
with past practices of the Company and its Restricted Subsidiaries in an
aggregate amount not to exceed $1 million outstanding at any one time, (x)
indemnities of officers, directors and employees of the Company or any
Restricted Subsidiary permitted by bylaw or statutory provisions, (y) the
payment of reasonable and customary regular fees to directors of the Company or
any of its Restricted Subsidiaries who are not employees of the Company or any
Affiliate and (z) the Company's employee compensation and other benefit
arrangements.
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume, affirm
or suffer to exist or become effective any Lien of any kind, except for
Permitted Liens, upon any of their respective property or assets, whether now
owned or acquired after the date of the Indenture, or any income, profits or
proceeds therefrom, to secure (a) any Indebtedness of the Company or such
Restricted Subsidiary (if it is not also a Subsidiary Guarantor), unless prior
to, or contemporaneously therewith, the Notes are equally and ratably secured,
or (b) any Indebtedness of any Subsidiary Guarantor, unless prior to, or
contemporaneously therewith, the Subsidiary Guarantees are equally and ratably
secured; provided, however, that if such Indebtedness is expressly subordinated
to the Notes or the Subsidiary Guarantees, the Lien securing such Indebtedness
will be subordinated and junior to the Lien securing the Notes or the Subsidiary
Guarantees, as the case may be, with the same relative priority as such
Indebtedness has with respect to the Notes or the Subsidiary Guarantees. The
foregoing covenant will not apply to any Lien securing Acquired Indebtedness,
provided that any such Lien extends only to the property or assets that were
subject to such Lien prior to the related acquisition by the Company or such
Restricted Subsidiary and was not created, incurred or assumed in contemplation
of such transaction. The incurrence of additional secured Indebtedness by the
Company and its Restricted Subsidiaries is subject to further limitations on the
incurrence of Indebtedness as described under "-- Limitation on Indebtedness and
Disqualified Capital Stock."
Change of Control. Upon the occurrence of a Change of Control, the Company
will be obligated to make an offer to purchase all of the then outstanding Notes
(a "Change of Control Offer"), and will purchase, on a Business Day (the "Change
of Control Purchase Date") not more than 60 nor less than 30 days following such
Change of Control, all of the then outstanding Notes validly tendered pursuant
to such Change of Control Offer and not withdrawn, at a purchase price (the
"Change of Control Purchase Price") equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the Change of Control
Purchase Date. The Change of Control Offer is required to remain open for at
least 20 Business Days and until the close of business on the fifth Business Day
prior to the Change of Control Purchase Date.
In order to effect such Change of Control Offer, the Company will, not
later than the 30th day after the Change of Control, mail to the Trustee and
each Holder a notice of the Change of Control Offer, which notice
38
<PAGE> 39
shall govern the terms of the Change of Control Offer and shall state, among
other things, the procedures that Holders must follow to accept the Change of
Control Offer.
The occurrence of a Change of Control may result in the lender under the
Revolving Credit Facility having the right to require the Company to repay all
Indebtedness outstanding thereunder. There can be no assurance that the Company
will have available funds sufficient to repay all Indebtedness owing under the
Revolving Credit Facility or to fund the purchase of the Notes upon a Change of
Control. In the event a Change of Control occurs at a time when the Company does
not have available funds sufficient to pay the Change of Control Purchase Price
for all of the Notes delivered by Holders seeking to accept the Change of
Control Offer, an Event of Default would occur under the Indenture. The
definition of Change of Control includes an event by which the Company sells,
conveys, transfers, leases or otherwise disposes of all or substantially all of
the properties and assets of the Company and its Restricted Subsidiaries, taken
as a whole; the phrase "all or substantially all" is subject to applicable legal
precedent and, as a result, in the future there may be uncertainty as to whether
or not a Change of Control has occurred.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if another Person makes the Change of Control Offer at the
same purchase price, at the same time and otherwise in substantial compliance
with the requirements applicable to a Change of Control Offer to be made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder, if applicable, in the event
that a Change of Control occurs and the Company is required to purchase Notes as
described above. The existence of a Holder's right to require, subject to
certain conditions, the Company to repurchase its Notes upon a Change of Control
may deter a third party from acquiring the Company in a transaction that
constitutes, or results in, a Change of Control.
Limitation on Asset Sales. (a) The Company will not, and will not permit
any Restricted Subsidiary to, engage in any Asset Sale unless (i) the Company or
such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets
and properties sold or otherwise disposed of pursuant to the Asset Sale (as
determined by the Board of Directors of the Company, whose determination in good
faith shall be conclusive and evidenced by a Board Resolution), (ii) at least
75% of the consideration received by the Company or the Restricted Subsidiary,
as the case may be, in respect of such Asset Sale consists of cash or Cash
Equivalents and (iii) the Company delivers to the Trustee an Officers'
Certificate certifying that such Asset Sale complies with clauses (i) and (ii).
The amount (without duplication) of any Indebtedness (other than Subordinated
Indebtedness) of the Company or such Restricted Subsidiary that is expressly
assumed by the transferee in such Asset Sale and with respect to which the
Company or such Restricted Subsidiary, as the case may be, is unconditionally
released by the holder of such Indebtedness, shall be deemed to be cash or Cash
Equivalents for purposes of clause (ii) and shall also be deemed to constitute a
repayment of, and a permanent reduction in, the amount of such Indebtedness for
purposes of the following paragraph.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale or
incurs an Event of Loss, the Company or such Restricted Subsidiary may either,
no later than 365 days after such Asset Sale or such Event of Loss, (i) apply
all or any of the Net Available Proceeds therefrom to repay Indebtedness (other
than Subordinated Indebtedness) of the Company or any Restricted Subsidiary,
provided, in each case, that the related loan commitment (if any) is thereby
permanently reduced by the amount of such Indebtedness so repaid, or (ii) invest
all or any part of the Net Available Proceeds thereof in properties and assets
that replace the properties or assets that were the subject of such Asset Sale
or such Event of Loss, as the case may be, or in other properties or assets that
will be used in the business of the Company and its Restricted Subsidiaries. The
amount of such Net Available Proceeds not applied or invested as provided in
this paragraph will constitute "Excess Proceeds."
39
<PAGE> 40
(c) When the aggregate amount of Excess Proceeds equals or exceeds $10
million, the Company will be required to make an offer to purchase, from all
Holders of the Notes, an aggregate principal amount of Notes equal to such
Excess Proceeds as follows:
(i) The Company will make an offer to purchase (a "Net Proceeds
Offer") from all Holders of the Notes in accordance with the procedures set
forth in the Indenture the maximum principal amount (expressed as a
multiple of $1,000) of Notes that may be purchased out of the amount (the
"Payment Amount") of such Excess Proceeds.
(ii) The offer price for the Notes will be payable in cash in an
amount equal to 100% of the principal amount of the Notes tendered pursuant
to a Net Proceeds Offer, plus accrued and unpaid interest, if any, to the
date such Net Proceeds Offer is consummated (the "Offered Price"), in
accordance with the procedures set forth in the Indenture. To the extent
that the aggregate Offered Price of the Notes tendered pursuant to a Net
Proceeds Offer is less than the Payment Amount relating thereto (such
shortfall constituting a "Net Proceeds Deficiency"), the Company may use
such Net Proceeds Deficiency, or a portion thereof, for general corporate
purposes, subject to the limitations of the "Limitation on Restricted
Payments" covenant.
(iii) If the aggregate Offered Price of Notes validly tendered and not
withdrawn by Holders thereof exceeds the Payment Amount, Notes to be
purchased will be selected on a pro rata basis.
(iv) Upon completion of such Net Proceeds Offer, the amount of Excess
Proceeds shall be reset to zero.
The Company will not permit any Restricted Subsidiary to enter into or
suffer to exist any agreement that would place any restriction of any kind
(other than pursuant to law or regulation) on the ability of the Company to make
a Net Proceeds Offer following any Asset Sale. The Company will comply with Rule
14e-1 under the Exchange Act, and any other securities laws and regulations
thereunder, if applicable, in the event that an Asset Sale occurs and the
Company is required to purchase Notes as described above.
Limitation on Guarantees by Subsidiary Guarantors. The Company will not
permit any Subsidiary Guarantor to guarantee the payment of any Subordinated
Indebtedness of the Company unless such guarantee shall be subordinated to such
Subsidiary Guarantor's Subsidiary Guarantee at least to the same extent as such
Subordinated Indebtedness is subordinated to the Notes; provided, however, that
this covenant will not be applicable to any guarantee of any Subsidiary
Guarantor that (i) existed at the time such Person became a Subsidiary of the
Company and (ii) was not incurred in connection with, or in contemplation of,
such Person becoming a Subsidiary of the Company.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or suffer to exist or allow to
become effective any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary (a) to pay dividends, in cash or otherwise,
or make any other distributions on its Capital Stock, or make payments on any
Indebtedness owed, to the Company or any other Restricted Subsidiary, (b) to
make loans or advances to the Company or any other Restricted Subsidiary, (c) to
transfer any of its property or assets to the Company or any other Restricted
Subsidiary or (d) to guarantee the Notes (any such restrictions being
collectively referred to herein as a "Payment Restriction"), except in any such
case for such encumbrances or restrictions existing under or by reason of (i)
the Indenture, the Revolving Credit Facility or any other agreement in effect or
entered into on the date of the Indenture, or (ii) any agreement, instrument or
charter of or in respect of a Restricted Subsidiary entered into prior to the
date on which such Restricted Subsidiary became a Restricted Subsidiary and
outstanding on such date and not entered into in connection with or in
contemplation of becoming a Restricted Subsidiary, provided such consensual
encumbrance or restriction is not applicable to any properties or assets other
than those owned or held by the Restricted Subsidiary at the time it became a
Restricted Subsidiary or subsequently acquired by such Restricted Subsidiary
other than from the Company or any other Restricted Subsidiary, or (iii)
pursuant to an agreement effecting a modification, renewal, refinancing,
replacement or extension of any agreement, instrument or charter (other than the
Indenture) referred to in clause (i) or (ii) above, provided, however, that the
40
<PAGE> 41
provisions relating to such encumbrance or restriction are not materially less
favorable to the Holders of the Notes than those under or pursuant to the
agreement, instrument or charter so modified, renewed, refinanced, replaced or
extended, or (iv) customary provisions restricting the subletting or assignment
of any lease or the transfer of copyrighted or patented materials, or (v)
provisions in agreements that restrict the assignment of such agreements or
rights thereunder, or (vi) the sale or other disposition of any properties or
assets subject to a Lien securing Indebtedness.
Limitation on Conduct of Business. The Company will not, and will not
permit any of its Restricted Subsidiaries to, engage in the conduct of any
business other than the businesses being conducted on the date of the Indenture
(and described therein and herein) and such other businesses as are reasonably
necessary or desirable to facilitate the conduct and operation of such
businesses.
Reports. The Company will file on a timely basis with the Commission, to
the extent such filings are accepted by the Commission and whether or not the
Company has a class of securities registered under the Exchange Act, the annual
reports, quarterly reports and other documents that the Company would be
required to file if it were subject to Section 13 or 15 of the Exchange Act. The
Company will also be required (a) to file with the Trustee (with exhibits), and
provide to each Holder of Notes (without exhibits), without cost to such Holder,
copies of such reports and documents within 15 days after the date on which the
Company files such reports and documents with the Commission or the date on
which the Company would be required to file such reports and documents if the
Company were so required and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the Exchange
Act, to supply at its cost copies of such reports and documents (including any
exhibits thereto) to any Holder of Notes, securities analyst or prospective
investor promptly upon written request.
Future Designation of Restricted and Unrestricted Subsidiaries. The
foregoing covenants (including calculation of financial ratios and the
determination of limitations on the incurrence of Indebtedness and Liens) may be
affected by the designation by the Company of any existing or future Subsidiary
of the Company as an Unrestricted Subsidiary. The definition of "Unrestricted
Subsidiary" set forth under the caption "-- Certain Definitions" describes the
circumstances under which a Subsidiary of the Company may be designated as an
Unrestricted Subsidiary by the Board of Directors of the Company.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company will not, in any single transaction or series of related
transactions, merge or consolidate with or into any other Person, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of the properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis to any Person or group of Affiliated Persons, and the Company
will not permit any of its Restricted Subsidiaries to enter into any such
transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in the sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis to any other Person or group of Affiliated Persons, unless at
the time and after giving effect thereto: (i) either (A) if the transaction is a
merger or consolidation, the Company shall be the surviving Person of such
merger or consolidation, or (B) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or to which the
properties and assets of the Company or its Restricted Subsidiaries, as the case
may be, are sold, assigned, conveyed, transferred, leased or otherwise disposed
of (any such surviving Person or transferee Person being the "Surviving Entity")
shall be a corporation organized and existing under the laws of the United
States of America, any state thereof or the District of Columbia and shall, in
either case, expressly assume by a supplemental indenture to the Indenture
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture, and, in each
case, the Indenture shall remain in full force and effect; (ii) immediately
before and immediately after giving effect to such transaction or series of
transactions on a pro forma basis (and treating any Indebtedness not previously
an obligation of Company or any of its Restricted Subsidiaries which becomes an
obligation of the Company or any of its Restricted Subsidiaries in connection
with or as a result of such transaction or transactions as having been incurred
at the time of such transaction or transactions), no Default or Event of Default
shall have occurred and be continuing; (iii) except
41
<PAGE> 42
in the case of the consolidation or merger of any Restricted Subsidiary with or
into the Company, immediately after giving effect to such transaction or
transactions on a pro forma basis, the Consolidated Net Worth of the Company (or
the Surviving Entity if the Company is not the continuing obligor under the
Indenture) is at least equal to the Consolidated Net Worth of the Company
immediately before such transaction or transactions; (iv) except in the case of
the consolidation or merger of the Company with or into a Restricted Subsidiary
or any Restricted Subsidiary with or into the Company or another Restricted
Subsidiary, immediately before and immediately after giving effect to such
transaction or transactions on a pro forma basis (assuming that the transaction
or transactions occurred on the first day of the period of four fiscal quarters
ending immediately prior to the consummation of such transaction or
transactions, with the appropriate adjustments with respect to the transaction
or transactions being included in such pro forma calculation), the Company (or
the Surviving Entity if the Company is not the continuing obligor under the
Indenture) could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the first paragraph of the "-- Limitation on
Indebtedness and Disqualified Capital Stock" covenant; (v) if the Company is not
the continuing obligor under the Indenture, then each Subsidiary Guarantor,
unless it is the Surviving Entity, shall have by supplemental indenture to the
Indenture confirmed that its Subsidiary Guarantee of the Notes shall apply to
the Surviving Entity's obligations under the Indenture and the Notes; (vi) if
any of the properties or assets of the Company or any of its Restricted
Subsidiaries would upon such transaction or series of related transactions
become subject to any Lien (other than a Permitted Lien), the creation and
imposition of such Lien shall have been in compliance with the "Limitation on
Liens" covenant; and (vii) the Company (or the Surviving Entity if the Company
is not the continuing obligor under the Indenture) shall have delivered to the
Trustee, in form and substance reasonably satisfactory to the Trustee, (a) an
Officers' Certificate stating that such consolidation, merger, transfer, lease
or other disposition and any supplemental indenture in respect thereto comply
with the requirements under the Indenture and (b) an Opinion of Counsel stating
that the requirements of clause (i) of this paragraph have been satisfied.
Upon any consolidation or merger or any sale, assignment, lease,
conveyance, transfer or other disposition of all or substantially all of the
properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis in accordance with the foregoing, in which the Company is not
the continuing corporation, the Surviving Entity shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if the Surviving Entity had been named as
the Company therein, and thereafter the Company, except in the case of a lease,
will be discharged from all obligations and covenants under the Indenture and
the Notes and may be liquidated and dissolved.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any, on
any of the Notes, whether such payment is due at Stated Maturity, upon
redemption, upon repurchase pursuant to a Change of Control Offer or a Net
Proceeds Offer, upon acceleration or otherwise; or
(ii) default in the payment of any installment of interest on any of
the Notes, when due, and the continuance of such default for a period of 30
days; or
(iii) default in the performance or breach of the provisions of the
"Merger, Consolidation and Sale of Assets" section of the Indenture, the
failure to make or consummate a Change of Control Offer in accordance with
the provisions of the "Change of Control" covenant or the failure to make
or consummate a Net Proceeds Offer in accordance with the provisions of the
"Limitation on Asset Sales" covenant; or
(iv) the Company or any Subsidiary Guarantor shall fail to perform or
observe any other term, covenant or agreement contained in the Notes, any
Subsidiary Guarantee or the Indenture (other than a default specified in
(i), (ii) or (iii) above) for a period of 45 days after written notice of
such failure stating that it is a "notice of default" under the Indenture
and requiring the Company or such Subsidiary Guarantor to remedy the same
shall have been given (x) to the Company by the Trustee or (y) to the
42
<PAGE> 43
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Notes then outstanding; or
(v) the occurrence and continuation beyond any applicable grace period
of any default in the payment of the principal of, premium, if any, or
interest on any Indebtedness of the Company (other than the Notes) or any
Subsidiary Guarantor or any other Restricted Subsidiary for money borrowed
when due, or any other default resulting in acceleration of any
Indebtedness of the Company or any Subsidiary Guarantor or any other
Restricted Subsidiary for money borrowed, provided that the aggregate
principal amount of such Indebtedness shall exceed $5 million and provided,
further, that if any such default is cured or waived or any such
acceleration rescinded, or such Indebtedness is repaid, within a period of
10 days from the continuation of such default beyond the applicable grace
period or the occurrence of such acceleration, as the case may be, such
Event of Default under the Indenture and any consequential acceleration of
the Notes shall be automatically rescinded, so long as such rescission does
not conflict with any judgment or decree; or
(vi) any Subsidiary Guarantee shall for any reason cease to be, or be
asserted by the Company or any Subsidiary Guarantor, as applicable, not to
be, in full force and effect (except pursuant to the release of any such
Subsidiary Guarantee in accordance with the Indenture); or
(vii) final judgments or orders rendered against the Company or any
Subsidiary Guarantor or any other Restricted Subsidiary that are
unsatisfied and that require the payment in money, either individually or
in an aggregate amount, that is more than $5 million over the coverage
under applicable insurance policies and either (A) commencement by any
creditor of an enforcement proceeding upon such judgment (other than a
judgment that is stayed by reason of pending appeal or otherwise) or
(B) the occurrence of a 60-day period during which a stay of such judgment
or order, by reason of pending appeal or otherwise, was not in effect; or
(viii) the entry of a decree or order by a court having jurisdiction
in the premises (A) for relief in respect of the Company or any Subsidiary
Guarantor or any other Restricted Subsidiary in an involuntary case or
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or (B) adjudging the Company or any
Subsidiary Guarantor or any other Restricted Subsidiary bankrupt or
insolvent, or approving a petition seeking reorganization, arrangement,
adjustment or composition of the Company or any Subsidiary Guarantor or any
other Restricted Subsidiary under any applicable federal or state law, or
appointing under any such law a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any
Subsidiary Guarantor or any other Restricted Subsidiary or of a substantial
part of its consolidated assets, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree or order for relief
or any such other decree or order unstayed and in effect for a period of 60
consecutive days; or
(ix) the commencement by the Company or any Subsidiary Guarantor or
any other Restricted Subsidiary of a voluntary case or proceeding under any
applicable federal or state bankruptcy, insolvency, reorganization or other
similar law or any other case or proceeding to be adjudicated bankrupt or
insolvent, or the consent by the Company or any Subsidiary Guarantor or any
other Restricted Subsidiary to the entry of a decree or order for relief in
respect thereof in an involuntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other similar
law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by the Company or any Subsidiary
Guarantor or any other Restricted Subsidiary of a petition or consent
seeking reorganization or relief under any applicable federal or state law,
or the consent by it under any such law to the filing of any such petition
or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or other similar official)
of the Company or any Subsidiary Guarantor or any other Restricted
Subsidiary or of any substantial part of its consolidated assets, or the
making by it of an assignment for the benefit of creditors under any such
law, or the admission by it in writing of its inability to pay its debts
generally as they become due or taking of corporate action by the
43
<PAGE> 44
Company or any Subsidiary Guarantor or any other Restricted Subsidiary in
furtherance of any such action.
If an Event of Default (other than as specified in clause (viii) or (ix)
above) shall occur and be continuing, the Trustee, by written notice to the
Company, or the Holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by written notice to the Trustee and the Company, may,
and the Trustee upon the request of the Holders of not less than 25% in
aggregate principal amount of the Notes then outstanding shall, declare the
principal of, premium, if any, and accrued and unpaid interest on all of the
Notes due and payable immediately, upon which declaration all amounts payable in
respect of the Notes shall be immediately due and payable. If an Event of
Default specified in clause (viii) or (ix) above occurs and is continuing, then
the principal of, premium, if any, and accrued and unpaid interest on all of the
Notes shall become and be immediately due and payable without any declaration,
notice or other act on the part of the Trustee or any Holder of Notes.
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the Holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company, the Subsidiary Guarantors
and the Trustee, may rescind and annul such declaration if (a) the Company or
any Subsidiary Guarantor has paid or deposited with the Trustee a sum sufficient
to pay (i) all sums paid or advanced by the Trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, (ii) all overdue interest on all Notes, (iii) the
principal of and premium, if any, on any Notes which have become due otherwise
than by such declaration of acceleration and interest thereon at the rate borne
by the Notes, and (iv) to the extent that payment of such interest is lawful,
interest upon overdue interest and overdue principal at the rate borne by the
Notes (without duplication of any amount paid or deposited pursuant to clause
(ii) or (iii)); (b) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction; and (c) all Events of Default,
other than the non-payment of principal of, premium, if any, or interest on the
Notes that has become due solely by such declaration of acceleration, have been
cured or waived.
No Holder will have any right to institute any proceeding with respect to
the Indenture or any remedy thereunder, unless such Holder has notified the
Trustee of a continuing Event of Default and the Holders of at least 25% in
aggregate principal amount of the outstanding Notes have made written request,
and offered reasonable indemnity, to the Trustee to institute such proceeding as
Trustee under the Notes and the Indenture, the Trustee has failed to institute
such proceeding within 60 days after receipt of such notice and the Trustee,
within such 60-day period, has not received directions inconsistent with such
written request by Holders of a majority in aggregate principal amount of the
outstanding Notes. Such limitations will not apply, however, to a suit
instituted by the Holder of a Note for the enforcement of the payment of the
principal of, premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee will be required
to exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing, the Trustee will not
be under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the Holders of a
majority in aggregate principal amount of the outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee under the Indenture.
If a Default occurs and is continuing and is known to the Trustee, the
Trustee shall mail to each Holder notice of the Default within 60 days after the
occurrence thereof. Except in the case of a Default in payment of principal of,
premium, if any, or interest on any Notes, the Trustee may withhold the notice
to the Holders of the Notes if the Trustee determines in good faith that
withholding the notice is in the interest of the Holders of the Notes.
44
<PAGE> 45
The Company will be required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company will also be
required to notify the Trustee within 10 days of any Default or Event of
Default.
LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations
of the Company and the Subsidiary Guarantors with respect to the outstanding
Notes (such action being a "legal defeasance"). Such legal defeasance means that
the Company and the Subsidiary Guarantors shall be deemed to have paid and
discharged the entire Indebtedness represented by the outstanding Notes and to
have been discharged from all their other obligations with respect to the Notes
and the Subsidiary Guarantees, except for (i) the rights of Holders of
outstanding Notes to receive payment in respect of the principal of, premium, if
any, and interest on such Notes when such payments are due, (ii) the Company's
obligations to replace any temporary Notes, register the transfer or exchange of
any Notes, replace mutilated, destroyed, lost or stolen Notes and maintain an
office or agency for payments in respect of the Notes, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and (iv) the legal defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to terminate the obligations of the Company and each Subsidiary
Guarantor with respect to certain covenants that are set forth in the Indenture,
some of which are described under "-- Certain Covenants" above, and any omission
to comply with such obligations shall not constitute a Default or an Event of
Default with respect to the Notes (such action being a "covenant defeasance").
In the event covenant defeasance occurs, certain events (not including
nonpayment, bankruptcy, insolvency and reorganization events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either legal defeasance or covenant defeasance, (i)
the Company or any Subsidiary Guarantor must irrevocably deposit with the
Trustee, in trust, for the benefit of the Holders of the Notes, cash in United
States dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes to
redemption or maturity; (ii) the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that the Holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such legal defeasance or covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such legal defeasance or covenant defeasance had not
occurred (in the case of legal defeasance, such opinion must refer to and be
based upon a published ruling of the Internal Revenue Service or a change in
applicable federal income tax laws); (iii) no Default or Event of Default shall
have occurred and be continuing on the date of such deposit or insofar as
clauses (viii) and (ix) under the first paragraph of "Events of Default" are
concerned, at any time during the period ending on the 91st day after the date
of deposit; (iv) such legal defeasance or covenant defeasance shall not cause
the Trustee to have a conflicting interest under the Indenture or the Trust
Indenture Act with respect to any securities of the Company or any Subsidiary
Guarantor; (v) such legal defeasance or covenant defeasance shall not result in
a breach or violation of, or constitute a default under, any material agreement
or instrument to which the Company or any Subsidiary Guarantor is a party or by
which it is bound; and (vi) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel satisfactory to the Trustee,
which, taken together, state that all conditions precedent under the Indenture
to either legal defeasance or covenant defeasance, as the case may be, have been
complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen, mutilated or destroyed Notes which have been replaced or
paid and Notes for whose payment money or certain United States government
obligations have theretofore been deposited in trust or segregated and
45
<PAGE> 46
held in trust by the Company and thereafter repaid to the Company or discharged
from such trust) have been delivered to the Trustee for cancellation or (b) all
Notes not theretofore delivered to the Trustee for cancellation have become due
and payable or will become due and payable at their Stated Maturity within one
year, or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the serving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit (in the case
of Notes which have become due and payable) or to the Stated Maturity or
Redemption Date, as the case may be, together with instructions from the Company
irrevocably directing the Trustee to apply such funds to the payment thereof at
maturity or redemption, as the case may be; (ii) the Company has paid all other
sums payable under the Indenture by the Company; and (iii) the Company has
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel
which, taken together, state that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
AMENDMENTS AND WAIVERS
From time to time, the Company, the Subsidiary Guarantors and the Trustee
may, without the consent of the Holders of the Notes, amend or supplement the
Indenture or the Notes for certain specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, qualifying, or
maintaining the qualification of, the Indenture under the Trust Indenture Act,
adding or releasing any Subsidiary Guarantor pursuant to the terms of the
Indenture, or making any change that does not materially adversely affect the
rights of any Holder of Notes. Other amendments and modifications of the
Indenture or the Notes may be made by the Company, the Subsidiary Guarantors and
the Trustee with the consent of the Holders of not less than a majority of the
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of, premium, if any, or interest on any Note, (c) change the
coin or currency of payment of principal of, premium, if any, or interest on,
any Note, (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any Note, (e) reduce the above-stated percentage
of aggregate principal amount of outstanding Notes necessary to modify or amend
the Indenture, (f) reduce the percentage of aggregate principal amount of
outstanding Notes necessary for waiver of compliance with certain provisions of
the Indenture or for waiver of certain defaults, (g) modify any provisions of
the Indenture relating to the modification and amendment of the Indenture or the
waiver of past defaults or covenants, except as otherwise specified, (h) change
the ranking of the Notes or the Subsidiary Guarantees in a manner adverse to the
Holders or expressly subordinate in right of payment the Notes or the Subsidiary
Guarantees to any other Indebtedness or (i) amend, change or modify the
obligation of the Company to make and consummate a Change of Control Offer in
the event of a Change of Control or make and consummate a Net Proceeds Offer
with respect to any Asset Sale or modify any of the provisions or definitions
with respect thereto.
The Holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the Holders of all Notes, waive any past
default under the Indenture, except a default in the payment of principal of,
premium, if any, or interest on the Notes, or in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the Holder of each Note outstanding.
THE TRUSTEE
Fleet National Bank serves as trustee under the Indenture.
The Indenture (including provisions of the Trust Indenture Act incorporated
by reference therein) contains limitations on the rights of the Trustee
thereunder, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Indenture permits the
Trustee to engage in other transactions; provided,
46
<PAGE> 47
however, if it acquires any conflicting interest (as defined in the Trust
Indenture Act) it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees are governed by the
laws of the State of New York.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Restricted Subsidiary or (b) assumed in connection
with acquisitions of properties or assets from such Person (other than any
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition). Acquired Indebtedness
shall be deemed to be incurred on the date the acquired Person becomes a
Restricted Subsidiary or the date of the related acquisition of properties or
assets from such Person.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
amount by which the fair value of the properties and assets of such Subsidiary
Guarantor exceeds the total amount of liabilities, including, without
limitation, contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under its Subsidiary Guarantee, of such Subsidiary Guarantor at such
date.
"Affiliate" means, with respect to any specified Person, 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 Person, means the power to direct 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. For
purposes of this definition, beneficial ownership of 10% or more of the voting
common equity (on a fully diluted basis) or options or warrants to purchase such
equity (but only if exercisable at the date of determination or within 60 days
thereof) of a Person shall be deemed to constitute control of such Person.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition to any Person other than the Company or any of its Restricted
Subsidiaries (including, without limitation, by means of a Sale/Leaseback
Transaction or a merger or consolidation) (collectively, for purposes of this
definition, a "transfer"), directly or indirectly, in one or a series of related
transactions, of (a) any Capital Stock of any Restricted Subsidiary held by the
Company or any other Restricted Subsidiary, (b) all or substantially all of the
properties and assets of any division or line of business of the Company or any
of its Restricted Subsidiaries or (c) any other properties or assets of the
Company or any of its Restricted Subsidiaries other than transfers of cash, Cash
Equivalents, accounts receivable, hydrocarbons or other properties or assets in
the ordinary course of business or transfers in accordance with the proviso to
clause (vi) of the definition of Permitted Investments. For the purposes of this
definition, the term "Asset Sale" also shall not include any of the following:
(i) any transfer of properties or assets (including Capital Stock) that is
governed by, and made in accordance with, the provisions described under
"-- Merger, Consolidation and Sale of Assets"; (ii) any transfer of properties
or assets to an Unrestricted Subsidiary, if permitted under the "Limitation on
Restricted Payments" covenant; (iii) sales of damaged, worn-out or obsolete
equipment or assets that, in the Company's reasonable judgment, are either (x)
no longer used or (y) no longer useful in the business of the Company or its
Restricted Subsidiaries; (iv) any charter (bareboat or otherwise) or other lease
of any property entered into in the ordinary course of business and with respect
to which the Company or any Restricted Subsidiary is the lessor, except any such
charter or lease that provides for the acquisition of such property by the
lessee during or at the end of the term thereof for an amount that is less than
the fair market value thereof at the time the right to acquire such property is
granted; (v) any trade or exchange by the Company or any Restricted Subsidiary
of one or more offshore drilling rigs for one or more other offshore drilling
rigs owned or held by another Person, provided that (x) the fair value of the
offshore drilling rig or rigs traded or exchanged by the Company or such
Restricted Subsidiary (including any cash or Cash Equivalents to be delivered by
the
47
<PAGE> 48
Company or such Restricted Subsidiary) is reasonably equivalent to the fair
value of the offshore drilling rig or rigs (together with any cash or Cash
Equivalents) to be received by the Company or such Restricted Subsidiary as
determined by written appraisal by a nationally recognized investment banking
firm or appraisal firm, in either case specializing or having a specialty in
offshore drilling rigs, and (y) such exchange is approved by a majority of the
Disinterested Directors of the Company; (vi) any transfer by the Company or any
Restricted Subsidiary to its customers of drill pipe and associated drilling
equipment utilized in connection with a drilling contract for the employment of
a drilling rig in the ordinary course of business and consistent with past
practice; and (vii) any transfers that, but for this clause (vii), would be
Asset Sales, if (A) the Company elects to designate such transfers as not
constituting Asset Sales and (B) after giving effect to such transfers, the
aggregate fair market value of the properties or assets transferred in such
transaction or any such series of related transactions so designated by the
Company does not exceed $500,000.
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the present value of the total net amount of
rent required to be paid by such Person under the lease during the primary term
thereof, without giving effect to any renewals at the option of the lessee,
discounted from the respective due dates thereof to such date of determination
at a rate per annum equal to the discount rate which would be applicable to a
Capitalized Lease Obligation with a like term in accordance with GAAP. As used
in the preceding sentence, the "net amount of rent" under any such lease for any
such period shall mean the sum of rental and other payments required to be paid
with respect to such period by the lessee thereunder, excluding any amounts
required to be paid by such lessee on account of maintenance and repairs,
insurance, taxes, assessments, water rates or similar charges. In the case of
any lease which is terminable by the lessee upon payment of a penalty, such net
amount of rent shall also include the amount of such penalty, but no rent shall
be considered as required to be paid under such lease subsequent to the first
date upon which it may be so terminated.
"Average Life" means, with respect to any Indebtedness, as at any date of
determination, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years (and any portion thereof) from the date of determination
to the date or dates of each successive scheduled principal payment (including,
without limitation, any sinking fund or mandatory redemption payment
requirements) of such Indebtedness multiplied by (ii) the amount of each such
principal payment by (b) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights or other equivalents in the equity interests
(however designated) in such Person, and any rights (other than debt securities
convertible into an equity interest), warrants or options exercisable for,
exchangeable for or convertible into such an equity interest in such Person.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified and
accounted for as a capital lease obligation under GAAP and, for the purpose of
the Indenture, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity
of 180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500 million; (iii) commercial
paper with a maturity of 180 days or less issued by a corporation that is not an
Affiliate of the Company and is organized under the laws of any state of the
United States or the District of Columbia and rated at least A-1 by S&P or at
least P-1 by Moody's; (iv) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i) above
entered into with any commercial bank meeting the specifications of clause (ii)
above; (v) overnight bank deposits and bankers' acceptances at any commercial
bank meeting the qualifications specified in clause (ii) above; (vi) deposits
available for withdrawal on demand with any
48
<PAGE> 49
commercial bank not meeting the qualifications specified in clause (ii) above,
provided all such deposits do not exceed $5 million in the aggregate at any one
time; (vii) demand and time deposits and certificates of deposit with any
commercial bank organized in the United States not meeting the qualifications
specified in clause (ii) above, provided that such deposits and certificates
support bond, letter of credit and other similar types of obligations incurred
in the ordinary course of business; and (viii) investments in money market or
other mutual funds substantially all of whose assets comprise securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any event or series of events
by which: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of
the total Voting Stock of the Company; (b) the Company consolidates with or
merges into another Person or any Person consolidates with, or merges into, the
Company, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities or
other property, other than any such transaction where (i) the outstanding Voting
Stock of the Company is changed into or exchanged for Voting Stock of the
surviving or resulting Person that is Qualified Capital Stock and (ii) the
holders of the Voting Stock of the Company immediately prior to such transaction
own, directly or indirectly, not less than a majority of the Voting Stock of the
surviving or resulting Person immediately after such transaction; (c) the
Company, either individually or in conjunction with one or more Restricted
Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes
of, or the Restricted Subsidiaries sell, assign, convey, transfer, lease or
otherwise dispose of, all or substantially all of the properties and assets of
the Company and its Restricted Subsidiaries, taken as a whole (either in one
transaction or a series of related transactions), including Capital Stock of the
Restricted Subsidiaries, to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary); (d) during any consecutive two-year period, individuals
who at the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of the Company
was approved by a vote of two-thirds of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office;
or (e) the liquidation or dissolution of the Company.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding-up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated EBITDA Coverage Ratio" means, for any period, the ratio on a
pro forma basis of (a) the sum of Consolidated Net Income, Consolidated Interest
Expense, Consolidated Income Tax Expense and Consolidated Non-cash Charges
deducted in computing Consolidated Net Income, in each case, for such period, of
the Company and its Restricted Subsidiaries on a consolidated basis, all
determined in accordance with GAAP, to (b) the sum of such Consolidated Interest
Expense for such period; provided, however, that (i) the Consolidated EBITDA
Coverage Ratio shall be calculated on a pro forma basis assuming that (A) the
Indebtedness to be incurred (and all other Indebtedness incurred after the first
day of such period of four full fiscal quarters referred to in the covenant
described in paragraph (a) under "-- Certain Covenants -- Limitation on
Indebtedness and Disqualified Capital Stock" through and including the date of
determination), and (if applicable) the application of the net proceeds
therefrom (and from any other such Indebtedness), including to refinance other
Indebtedness, had been incurred on the first day of such four-quarter period
and, in the case of Acquired Indebtedness, on the assumption that the related
transaction (whether by means of purchase, merger or otherwise) also had
occurred on such date with the appropriate adjustments with respect to such
acquisition being included in such pro forma calculation and (B) any acquisition
or disposition by the Company or any Restricted Subsidiary of any properties or
assets outside the ordinary course of business, or any repayment of any
principal amount of any Indebtedness of the Company or any Restricted Subsidiary
prior to the Stated Maturity thereof, in either case since the first day of such
period of four full fiscal quarters through and including the date of
determination, had been consummated on such first day of such four-quarter
period, (ii) in making such computation, the Consolidated Interest Expense
49
<PAGE> 50
attributable to interest on any Indebtedness required to be computed on a pro
forma basis in accordance with the covenant described in paragraph (a) under
"-- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital
Stock" and (A) bearing a floating interest rate shall be computed as if the rate
in effect on the date of computation had been the applicable rate for the entire
period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of the Company, a fixed
or floating rate of interest, shall be computed by applying, at the option of
the Company, either the fixed or floating rate, (iii) in making such
computation, the Consolidated Interest Expense attributable to interest on any
Indebtedness under a revolving credit facility required to be computed on a pro
forma basis in accordance with the covenant described in paragraph (a) under
"-- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital
Stock" shall be computed based upon the average daily balance of such
Indebtedness during the applicable period, provided that such average daily
balance shall be reduced by the amount of any repayment of Indebtedness under a
revolving credit facility during the applicable period, which repayment
permanently reduced the commitments or amounts available to be reborrowed under
such facility, (iv) notwithstanding clauses (ii) and (iii) of this proviso,
interest on Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by agreements relating to Interest Rate Protection
Obligations, shall be deemed to have accrued at the rate per annum resulting
after giving effect to the operation of such agreements, and (v) if after the
first day of the period referred to in clause (a) of this definition the Company
has permanently retired any Indebtedness out of the Net Cash Proceeds of the
issuance and sale of shares of Qualified Capital Stock of the Company within 30
days of such issuance and sale, Consolidated Interest Expense shall be
calculated on a pro forma basis as if such Indebtedness had been retired on the
first day of such period.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes (including state franchise taxes
accounted for as income taxes in accordance with GAAP) of the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without duplication,
(i) the sum of (a) the interest expense of the Company and its Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP, including, without limitation, (A) any amortization of debt discount,
(B) the net cost under Interest Rate Protection Obligations (including any
amortization of discounts), (C) the interest portion of any deferred payment
obligation constituting Indebtedness, (D) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing and (E) all accrued interest, in each case to the extent attributable
to such period, (b) to the extent any Indebtedness of any Person (other than the
Company or a Restricted Subsidiary) is guaranteed by the Company or any
Restricted Subsidiary, the aggregate amount of interest paid (to the extent not
accrued in a prior period) or accrued by such other Person during such period
attributable to any such Indebtedness, in each case to the extent attributable
to that period, (c) the aggregate amount of the interest component of
Capitalized Lease Obligations paid (to the extent not accrued in a prior
period), accrued or scheduled to be paid or accrued by the Company and its
Restricted Subsidiaries during such period and (d) the aggregate amount of
dividends paid (to the extent not accrued in a prior period) or accrued on
Preferred Stock or Disqualified Capital Stock of the Company and its Restricted
Subsidiaries, to the extent such Preferred Stock or Disqualified Capital Stock
is owned by Persons other than the Company or any Restricted Subsidiary, less
(ii), to the extent included in clause (i) above, amortization of capitalized
debt issuance costs of the Company and its Restricted Subsidiaries during such
period.
"Consolidated Net Income" means, for any period, the consolidated net
income (or loss) of the Company and its Restricted Subsidiaries for such period
as determined in accordance with GAAP, adjusted by excluding (a) net after-tax
extraordinary gains or losses (less all fees and expenses relating thereto), (b)
net after-tax gains or losses (less all fees and expenses relating thereto)
attributable to Asset Sales, (c) the net income (or net loss) of any Person
(other than the Company or any of its Restricted Subsidiaries), in which the
Company or any of its Restricted Subsidiaries has an ownership interest, except
to the extent of the amount of dividends or other distributions actually paid to
the Company or any of its Restricted Subsidiaries in cash by such other Person
during such period (regardless of whether such cash dividends or
50
<PAGE> 51
distributions are attributable to net income (or net loss) of such Person during
such period or during any prior period), (d) net income (or net loss) of any
Person combined with the Company or any of its Restricted Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (e) the net income of any Restricted Subsidiary to the extent that
the declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of its net income is not at the date of determination
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders, and (f) income resulting from transfers of assets received by the
Company or any Restricted Subsidiary from an Unrestricted Subsidiary.
"Consolidated Net Worth" means, at any date, the consolidated stockholders'
equity of the Company less the amount of such stockholders' equity attributable
to Disqualified Capital Stock or treasury stock of the Company and its
Restricted Subsidiaries, as determined in accordance with GAAP.
"Consolidated Non-cash Charges" means, for any period, the aggregate
depreciation, depletion, amortization and other non-cash expenses of the Company
and its Restricted Subsidiaries reducing Consolidated Net Income for such
period, determined on a consolidated basis in accordance with GAAP (excluding
any such non-cash charge for which an accrual of or reserve for cash charges for
any future period is required).
"Currency Hedge Obligations" means, at any time as to any Person, the
obligations of such Person at such time which were incurred in the ordinary
course of business pursuant to any foreign currency exchange agreement, option
or futures contract or other similar agreement or arrangement designed to
protect against or manage such Person's or any of its Subsidiaries' exposure to
fluctuations in foreign currency exchange rates.
"Default" means any event, act or condition that is, or after notice or
passage of time or both would become, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors of the Company is
required to deliver a resolution of the Board of Directors under the Indenture,
a member of the Board of Directors of the Company who does not have any material
direct or indirect financial interest (other than an interest arising solely
from the beneficial ownership of Capital Stock of the Company) in or with
respect to such transaction or series of transactions.
"Disqualified Capital Stock" means any Capital Stock that, either by its
terms, by the terms of any security into which it is convertible or exchangeable
or by contract or otherwise, is, or upon the happening of an event or passage of
time would be, required to be redeemed or repurchased prior to the final Stated
Maturity of the Notes or is redeemable at the option of the holder thereof at
any time prior to such final Stated Maturity, or is convertible into or
exchangeable for debt securities at any time prior to such final Stated
Maturity. For purposes of the covenant described in paragraph (a) under
"-- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital
Stock", Disqualified Capital Stock shall be valued at the greater of its
voluntary or involuntary maximum fixed redemption or repurchase price plus
accrued and unpaid dividends. For such purposes, the "maximum fixed redemption
or repurchase price" of any Disqualified Capital Stock which does not have a
fixed redemption or repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were redeemed or repurchased on the date of determination, and if such price is
based upon, or measured by, the fair market value of such Disqualified Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the issuer of such Disqualified Capital Stock; provided, however,
that if such Disqualified Capital Stock is not at the date of determination
permitted or required to be redeemed or repurchased, the "maximum fixed
redemption or repurchase price" shall be the book value of such Disqualified
Capital Stock.
"Event of Default" has the meaning set forth above under the caption
"Events of Default."
"Event of Loss" means, with respect to any drilling rig, MOPU or related
property or asset of the Company or any Restricted Subsidiary, (i) any damage to
such drilling rig, MOPU or related property or asset which results in an
insurance settlement with respect thereto on the basis of a total loss or a
constructive or compromised total loss or (ii) the confiscation, condemnation or
requisition of title to such drilling rig, MOPU or related property or asset by
any government or any instrumentality or agency thereof. An Event of
51
<PAGE> 52
Loss shall be deemed to occur as of the date of the insurance settlement,
confiscation, condemnation or requisition of title, as applicable.
"GAAP" means generally accepted accounting principles, consistently
applied, that are set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as may be approved by a significant
segment of the accounting profession of the United States of America, which are
applicable as of the date of the Indenture.
The term "guarantee" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down under letters of credit. When used as a verb,
"guarantee" has a corresponding meaning.
"Holder" means a Person in whose name a Note is registered in the Note
Register.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities of such Person, contingent or otherwise, for borrowed money or
for the deferred purchase price of property or services (excluding any trade
accounts payable and other accrued current liabilities incurred in the ordinary
course of business) and all liabilities of such Person incurred in connection
with any letters of credit, bankers' acceptances or other similar credit
transactions or any agreement to purchase, redeem, exchange, convert or
otherwise acquire for value any Capital Stock of such Person, or any warrants,
rights or options to acquire such Capital Stock, outstanding on the date of the
Indenture or thereafter, if, and to the extent, any of the foregoing would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, (b) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments, if, and to the extent, any of the
foregoing would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, (c) all Indebtedness of such Person created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even if the rights and remedies of
the seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade accounts payable
arising in the ordinary course of business, (d) the Attributable Indebtedness
respecting all Capitalized Lease Obligations of such Person (e) all Indebtedness
referred to in the preceding clauses of other Persons and all dividends of other
Persons, the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness (the amount of such obligation being
deemed to be the lesser of the value of such property or the amount of the
obligation so secured), (f) all guarantees by such Person of Indebtedness
referred to in this definition and (g) all obligations of such Person under or
in respect of Currency Hedge Obligations and Interest Rate Protection
Obligations.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements or arrangements designed to protect
against or manage such Person's or any of its Subsidiaries exposure to
fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee of Indebtedness or other extension of credit or capital
contribution to (by means of any transfer of cash or other property or assets to
others or any payment for property, assets or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities (including derivatives) or
evidences of Indebtedness issued by, any other Person. In addition, the fair
market
52
<PAGE> 53
value of the net assets of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary shall be deemed
to be an "Investment" made by the Company in such Unrestricted Subsidiary at
such time. "Investments" shall exclude (a) extensions of trade credit or other
advances to customers on commercially reasonable terms in accordance with normal
trade practices or otherwise in the ordinary course of business, (b) Interest
Rate Protection Obligations and Currency Hedge Obligations, but only to the
extent that the same constitute Permitted Indebtedness and (c) endorsements of
negotiable instruments and documents in the ordinary course of business.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim or similar type
of encumbrance (including, without limitation, any agreement to give or grant
any lease, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing) upon or with
respect to any property of any kind. A Person shall be deemed to own subject to
a Lien any property which such Person has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as therein or in the Indenture provided,
whether at the Stated Maturity with respect to such principal or by declaration
of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Proceeds" means, with respect to any Asset Sale, the
proceeds thereof in the form of cash or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary), net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel, accountants and investment banks) related to such Asset Sale,
(ii) provisions for all taxes payable as a result of such Asset Sale, (iii)
amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the properties or assets
subject to the Asset Sale or having a Lien thereon and (iv) appropriate amounts
to be provided by the Company or any Restricted Subsidiary, as the case may be,
as a reserve required in accordance with GAAP against any liabilities associated
with such Asset Sale and retained by the Company or any Restricted Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an Officers' Certificate
delivered to the Trustee; provided, however, that any amounts remaining after
adjustments, revaluations or liquidations of such reserves shall constitute Net
Available Proceeds. "Net Available Proceeds" means, with respect to any Event of
Loss, the proceeds to the Company or any Restricted Subsidiary as a result
thereof in the form of cash or Cash Equivalents, including insurance proceeds
paid to the Company or any Restricted Subsidiary, and all payments received by
the Company or any Restricted Subsidiary from any government or any
instrumentality or agency thereof by way of compensation for the requisition of
title to property, net of all fees and expenses incurred by the Company or any
Restricted Subsidiary related to the collection or receipt of such proceeds, all
as reflected in an Officers' Certificate delivered to the Trustee.
"Net Cash Proceeds," with respect to any issuance or sale of Qualified
Capital Stock or other securities, means the cash proceeds of such issuance or
sale net of attorneys' fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant and other fees
and expenses actually incurred in connection with such issuance or sale and net
of taxes paid or payable as a result thereof.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of the Company or any Restricted Subsidiary incurred in connection
with the acquisition by the Company or such Restricted Subsidiary of any
property or assets and as to which (a) the holders of such Indebtedness agree
that they will look solely to the property or assets so acquired and securing
such Indebtedness for payment on or in respect of such Indebtedness, and neither
the Company nor any Subsidiary (other than an Unrestricted Subsidiary) (i)
provides credit support, including any undertaking, agreement or instrument
which would constitute Indebtedness or (ii) is directly or indirectly liable for
such Indebtedness, and (b) no default with respect to such Indebtedness would
permit (after notice or passage of time or both), according to the terms
thereof, any
53
<PAGE> 54
holder of any Indebtedness of the Company or a Restricted Subsidiary to declare
a default on such Indebtedness or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity.
"Note Register" means the register maintained by or for the Company in
which the Company shall provide for the registration of the Notes and the
transfer of the Notes.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness (and any guarantee thereof) under one or more credit
facilities with banks and other financial institutions in an aggregate
principal amount at any one time outstanding not to exceed $35 million,
less any amounts derived from Asset Sales and applied to the permanent
reduction of the Indebtedness under any such credit facilities as
contemplated by the "Limitation on Asset Sales" covenant (the "Maximum Bank
Credit Amount"), and any renewals, amendments, extensions, supplements,
modifications, deferrals, refinancing or replacements (each, for purposes
of this clause (i), a "refinancing") thereof, including any successive
refinancing thereof, so long as the aggregate principal amount of any such
new Indebtedness, together with the aggregate principal amount of all other
Indebtedness outstanding pursuant to this clause (i), shall not at any one
time exceed the Maximum Bank Credit Amount;
(ii) Indebtedness under the Notes and any Exchange Notes issued in
exchange for Notes of an equal principal amount;
(iii) Indebtedness outstanding or in effect on the date of the
Indenture (and not repaid or defeased with the proceeds of the offering of
the Notes), including Indebtedness of a Trinidad and Tobago joint venture
being guaranteed by the Company in connection with the Rig Acquisitions,
which Indebtedness is deemed to be outstanding on the date of the
Indenture;
(iv) Indebtedness under Interest Rate Protection Obligations, provided
that (1) such Interest Rate Protection Obligations are related to payment
obligations on Permitted Indebtedness or Indebtedness otherwise permitted
by paragraph (a) of the "Limitation on Indebtedness and Disqualified
Capital Stock" covenant, and (2) the notional principal amount of such
Interest Rate Protection Obligations does not exceed the principal amount
of such Indebtedness to which such Interest Rate Protection Obligations
relate;
(v) Indebtedness under Currency Hedge Obligations, provided that (1)
such Currency Hedge Obligations are related to payment obligations on
Permitted Indebtedness or Indebtedness otherwise permitted by paragraph (a)
of the "Limitation on Indebtedness and Disqualified Capital Stock" covenant
or to the foreign currency cash flows reasonably expected to be generated
by the Company and its Restricted Subsidiaries, and (2) the notional
principal amount of such Currency Hedge Obligations does not exceed the
principal amount of such Indebtedness and the amount of such foreign
currency cash flows to which such Currency Hedge Obligations relate;
(vi) the Subsidiary Guarantees of the Notes (and any assumption of the
obligations guaranteed thereby);
(vii) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary and Indebtedness of any Restricted Subsidiary to the Company or
a Wholly Owned Restricted Subsidiary; provided, however, that upon any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly Owned Restricted Subsidiary ceasing to be
a Wholly Owned Restricted Subsidiary or any other subsequent transfer of
any such Indebtedness (except to the Company or a Wholly Owned Restricted
Subsidiary), such Indebtedness shall be deemed, in each case, to be
incurred and shall be treated as an incurrence for purposes of paragraph
(a) of the "Limitation on Indebtedness and Disqualified Capital Stock"
covenant at the time the Wholly Owned Restricted Subsidiary in question
ceased to be a Wholly Owned Restricted Subsidiary or the time such
subsequent transfer occurred;
(viii) Indebtedness in respect of bid, performance or surety bonds
issued for the account of the Company or any Restricted Subsidiary in the
ordinary course of business, including guaranties or
54
<PAGE> 55
obligations of the Company or any Restricted Subsidiary with respect to
letters of credit supporting such bid, performance or surety obligations
(in each case other than for an obligation for money borrowed);
(ix) Non-Recourse Indebtedness;
(x) any renewals, substitutions, refinancing or replacements (each,
for purposes of this clause (x), a "refinancing") by the Company or a
Restricted Subsidiary of any Indebtedness incurred pursuant to clause (ii)
or (iii) of this definition, including any successive refinancing by the
Company or such Restricted Subsidiary, so long as (A) any such new
Indebtedness shall be in a principal amount that does not exceed the
principal amount (or, if such Indebtedness being refinanced provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium reasonably determined
by the Company or such Restricted Subsidiary as necessary to accomplish
such refinancing, plus the amount of expenses of the Company or such
Restricted Subsidiary incurred in connection with such refinancing, (B) in
the case of any refinancing of Indebtedness (including the Notes) that is
pari passu with or subordinated in right of payment to either the Notes or
the Subsidiary Guarantees, then such new Indebtedness is either pari passu
with or subordinated in right of payment to the Notes or the Subsidiary
Guarantees, as the case may be, at least to the same extent as the
Indebtedness being refinanced and (C) such new Indebtedness has an Average
Life equal to or longer than the Average Life of the Indebtedness being
refinanced and a final Stated Maturity that is at least 91 days later than
the final Stated Maturity of the Indebtedness being refinanced; and
(xi) any additional Indebtedness in an aggregate principal amount not
in excess of $75 million at any one time outstanding and any guarantee
thereof.
"Permitted Investments" means any of the following: (i) Investments in Cash
Equivalents; (ii) Investments in the Company or any of its Wholly Owned
Restricted Subsidiaries; (iii) Investments by the Company or any of its
Restricted Subsidiaries in another Person, if as a result of such Investment (A)
such other Person becomes a Wholly Owned Restricted Subsidiary or (B) such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all of its properties and assets to, the Company or a Wholly Owned
Restricted Subsidiary; (iv) Investments permitted under the "Limitation on Asset
Sales" covenant or the "Limitation on Transactions with Affiliates" covenant;
(v) Investments made in the ordinary course of business in prepaid expenses,
lease, utility, workers' compensation, performance and other similar deposits;
(vi) Investments in stock, obligations or securities received in settlement of
debts owing to the Company or any Restricted Subsidiary as a result of
bankruptcy or insolvency proceedings or upon the foreclosure, perfection or
enforcement of any Lien in favor of the Company or any Restricted Subsidiary, in
each case as to debt owing to the Company or any Restricted Subsidiary that
arose in the ordinary course of business of the Company or any such Restricted
Subsidiary, provided that any stocks, obligations or securities received in
settlement of debts that arose in the ordinary course of business (and received
other than as a result of bankruptcy or insolvency proceedings or upon
foreclosure, perfection or enforcement of any Lien) that are, within 30 days of
receipt, converted into cash or Cash Equivalents shall be treated as having been
cash or Cash Equivalents at the time received; (vii) other Investments in joint
ventures, corporations, limited liability companies or partnerships formed with
or organized by third Persons, which joint ventures, corporations, limited
liability companies or partnerships, engage in a business substantially similar,
or related, to the business conducted by the Company and its Restricted
Subsidiaries, provided such Investments do not, in the aggregate, exceed the sum
of (1) $15 million and (2) the aggregate amount of principal repayments,
interest on Indebtedness, dividends, distributions or other return of capital
received by the Company or a Restricted Subsidiary from any Person (other than
the Company or any Restricted Subsidiary) in which the Company or any of its
Restricted Subsidiaries has an ownership interest (including any return of
capital resulting from redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary).
55
<PAGE> 56
"Permitted Liens" means the following types of Liens:
(a) Liens existing as of the date of the Indenture;
(b) Liens securing the Notes or the Subsidiary Guarantees;
(c) Liens in favor of the Company;
(d) Liens securing Indebtedness that constitutes Permitted
Indebtedness pursuant to clause (i) of the definition of "Permitted
Indebtedness";
(e) Liens for taxes, assessments and governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(f) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(g) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety and appeal bonds,
bids, government contracts and leases, performance and return of money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(h) judgment Liens not giving rise to an Event of Default so long as
any appropriate legal proceedings which may have been duly initiated for
the review of such judgment shall not have been finally terminated or the
period within which such proceeding may be initiated shall not have
expired;
(i) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease;
(j) purchase money Liens; provided, however, that (i) the related
purchase money Indebtedness shall not be secured by any property or assets
of the Company or any Restricted Subsidiary other than the property or
assets so acquired and any proceeds therefrom and (ii) the Lien securing
such Indebtedness shall be created within 90 days of such acquisition;
(k) Liens securing obligations under or in respect of either Currency
Hedge Obligations or Interest Rate Protection Obligations;
(l) Liens upon specific items of inventory or other goods of any
Person securing such Person's obligations in respect of bankers acceptances
issued or created for the account of such Person to facilitate the
purchase, shipment or storage of such inventory or other goods;
(m) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property or
assets relating to such letters of credit and products and proceeds
thereof;
(n) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(o) Liens on, or related to, properties or assets to secure all or
part of the costs incurred in the ordinary course of business for the
exploration, drilling, development or operation thereof; and
(p) Liens securing Non-Recourse Indebtedness; provided, however, that
the related Non-Recourse Indebtedness shall not be secured by any property
or assets of the Company or any Restricted Subsidiary other than the
property and assets acquired by the Company or any Restricted Subsidiary
with the proceeds of such Non-Recourse Indebtedness.
56
<PAGE> 57
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, whether now outstanding or issued after
the date of the Indenture, including, without limitation, all classes and series
of preferred or preference stock of such Person.
"Public Equity Offering" means an offer and sale of Common Stock of the
Company pursuant to a registration statement that has been declared effective by
the Commission pursuant to the Securities Act (other than a registration
statement on Form S-8 or otherwise relating to equity securities issuable under
any employee benefit plan of the Company).
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Capital Stock.
"Restricted Investment" means (without duplication) (i) the designation of
a Subsidiary as an Unrestricted Subsidiary in the manner described in the
definition of "Unrestricted Subsidiary" and (ii) any Investment other than a
Permitted Investment or an Investment in the Trinidad and Tobago joint venture
owning one of the Southwestern Rigs.
"Restricted Subsidiary" means any Subsidiary of the Company, whether
existing on or after the date of the Indenture, unless such Subsidiary of the
Company is an Unrestricted Subsidiary or is designated as an Unrestricted
Subsidiary pursuant to the terms of the Indenture.
"S&P" means Standard and Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Sale/Leaseback Transaction" means any direct or indirect arrangement
pursuant to which properties or assets are sold or transferred by the Company or
a Restricted Subsidiary and are thereafter leased back from the purchaser or
transferee thereof by the Company or one of its Restricted Subsidiaries.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the date specified in the instrument evidencing
or governing such Indebtedness as the fixed date on which the principal of such
Indebtedness or such installment of interest is due and payable.
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor which is expressly subordinated in right of payment to the
Notes or the Subsidiary Guarantees, as the case may be.
"Subsidiary" means, with respect to any Person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such Person, by one or more Subsidiaries of such Person or by such Person and
one or more Subsidiaries thereof or (ii) any other Person (other than a
corporation), including, without limitation, a joint venture, in which such
Person, one or more Subsidiaries thereof or such Person and one or more
Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, have at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other Person performing
similar functions).
"Subsidiary Guarantee" means any guarantee of the Notes by any Subsidiary
Guarantor in accordance with the provisions described under "-- Subsidiary
Guarantees of Notes."
"Subsidiary Guarantor" means (i) Southwestern Offshore Corporation (f/k/a
Cliffs Drilling Asset Acquisition Company), (ii) Cliffs Drilling Merger Company,
(iii) Cliffs Drilling International, Inc., (iv) Cliffs Oil and Gas Company, (v)
DRL, Inc., (vi) each of the Company's other Restricted Subsidiaries, if any,
executing a supplemental indenture in which such Subsidiary agrees to be bound
by the terms of the Indenture and (vii) any Person that becomes a successor
guarantor of the Notes in compliance with the provisions described under
"-- Subsidiary Guarantees of Notes."
57
<PAGE> 58
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination will be designated an Unrestricted Subsidiary by the
Board of Directors of the Company as provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company as an Unrestricted Subsidiary so long as (a)
neither the Company nor any Restricted Subsidiary is directly or indirectly
liable pursuant to the terms of any Indebtedness of such Subsidiary; (b) no
default with respect to any Indebtedness of such Subsidiary would permit (upon
notice, lapse of time or otherwise) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity; (c) such designation as an Unrestricted Subsidiary would be
permitted under the "Limitation on Restricted Payments" covenant; and (d) such
designation shall not result in the creation or imposition of any Lien on any of
the properties or assets of the Company or any Restricted Subsidiary (other than
any Permitted Lien or any Lien the creation or imposition of which shall have
been in compliance with the "Limitation on Liens" covenant); provided, however,
that with respect to clause (a), the Company or a Restricted Subsidiary may be
liable for Indebtedness of an Unrestricted Subsidiary if (x) such liability
constituted a Permitted Investment or a Restricted Payment permitted by the
"Limitation on Restricted Payments" covenant, in each case at the time of
incurrence, or (y) the liability would be a Permitted Investment at the time of
designation of such Subsidiary as an Unrestricted Subsidiary. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing a Board Resolution with the Trustee giving effect to such
designation. The Board of Directors of the Company may designate any
Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving
effect to such designation on a pro forma basis, (i) no Default or Event of
Default shall have occurred and be continuing, (ii) the Company could incur
$1.00 of additional Indebtedness (not including the incurrence of Permitted
Indebtedness) under the first paragraph of the "Limitation on Indebtedness and
Disqualified Capital Stock" covenant and (iii) if any of the properties and
assets of the Company or any of its Restricted Subsidiaries would upon such
designation become subject to any Lien (other than a Permitted Lien), the
creation or imposition of such Lien shall have been in compliance with the
"Limitation on Liens" covenant.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary to the
extent (i) all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors' qualifying shares mandated by
applicable law, is owned directly or indirectly by the Company or (ii) such
Restricted Subsidiary is organized in a foreign jurisdiction and is required by
the applicable laws and regulations of such foreign jurisdiction to be partially
owned by the government of such foreign jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Restricted Subsidiary to
transact business in such foreign jurisdiction, provided that the Company,
directly or indirectly, owns the remaining Capital Stock or ownership interest
in such Restricted Subsidiary and, by contract or otherwise, controls the
management and business of such Restricted Subsidiary and derives the economic
benefits of ownership of such Restricted Subsidiary to substantially the same
extent as if such Restricted Subsidiary were a wholly owned Subsidiary.
BOOK ENTRY; DELIVERY AND FORM
The Exchange Notes initially will be represented by a single, permanent
global certificate in definitive, fully registered form (the "Global Note"). The
Global Note will be deposited on the Closing Date with, or on behalf of, DTC and
registered in the name of a nominee of DTC.
The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Note, DTC or its custodian will credit, on its
internal system, the principal amount of Exchange Notes of the individual
beneficial interests represented by such Global Note to the respective accounts
for persons who have accounts with DTC and (ii) ownership of beneficial
interests in the Global Note will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons
58
<PAGE> 59
other than participants). Ownership of beneficial interests in the Global Note
will be limited to persons who have accounts with DTC ("participants") or
persons who own interests through participants. Owners of beneficial interests
in the Global Note will hold their interests in the Global Note directly through
DTC, if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC or its nominee is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by the Global Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Note will be able to transfer that interest except in accordance with DTC's
procedures.
Payments of the principal of, premium, if any, and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee, the Exchange Agent or any
paying agent of the Company will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in the Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in immediately available funds.
The laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in the Global Note.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Old Notes for exchange
for Exchange Notes) only at the direction of one or more participants to whose
account the interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants have given such direction. However, if there is an
Event of Default under the Indenture, DTC will exchange the Global Note for
certificated Notes in registered form ("Certificated Securities"), which it will
distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Initial Purchasers, the
Trustee or the Exchange Agent will have any responsibility for the performance
by DTC or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Note and a successor depositary is not appointed by the Company
within 90 days, or at the Company's election at any time, Certificated
Securities will be issued in exchange for the Global Note.
59
<PAGE> 60
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the SEC the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to an offer to exchange the Old Notes for
the Exchange Notes. The Registration Statement of which this Prospectus is a
part constitutes such Exchange Offer Registration Statement, and pursuant to the
Exchange Offer described herein the Company is offering to the holders of Notes
who are able to make certain representations the opportunity to exchange their
Old Notes for Exchange Notes.
If (i) the Company is not permitted to file the Exchange Offer Registration
Statement or to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or interpretation of the staff of the SEC or (ii)
any holder of Old Notes notifies the Company within the specified time period
that (A) due to a change in law or policy it is not entitled to participate in
the Exchange Offer, (B) due to a change in law or policy it may not resell the
Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
holder or (C) it is a broker-dealer and owns Old Notes acquired directly from
the Company or an affiliate of the Company, the Company will file with the SEC
the Shelf Registration Statement to cover resales of the Transfer Restricted
Notes (as defined) by the holders thereof. The Company will use its best efforts
to cause the applicable registration statement to be declared effective within
specified periods by the SEC. For purposes of the foregoing, "Transfer
Restricted Notes" means each Note until (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for an Exchange Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of an Old Note for an Exchange Note, the date on which such Exchange Note
is sold to a purchaser who receives from such broker-dealer on or prior to the
date of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Note is distributed to the
public pursuant to Rule 144 under the Securities Act.
Under existing SEC staff interpretations, the Transfer Restricted Notes
would, in general, be freely transferable after the Exchange Offer without
further registration under the Securities Act, provided that in the case of
broker-dealers participating in the Exchange Offer, a prospectus meeting the
requirements of the Securities Act will be delivered upon resale by such
broker-dealers in connection with resales of Exchange Notes. The Company has
agreed, for a period of 180 days after consummation of the Exchange Offer, to
make available a prospectus meeting the requirements of the Securities Act to
any broker-dealer for use in connection with any resale of Exchange Notes
acquired in the Exchange Offer (other than a resale of any unsold allotment from
the original sale of the Old Notes). A broker-dealer which delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
The Registration Rights Agreement provides that: (i) unless the Exchange
Offer would not be permitted by applicable law or SEC policy, the Company will
file an Exchange Offer Registration Statement with the SEC on or prior to 60
days after the date of original issuance of the Notes (the "Closing Date," which
was May 23, 1996), (ii) unless the Exchange Offer would not be permitted by
applicable law or SEC policy, the Company will use its best efforts to have the
Exchange Offer Registration Statement declared effective by the SEC on or prior
to 120 days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or SEC policy, the Company will commence the
Exchange Offer and use its best efforts to issue, on or prior to 30 business
days after the date on which the Exchange Offer Registration Statement was
declared effective by the SEC, Exchange Notes in exchange for all Old Notes
tendered prior thereto in the Exchange Offer and (iv) if obligated to file the
Shelf Registration Statement, the Company will file prior to the later of (x) 90
days after the Closing Date or (y) 30 days after such filing obligation arises
and use its best efforts to cause the Shelf Registration Statement to be
declared effective by the SEC on or prior to 90 days after such obligation
arises; provided that if the Company has not consummated the Exchange Offer
within 180 days of the Closing Date, then the Company will file the Shelf
Registration Statement with the SEC on or
60
<PAGE> 61
prior to the 181st day after the Closing Date and use its best efforts to cause
the Shelf Registration Statement to be declared effective within 60 days after
such filing. The Company shall use its best efforts to keep such Shelf
Registration Statement continuously effective, supplemented and amended until
the third anniversary of the Closing Date or such shorter period that will
terminate when all the Transfer Restricted Notes covered by the Shelf
Registration Statement have been sold pursuant thereto.
If (i) the Company fails to file any of the registration statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (ii) any of such registration statements are not declared
effective by the SEC on or prior to the date specified for such effectiveness
(the "Effectiveness Target Date"), (iii) the Company fails to consummate the
Exchange Offer within 30 business days of the Effectiveness Target Date with
respect to the Exchange Offer Registration Statement, or (iv) the Shelf
Registration Statement or the Exchange Offer Registration Statement is declared
effective but thereafter, subject to certain exceptions, ceases to be effective
or usable in connection with the Exchange Offer or resales of Transfer
Restricted Notes, as the case may be, during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (i)
through (iv) above, a "Registration Default"), then the interest rate on
Transfer Restricted Notes will increase ("Additional Interest"), with respect to
the first 90-day period immediately following the occurrence of such
Registration Default by 0.50% per annum and will increase by an additional 0.50%
per annum with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of 2% per annum with respect to
all Registration Defaults. Following the cure of all Registration Defaults, the
accrual of Additional Interest will cease and the interest rate will revert to
the original rate.
TRANSFER RESTRICTIONS ON OLD NOTES
The Old Notes have not been registered under the Securities Act and may not
be offered or sold within the United States or to, or for the account or benefit
of, U.S. persons except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act. Accordingly,
the Old Notes were offered and sold only (1) to "Qualified Institutional Buyers"
(as defined in Rule 144A under the Securities Act) in compliance with Rule 144A
and (2) to a limited number of other institutional "Accredited Investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) that, prior
to their purchase of any Old Notes, delivered to the Initial Purchasers a letter
containing certain representations and agreements.
Each purchaser of Old Notes was deemed to have acknowledged, represented
and agreed as follows:
(1) it is purchasing the Old Notes 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 or an Accredited
Investor, in each case for investment and not with a view to distribution;
(2) the Old Notes have not been registered under the Securities Act
and may be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except as set forth below;
(3) if it should resell or otherwise transfer the Old Notes within
three years after the original issuance of the Old Notes, it will do so
only (a) to the Company or any of its subsidiaries, (b) inside the United
States to a Qualified Institutional Buyer in compliance with Rule 144A, (c)
inside the United States to an Accredited Investor that, prior to such
transfer, furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer of
the Notes (the form of which letter can be obtained from such Trustee), (d)
outside the United States in compliance with Rule 904 of Regulation S under
the Securities Act, (e) pursuant to Rule 144 under the Securities Act, or
(f) pursuant to an effective registration statement under the Securities
Act;
(4) it will give to each transferee of the Old Notes notice of any
restrictions on transfer of such Old Notes;
(5) none of the Company or the Initial Purchasers or any person
representing the Company or the Initial Purchasers has made any
representation to it with respect to the Company or the offering or sale of
61
<PAGE> 62
any Old Notes, other than the information contained in the Offering
Memorandum provided with such Old Notes, which has been delivered to it and
upon which it is relying in making its investment decision with respect to
the Old Notes, accordingly it acknowledges that no representation or
warranty is made by the Company or the Initial Purchasers as to the
accuracy or completeness of such materials;
(6) it has had access to such financial and other information
concerning the Company and the Old Notes as it has deemed necessary in
connection with its decision to purchase the Old Notes, including an
opportunity to ask questions of and request information from the Company
and the Initial Purchasers;
(7) the Trustee will not be required to accept for registration of
transfer any Old Notes acquired by it, except upon presentation of evidence
satisfactory to the Company and the Trustee that the restrictions set forth
herein have been complied with;
(8) the Company, the Trustee, the Initial Purchasers and others will
rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agrees that, if any of the
acknowledgments, representations or agreements deemed to have been made by
its purchase of the Old Notes are no longer accurate, it shall promptly
notify the Initial Purchasers; and
(9) if it is acquiring the Old Notes as a fiduciary or agent for one
or more investor accounts, it represents that it has sole investment
discretion with respect to each such account and it has full power to make
the foregoing acknowledgments, representations and agreements on behalf of
each account.
Each certificate respecting the Old Notes will bear the following legend:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS
THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN
"ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT WITHIN THREE
YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR OTHERWISE TRANSFER
THIS SECURITY EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE
UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A
UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR
THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH LETTER CAN
BE OBTAINED FROM THE TRUSTEE), (D) OUTSIDE THE UNITED STATES TO FOREIGN
PURCHASERS IN OFFSHORE TRANSACTIONS MEETING THE REQUIREMENTS OF RULE 904 OF
REGULATION S UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM
REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR
(F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND
(3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED
A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE
MEANINGS GIVEN TO THEM IN REGULATION S UNDER THE SECURITIES ACT.
Any Old Notes not exchanged in the Exchange Offer for Exchange Notes will
continue to be subject to the transfer restrictions described above.
62
<PAGE> 63
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax consequences
associated with the Exchange Offer, and also with respect to the acquisition,
ownership, and disposition of the Exchange Notes. The following summary does not
discuss all of the aspects of federal income taxation that may be relevant to a
prospective holder of Exchange Notes in light of his or her particular
circumstances, or to certain types of holders which are subject to special
treatment under the federal income tax laws (including persons who hold Exchange
Notes as part of a conversion, straddle or hedge, dealers in securities,
insurance companies, tax exempt organizations, financial institutions,
broker-dealers and S corporations). Further, the summary pertains only to
holders that are citizens or residents of the United States, or any political
subdivision thereof, or estates or trusts the income of which is subject to
United States federal income taxation regardless of its source. In addition,
this summary does not describe any tax consequences under state, local, or
foreign tax laws.
The discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change at any time by legislative, judicial or administrative action. Any such
changes may be applied retroactively in a manner that could adversely affect
holders of Exchange Notes. The Company has not sought and will not seek any
rulings or opinions from the IRS or counsel with respect to the matters
discussed below. There can be no assurance that the IRS will not take positions
concerning the tax consequences of the valuation, purchase, ownership or
disposition of the Exchange Notes which are different from those discussed
herein.
THIS SUMMARY DOES NOT PURPORT TO COVER ALL THE POSSIBLE TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE EXCHANGE NOTES, AND IS NOT
INTENDED AS TAX ADVICE. PROSPECTIVE PURCHASERS OF EXCHANGE NOTES SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES THAT MAY BE SPECIFIC TO THEM OF ACQUIRING, OWNING AND DISPOSING OF
EXCHANGE NOTES, AS WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS.
EXCHANGE OFFER
Under federal income tax law, a holder of Old Notes will not recognize gain
or loss upon an exchange of the Old Notes for Exchange Notes pursuant to the
Exchange Offer. A holder's basis and holding period for the Exchange Notes
received pursuant to the Exchange Offer will be the same as such holder's basis
and holding period for the Old Notes exchanged therefor.
Each exchanging holder should consult with his or her individual tax
advisor as to any foreign, state and local tax consequences of the Exchange
Offer as well as to the effect of his or her particular facts and circumstances
on the matters discussed herein.
TAXATION OF QUALIFIED STATED INTEREST ON EXCHANGE NOTES
Absent some special circumstances that may be particular to a holder,
qualified stated interest paid on an Exchange Note will be taxable to a holder
as ordinary interest income at the time it accrues or is received, in accordance
the holder's regular method of accounting for federal income tax purposes.
The Company will annually furnish to certain record holders of the Exchange
Notes and to the IRS information with respect to qualified stated interest paid
during the calendar year as may be required under applicable regulations.
SALE OR OTHER TAXABLE DISPOSITION OF EXCHANGE NOTES
The sale, redemption, or other taxable disposition of an Exchange Note will
result in the recognition of gain or loss to the holder in an amount equal to
the difference between (a) the amount of cash and fair market value of property
received (except to the extent attributable to the payment of accrued qualified
stated interest) in exchange therefor and (b) the holder's adjusted tax basis in
such Exchange Note.
63
<PAGE> 64
A holder's initial tax basis in an Exchange Note purchased by such holder
will be equal to the portion of the issue price allocable to the Exchange Notes,
as discussed above. The holder's initial tax basis in an Exchange Note will be
increased by the amount of any original issue discount included in gross income
with respect to such Exchange Note to the date of disposition.
Any gain or loss on the sale, redemption, or other taxable disposition of
an Exchange Note will be capital gain or loss, assuming the owner of the
Exchange Note holds such security as a "capital asset" (generally property held
for investment) within the meaning of Section 1221 of the Code. Any capital gain
or loss will be long-term capital gain or loss if the Exchange Note is held for
more than one year and otherwise will be short-term capital gain or loss.
Payments on such disposition for accrued qualified stated interest not
previously included in income will be treated as ordinary interest income.
If the Exchange Offer is not consummated within the required period of time
(and in certain other circumstances), then Additional Interest may become
payable with respect to the Notes. See "Registration Rights Agreement." This
rate increase should not result in a deemed taxable exchange of the Notes.
PURCHASERS OF NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE OR DATE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquired Old Notes either (a) other than at the time of
original issuance or (b) at the time of original issuance other than at the
issue price, including those provisions of the Code relating to the treatment of
"market discount," "acquisition premium" and "amortizable bond premium." Any
such purchaser should consult his or her tax advisor as to the consequences to
him or her of the acquisition, ownership, and disposition of Notes.
BACKUP WITHHOLDING
The backup withholding rules require a payor to deduct and withhold a tax
if (a) the payee fails to furnish a taxpayer identification number ("TIN") to
the payor, (b) the IRS notifies the payor that the TIN furnished by the payee is
incorrect, (c) the payee has failed to report properly the receipt of
"reportable payments" and the IRS has notified the payor that withholding is
required, or (d) there has been a failure of the payee to certify under the
penalty of perjury that a payee is not subject to withholding under Section 3406
of the Code. As a result, if any one of the events discussed above occurs with
respect to a holder of Notes, the Company, its paying agent or other withholding
agent will be required to withhold a tax equal to 31% of any "reportable
payment" made in connection with the Notes of such holder. A "reportable
payment" includes, among other things, amounts paid in respect of interest or
original issue discount and amounts paid through brokers in retirement of
securities. Any amounts withheld from a payment to a holder under the backup
withholding rules will be allowed as a refund or credit against such holder's
federal income tax, provided, that the required information is furnished to the
IRS. Certain holders (including, among others, corporations and certain
tax-exempt organizations) are not subject to the backup withholding rules.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale for a period of 180
days after consummation of the Exchange Offer, or such shorter period as will
terminate when all Old Notes acquired by broker-dealers for their own accounts
as a result of market-making activities or other trading activities have been
exchanged for Exchange Notes and resold by such broker-dealers. A broker-dealer
that delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations).
64
<PAGE> 65
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. For a period of 180 days after consummation of the Exchange Offer, or such
shorter period as will terminate when all Old Notes acquired by broker-dealers
for their own accounts as a result of market-making activities or other trading
activities have been exchanged for Exchange Notes and resold by such
broker-dealers, the Company will promptly send additional copies of this
Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. The
Company has agreed in the Registration Rights Agreement to indemnify such
broker-dealers against certain liabilities, including liabilities under the
Securities Act.
EXPERTS
The validity of the issuance of the Notes offered hereby will be passed
upon for the Company by Griggs & Harrison, P.C., Houston, Texas.
The Consolidated Financial Statements and schedule of the Company appearing
(or incorporated by reference) in the Company's Annual Report (Form 10-K) for
the year ended December 31, 1995, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein (or
incorporated by reference). Such Consolidated Financial Statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. The Consolidated
Financial Statements of Southwestern Offshore Corporation and Subsidiaries at
December 31, 1995 and 1994 and for the years ended December 31, 1995 and 1994
and for the period from inception (July 19, 1993) through December 31, 1993
included in the Company's Current Report on Form 8-K filed June 6, 1996,
incorporated by reference in this Prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as stated in their report with
respect thereto, and are included herein in reliance upon the authority of such
firm as experts in accounting and auditing in giving such report.
65
