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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-16703
CLIFFS DRILLING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 76-0248934
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1200 SMITH STREET, SUITE 300 77002
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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Registrant's telephone number, including area code: (713) 651-9426
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
$2.3125 Convertible Exchangeable Preferred Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the Registrant's common stock, $.01 par
value, held by nonaffiliates, as of March 5, 1997, was $399,745,687. All
executive officers and directors of the Registrant are treated as if they may be
deemed affiliates of the Registrant.
Number of shares of Common Stock, $.01 par value, of the Registrant
outstanding at March 5, 1997, was 7,573,861.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENTS REFERENCED IN THIS REPORT
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Certain portions of the Registrant's definitive proxy
statement for the 1997
Annual Meeting of Shareholders Part III
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(Exhibit Index Located on Pages 47 to 50)
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TABLE OF CONTENTS TO FORM 10-K
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PAGE
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PART
I
1. Business and Properties..................................... 2
and
2.
General..................................................... 2
Recent Developments......................................... 2
Industry Conditions and Company Strategy.................... 2
Contract Drilling and MOPU Operations....................... 4
Oil and Gas Operations...................................... 8
Environmental Controls...................................... 8
Government Regulation....................................... 8
Risks and Insurance......................................... 9
Employees................................................... 9
Other Properties............................................ 10
3. Legal Proceedings........................................... 10
4. Submission of Matters to a Vote of Security-Holders......... 10
PART II
5. Market For Registrant's Common Equity and Related
Stockholder Matters....................................... 10
6. Selected Financial Data..................................... 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
8. Financial Statements and Supplementary Data................. 20
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 20
PART III
10. Directors and Executive Officers of the Registrant.......... 20
11. Executive Compensation...................................... 21
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 21
13. Certain Relationships and Related Transactions.............. 21
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 21
SIGNATURES......................................................... 23
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
Cliffs Drilling Company (the "Company") is an international contract
drilling and engineering company. The Company is primarily engaged in daywork
drilling, engineering services and 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 five 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, Qatar, Mexico,
Trinidad and Nigeria. The Company owns 13 jack-up drilling rigs, 11 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.
RECENT DEVELOPMENTS
On January 24, 1997, the Company completed the acquisition of the stock of
a subsidiary of Andrade Gutierrez Perfuracao Ltda. owning the jack-up drilling
rig ATENA, four 1500 HP land drilling rigs, miscellaneous drilling equipment and
a contract to operate a platform rig in Brazil (the "AGP Acquisition"). The
purchase price was $28.5 million in cash.
In February, 1997, the Company was awarded a contract to drill 12 turnkey
wells for Corpoven, S.A. ("Corpoven") in Venezuela. The total expected revenues
for the 12 wells are approximately $93.1 million. The wells are expected to be
drilled during the period from February, 1997 to September, 1998.
INDUSTRY CONDITIONS AND COMPANY STRATEGY
Activity in the contract drilling industry and related oil service
businesses has improved 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. Current market dynamics
in the Gulf of Mexico have resulted in greater utilization of the Company's rigs
and services.
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The Company's management has adopted a proactive approach to identify,
develop and exploit several market segments which the Company believes provide
high margins and reliable operating income and cash flow. In addition, 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 include, among others, the objectives of increasing
operating leverage and diversifying geographically. As a result of its actions,
the Company is now positioned in 3 primary business segments, namely, daywork
drilling, engineering services and MOPU operations. See Note 12 of Notes to
Consolidated Financial Statements.
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 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 has expanded its asset base and currently has a
balance of term and spot (well-to-well) contracts.
On May 23, 1996, the Company completed the acquisition of 9 jack-up
drilling rigs and a 50% interest in the West Indies Drilling Joint Venture (the
"WINDJV"), a joint venture between Cliffs Drilling Trinidad Limited and Well
Services (Marine) Limited, 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"). 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 and (c)
assumption of certain contractual liabilities, including the Company's guarantee
of $4.25 million in indebtedness of the WINDJV to Citibank N.A. related to the
refurbishment of the jack-up drilling rig owned by it (together with accrued but
unpaid interest thereon and costs of collection). In addition, on May 10, 1996,
the Company acquired the jack-up drilling rig OCEAN MAGALLANES from Diamond
Offshore Southern Company ("Diamond") for $4.5 million. The Company renamed this
unit Cliffs Drilling 155. The Company signed an initial eight-month contract
with Maraven for use of the rig in Lake Maracaibo, Venezuela. On September 30,
1996, the Company acquired a land rig from Quarles Drilling Corp. for $2.9
million which has been refurbished and is expected to commence operations during
the second quarter of 1997 in Venezuela. On January 24, 1997, the Company
completed the AGP Acquisition for a purchase price of $28.5 million in cash.
Upon completion of all planned refurbishments, the Company will operate 2
jack-up rigs and 11 land rigs in Venezuela, 8 jack-up rigs in the Gulf of
Mexico, 2 jack-up rigs in Qatar and one jack-up rig in each of Mexico and
Trinidad. Of the 14 jack-up drilling rigs owned by the Company or in which the
Company has an interest, 13 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.
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. From 1982 through December 31, 1996,
the Company completed 270 turnkeys with aggregate revenues of $690.0 million,
direct income before depreciation and allocated overhead of $91.0 million, and
operating income of $61.1 million. In recent years, the turnkey drilling market
has become more competitive as more companies entered the market and margins
were reduced. Domestic turnkey operators have been very aggressive in pricing
Gulf of Mexico turnkeys, and competition is intense. International turnkeys have
achieved greater acceptance, and the Company believes that expansion
opportunities exist in this market. The Company believes its expertise has
enabled it to be more selective in its turnkey drilling operations and to
achieve profitable turnkey drilling operating results. 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. The conversion of offshore drilling rigs into MOPUs has
become one of the attractive niches in which the Company has diversified its
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
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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 operating costs assumed by the customer. The Company
also believes that its engineering expertise and experience with MOPUs give it a
competitive advantage which will allow the Company to take advantage of
opportunities in both domestic and foreign markets.
CONTRACT DRILLING AND MOPU OPERATIONS
The following table provides the current status of and information about
the drilling rigs and MOPUs owned and operated by the Company. Substantially all
of these assets are pledged to secure the Company's revolving credit facility
("Revolving Credit Facility") with ING (U.S.) Capital Corporation ("ING"),
formerly International Nederlanden (U.S.) Capital Corporation.
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YEAR RATED DEPTH
DELIVERED/ ---------------- TYPE OF EXPIRATION
EQUIPMENT TYPE(A) REFURBISHED WATER DRILLING LOCATION CONTRACT DATE
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JACK-UP DRILLING RIGS
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DOMESTIC(8)
Southwestern 100................ MC 1982/1993 100' 25,000' Gulf of Mexico Well-to-Well July, 1997
Southwestern 150................ IC 1979/1994 150' 20,000' Gulf of Mexico Well-to-Well May, 1997
Southwestern 151................ IC 1981/1993 150' 25,000' Gulf of Mexico Well-to-Well September, 1997
Southwestern 152................ MC 1980/1993 150' 25,000' Gulf of Mexico Well-to-Well April, 1997
Southwestern 153................ MC 1980/1994 150' 25,000' Gulf of Mexico Well-to-Well September, 1997
Southwestern 154................ IC 1979/1996 150' 20,000' Gulf of Mexico Well-to-Well April, 1997
Southwestern 180................ MS 1978/1997 184' 25,000' Shipyard N/A N/A
Southwestern 200................ MC 1979/1992 200' 25,000' Gulf of Mexico Well-to-Well May, 1997
INTERNATIONAL(6)
Cliffs Drilling 155............. IC 1980/1996 150' 22,000' Venezuela Term Daywork April, 1997
Cliffs Drilling 156............. IC 1983 150' 25,000' Venezuela Term Daywork January, 1998
LASALLE......................... IC 1982/1997 150' 25,000' Qatar Term Daywork April, 2000
Southwestern 160................ IC 1980/1996 160' 20,000' Qatar Term Daywork August, 1998
Cliffs Drilling 12.............. MC 1980/1996 200' 20,000' Mexico Term Daywork December, 1998
Southwestern Marine 4 (b)....... MC 1982/1996 110' 25,000' Trinidad Term Daywork June, 1997
LAND DRILLING RIGS
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INTERNATIONAL(11)
Cliffs Drilling 28(c)........... 1977/1994 -- 25,000' Venezuela Term Daywork May, 1998
Cliffs Drilling 34.............. 1980 -- 18,000' Venezuela N/A N/A
Cliffs Drilling 35.............. 1980 -- 18,000' Venezuela N/A N/A
Cliffs Drilling 36.............. 1982 -- 18,000' Brazil N/A N/A
Cliffs Drilling 37.............. 1982 -- 18,000' Brazil N/A N/A
Cliffs Drilling 40.............. 1980/1991 -- 25,000' Venezuela Term Daywork September, 1997
Cliffs Drilling 41(c)........... 1981/1994 -- 25,000' Venezuela Term Daywork August, 1998
Cliffs Drilling 42(c)........... 1981/1994 -- 25,000' Venezuela Term Daywork June, 1998
Cliffs Drilling 43(c)........... 1981/1991 -- 25,000' Venezuela Term Daywork February, 1998
Cliffs Drilling 54.............. 1981/1995 -- 30,000' Venezuela Term Daywork July, 1997
Cliffs Drilling 55.............. 1983/1997 -- 35,000' Louisiana Yard Term Daywork April, 1998
MOBILE OFFSHORE PRODUCTION UNITS
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DOMESTIC(3)
Cliffs Drilling 4............... 1967/1995 150' -- Gulf of Mexico Month-to-Month N/A
Cliffs Drilling 8............... 1977/1993 250' -- Gulf of Mexico Term Daywork December, 1997
Cliffs Drilling 14.............. 1980/1996 200' -- Gulf of Mexico Term Daywork July, 1997
INTERNATIONAL(2)
Cliffs Drilling 10.............. 1979/1993 250' -- Shipyard Term Daywork October, 1998
LANGLEY......................... 1965/1996 150' -- Nigeria Term Daywork December, 2001
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(a) 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
(b) Formerly the Southwestern 110, the Southwestern Marine 4 is owned by the
WINDJV in which the Company has an indirect 50% ownership interest.
(c) Contracted to the Company's Engineering Services business segment for
turnkey drilling activities.
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Daywork Drilling. The Company currently owns and operates 25 drilling rigs,
consisting of 13 jack-up drilling rigs, a 50% interest in the WINDJV which owns
one jack-up drilling rig, and 11 land drilling rigs. Under daywork drilling
contracts, the Company provides a drilling rig with required personnel to the
operator, who supervises the drilling of the contracted well. Compensation to
the Company is based on a negotiated rate per day that the rig is utilized.
Daywork drilling contracts generally specify the type of equipment to be used,
the size of the hole and the depth of the proposed well. Under a daywork
drilling contract, the Company generally bears no part of the costs due to
downhole losses (such as time delays for various reasons, including stuck drill
stem and blowout).
Most of the Company's drilling contracts are obtained through competitive
bids. Generally, domestic drilling contracts are for a single well while foreign
drilling contracts are for multiple wells, with the terms and rates varying
depending upon the nature and duration of the work, the equipment and services
supplied and other matters. The contracts typically obligate the Company to pay
certain operating expenses, including wages of drilling personnel, maintenance
expenses, incidental rig supplies, equipment and local office facilities.
Domestic drilling contracts are typically subject to termination by the customer
on short notice, usually upon payment of a fee. Foreign drilling contracts
generally require longer notice periods for termination and also may require
that the customer pay mobilization and demobilization expenses.
Engineering Services. The Company has been active in drilling wells on a
turnkey basis since 1982. 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 employs a
technically proficient and experienced engineering staff that examines the
available seismic, geologic and drilling data to identify and minimize many of
the drilling risks assumed by the Company. The Company believes that the
application of this expertise allows it to evaluate the risks of a proposed
contract and bid accordingly. When possible, the Company seeks fixed price
contracts from its subcontractors to minimize or eliminate cost fluctuations.
The Company also maintains insurance coverage against certain drilling hazards.
See "Business and Properties -- Risks and Insurance."
The Company completed 13 turnkey drilling contracts during 1996 and 15
turnkey drilling contracts during 1995, with revenues of $56.1 million and $54.2
million, respectively. The increase in revenues was primarily attributable to
the mix of turnkey wells drilled during 1996 and 1995. One of the turnkey
contracts completed in 1995 related to the Company's interest in Cliffs Neddrill
Central Turnkey International ("CNCTI"), a joint venture among Cliffs Drilling
International, Inc. ("International"), a wholly-owned subsidiary of the Company,
Neddrill Turnkey Drilling B.V. and Perforadora Central, S.A. de C.V.
("Central"). The joint venture turnkey contract was accounted for under the
equity method in the Company's consolidated financial statements. See Note 4 of
Notes to Consolidated Financial Statements. Three turnkey drilling contracts
have been completed since December 31, 1996 with contract revenues of $25.6
million. The Company currently has 2 Venezuelan turnkey drilling contracts in
progress with expected contract revenues of approximately $13.8 million.
The Company also provides well engineering and management services. Under
these agreements, the Company is responsible for well design and well site
supervision. The Company has provided these services both domestically and
internationally since 1993.
MOPU Operations. The Company currently owns 5 MOPUs capable of operating in
both domestic and foreign waters. MOPU contracts are generally on a dayrate
basis and are normally long-term, either for a period of years or a period of
time sufficient to obtain the economic production from an offshore oil and gas
field or wells within such field. It is not unusual for such contracts to
contain renewal provisions at the option of the customer. Under such contracts,
the Company is generally responsible for maintenance, operation and repair of
the MOPU hull structure. The Company is generally not responsible for risk of
pollution or for damage to or replacement of the customer's production
equipment, although the Company generally is responsible for damage to its
production equipment. The Company maintains
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insurance coverage against risk of damage to or loss of the MOPUs and related
equipment as is customary in the industry. See "Business and Properties -- Risks
and Insurance."
Utilization. The Company's rigs are inactive from time to time. The Company
believes that its stacking procedures minimize stacking and maintenance costs,
and that the stacked rigs could be placed in service with minimal cost and delay
should it become attractive to do so.
Foreign Operations. For the fiscal years ended December 31, 1996, 1995 and
1994, 55%, 63% and 78%, respectively, of the Company's consolidated revenues
were derived from foreign operations, principally in Venezuela. See Note 13 of
Notes to Consolidated Financial Statements.
The Company currently operates 6 jack-up drilling rigs in international
locations, including 2 rigs in Venezuela, 2 rigs in Qatar and one rig in each of
Mexico and Trinidad. The Company currently operates 6 land drilling rigs in
Venezuela and expects to mobilize additional land rigs for Venezuelan operations
during 1997. The Company currently operates one MOPU in Nigeria and expects to
mobilize one additional MOPU to the Arabian Gulf during the second quarter of
1997.
On May 23, 1996, the Company acquired the stock of Viking Trinidad Limited,
which owned a 50% interest in the WINDJV. Viking Trinidad Limited was renamed
Cliffs Drilling Trinidad Limited.
In 1996, the Company formed Cliffs Central Drilling International ("CCDI"),
a 50/50 joint venture with Central, for the marketing of drilling services in
Mexico. CNCTI was formed in 1992 and completed all drilling operations in Mexico
during 1995.
Operations of the Company which are conducted in foreign countries are
subject to certain political, economic and other uncertainties not encountered
by purely domestic drillers, including risk of expropriation, nationalization,
labor disputes, foreign taxation, foreign and domestic monetary policies and
regulations which may limit operations in areas by foreign companies and/or
personnel. Generally, the Company purchases insurance to protect against some or
all losses due to events of political risks, such as nationalization,
expropriation, war, confiscation and deprivation. Occasionally, customers will
indemnify the Company against such losses. See "Business and
Properties-Government Regulation."
Customers. The Company's largest customer for the year ended December 31,
1996, Corpoven, accounted for approximately 31% of the Company's consolidated
revenues. The Company's 3 largest customers for the year ended December 31,
1995, Corpoven, Maraven, S.A. 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 CNCTI, a joint venture in which the Company's
wholly owned subsidiary was a joint venture partner, accounted for approximately
78% of the Company's consolidated revenues. The loss of any major customer could
have an adverse impact on the Company's operations for such period of time as
may be required to find other users for the equipment. See Note 12 of Notes to
Consolidated Financial Statements.
Equipment and Supplies. The Company obtains required supplies, services and
equipment from a variety of sources. The Company has not in the past experienced
shortages of such materials necessary to conduct the Company's business.
However, such shortages could occur in the future and could have a material
adverse effect on the Company's operations. There may be additional delays or
shortages associated with obtaining supplies, services and equipment,
particularly with respect to the Company's foreign operations.
Competition. Demand for offshore drilling rigs and utilization are much
improved from previous years. However, the drilling industry remains highly
competitive, and no one or few drilling contractors is dominant. The Company
competes with numerous other drilling contractors, some of which are
substantially larger than the Company and possess appreciably greater financial
and other resources. During the last three years, there have been several
business consolidations which have reduced the fragmented nature of the drilling
industry. Although this has decreased the total number of competitors, the
Company believes that competition for drilling contracts will continue to be
intense in the foreseeable future.
Price competition is generally the major factor in the energy service
industry, but the technical capability of specialized drilling equipment and
personnel at the time and place required by customers is also important. Other
competitive factors include technical and engineering expertise, work force
experience, rig suitability, safety record,
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efficiency, condition of equipment, reputation and customer relations. The
Company believes that it competes favorably with respect to all of these
factors. If demand for drilling rigs increases in the future, rig availability
may also become a competitive factor. Competition is usually on a regional
basis; however, drilling rigs are mobile and can be moved from one region to
another in response to increased demand, and an oversupply of rigs in any region
may result. The Company's domestic turnkey drilling and MOPU operations are
concentrated in the Texas/Louisiana Gulf Coast area, and its foreign daywork and
turnkey drilling operations are primarily in Venezuela. In foreign markets, the
Company competes with many of the same competitors under the same factors as in
the domestic markets. Demand for onshore and offshore drilling and production
equipment is also dependent on the exploration and development programs of oil
and gas companies, which are in turn influenced by the financial condition of
such companies, general economic conditions, prices of oil and gas and political
considerations and policies. Improved technologies such as 3-D seismic, subsea
completions, floating production systems and directional drilling have reduced
the number of wells necessary to maintain or even increase supplies of oil and
gas, and have therefore improved overall industry fundamentals.
Historically, there have been few drilling contractors specializing in
turnkey drilling contracts because of the extent of engineering and technical
expertise required to manage the risks inherent in turnkey drilling operations,
the magnitude of management commitment and the financial resources required. In
recent years, the turnkey drilling market has become more competitive as more
companies entered the market and margins were reduced. Domestic turnkey
contractors have been very aggressive in pricing Gulf of Mexico turnkeys and
competition is intense.
In order to remain competitive in the current environment, the Company has
enhanced its geographical diversification, participated in turnkey drilling
contracts, developed and marketed well engineering and management services and
become active in the development and operation of MOPUs. The Company believes
that MOPUs offer several economic advantages to oil and gas operators, namely,
optimizing the use of exploration budgets by avoiding the high capital costs of
production platforms, providing more flexibility than conventional fixed
platforms in producing oil and gas and allowing for the economic development of
smaller reserves. Although the Company believes there is a market for additional
MOPUs, the Company can give no assurance that there will be sufficient demand
for MOPUs at rates which are profitable. Currently, margins on MOPU operations
are high, which is likely to result in increased competition. Moreover, MOPUs
are not widely utilized, and most companies that do utilize MOPUs own and
operate their own units. The Company believes that its experience in MOPU
operations enables it to compete favorably in the MOPU market. For these
reasons, the Company views MOPUs as an attractive opportunity to expand its
offshore services.
Acquisitions and Dispositions of Assets. On October 31, 1991, the Company
purchased 3 jack-up rigs from Chiles Offshore Corporation. These rigs were
refurbished, converted to MOPUs and used as portacompressors in Venezuela. The
Company purchased 5 jack-up drilling rigs during the fourth quarter of 1992 and
converted 2 of the 5 rigs to MOPUs, converted one unit for use as a mobile
offshore supply unit in Mexico, used one unit for drilling operations in Mexico
and bareboat chartered the other unit to a third party for use as a workover rig
in the U.S. Gulf of Mexico. During 1995, the Company purchased and renovated a
3000 HP land rig, Cliffs Drilling 54, for an initial contract to drill 2 wells
on a daywork basis in Venezuela.
On May 23, 1996, the Company completed the acquisition of the Southwestern
Rigs for a purchase price of (a) $103.8 million in cash plus (b) issuance of 1.2
million shares of the Company's Common Stock and (c) assumption of certain
contractual liabilities, including the Company's guarantee of $4.25 million in
indebtedness of the WINDJV. In addition, on May 10, 1996, the Company acquired a
jack-up drilling rig from Diamond for $4.5 million. The Company signed an
initial eight-month contract with Maraven for use of the rig in Lake Maracaibo,
Venezuela. On September 30, 1996, the Company acquired a land rig from Quarles
Drilling Corp. for $2.9 million which has been refurbished and is expected to
commence operations during the second quarter of 1997 in Venezuela. On January
24, 1997, the Company completed the AGP Acquisition for a purchase price of
$28.5 million in cash.
As a result of hurricane damage sustained in August, 1992, one of the
Company's MOPUs, the Marlin No. 3, was declared a constructive total loss in
September, 1992, and insurance underwriters paid the Company $10 million. The
Company sold its four inland posted barge drilling rigs effective January 1,
1993. Pursuant to buyout options exercised by the charterer during the fourth
quarter of 1994, the Company sold 2 of the 3 portacompressors which worked in
Lake Maracaibo, Venezuela. As a result of damage caused by an earthquake, the
jack-up drilling rig MARQUETTE was declared a compromised total loss in
December, 1995, and insurance underwriters paid the Company $14.6 million. On
7
<PAGE> 9
June 19, 1996, Cliffs Drilling 11 completed its two-year bareboat charter as a
workover rig in the U.S. Gulf of Mexico, and the charterer exercised its option
to purchase the unit for $5.4 million, resulting in a gain of $2.7 million.
OIL AND GAS OPERATIONS
Since 1987, the Company has engaged in oil and gas exploration and
production activities in conjunction with marketing the Company's contract
drilling services, primarily turnkey, under the Company's contract drilling
support ("CDS") program. Under this program, the Company has taken working
interests in oil and gas properties in connection with the award to the Company
of a drilling contract. The Company's policy has been that its working interest
in such CDS wells would generally not exceed 25%. In 1993, the Company began to
de-emphasize its CDS program due to marginal financial performance of the
segment. The Company's oil and gas operations were not significant; therefore,
applicable disclosures were not required at or for the years ended December 31,
1996 and 1995.
ENVIRONMENTAL CONTROLS
The Company believes it is in substantial compliance with applicable
federal, state, local and foreign laws and regulations relating to environmental
controls. Also, the existence of such laws and regulations has not had, nor at
this time is expected to have, any materially restrictive effect on the Company.
To date, the Company has not accounted for costs or capital expenditures
incurred for environmental control facilities separately from other costs
incurred in the operation of its businesses. The Company does not, however,
believe that any such costs or expenditures have been material, and the Company
does not expect that under present conditions such costs or expenditures will
become material in the foreseeable future.
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 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. The Company's foreign operations are subject to political,
economic and other uncertainties associated with foreign operations generally,
as well as the additional risks of fluctuating currency values and exchange
controls. 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.
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.
8
<PAGE> 10
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 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.
The Company also maintains insurance coverage 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. This insurance, which is principally through
Underwriters at Lloyd's and Institute of London Underwriters Companies, covers
"control of well" (including blowouts above and below the surface); cratering;
seepage and pollution; and care, custody and control. The Company believes that
it maintains insurance in accordance with industry standards. The Company's
current insurance program provides $500,000 coverage per occurrence for care,
custody and control, and $75 million coverage per occurrence for control of
well, cratering and seepage and pollution associated with foreign operations.
The amount of coverage per occurrence provided by the Company's current
insurance program for domestic land, coastal and inland water, and offshore
operations is $10 million, $20 million and $30 million, respectively, for
control of well, cratering and seepage and pollution. Each form of coverage
provides for a retention amount for the account of the Company, as well as a
maximum limit of liability. Each casualty is an occurrence, and there may be
more than one such occurrence on a well, each of which would be subject to a
separate retention amount. No assurance can be given that the Company will be
able to maintain the types and amounts of coverage that it considers adequate
with respect to its turnkey drilling and oil and gas operations. If the Company
were unable to insure against certain of these risks, either because such
insurance was no longer available or because the premium costs became too great
in relation to the coverage afforded, the Company's insurance might not be
adequate to protect the Company against liability from all consequences of well
disasters, downhole problems, extensive fire damage or damage to the
environment. The occurrence of a casualty or loss against which the Company is
not fully insured could have a material adverse effect on the Company's
financial position.
EMPLOYEES
At December 31, 1996, the Company employed 1,106 persons as follows:
<TABLE>
<CAPTION>
SALARIED HOURLY
EMPLOYEES EMPLOYEES
--------- ---------
<S> <C> <C>
Domestic............................................... 153 417
Venezuela.............................................. 180 297
Other.................................................. 49 10
</TABLE>
There were no collective bargaining contracts covering the Company's
domestic employees or employees in foreign locations in effect as of December
31, 1996, except for employees in Venezuela who are covered by the Collective
Labor Contract of the Venezuelan Petroleum Industry.
9
<PAGE> 11
OTHER PROPERTIES
The Company owns an office building and warehouse on a 2.5 acre tract of
land in Lafayette Parish, Louisiana. The Company leases additional properties,
including its executive offices in Houston, Texas, a yard in Lafayette,
Louisiana, 2 field offices in Venezuela and a field office in Doha, Qatar.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to a number of lawsuits which are ordinary, routine
litigation incidental to the Company's business, the outcome of which,
individually, or in the aggregate, is not expected to have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company did not hold a meeting of stockholders or otherwise submit any
matter to a vote of stockholders in the fourth quarter of 1996.
PART I I
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the over-the-counter market
and quoted on The Nasdaq Stock Market ("Nasdaq") under the symbol "CLDR." The
following table sets forth the range of high and low sales prices per share of
Common Stock as reported by Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
1996 1995
------------ -------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
March 31........................................ $15 3/4 $13 3/4 $14 1/4 $11 1/4
June 30......................................... $34 $15 1/4 $15 $12 1/2
September 30.................................... $36 3/4 $25 3/4 $15 1/4 $13
December 31..................................... $69 1/4 $33 1/2 $16 3/8 $13 1/16
</TABLE>
On March 5, 1997, the closing sale price of the Company's Common Stock, as
reported by Nasdaq, was 53 1/2 per share. On that date, there were approximately
1,754 holders of record of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock, and it is
not anticipated that cash dividends will be paid to holders of Common Stock in
the foreseeable future. Under the Company's 10.25% Senior Notes due 2003 (the
"Senior Notes") and Revolving Credit Facility with ING, the Company is
restricted from declaring, making or paying cash dividends on the Common Stock.
The Company's $2.3125 Convertible Exchangeable Preferred Stock (the
"Preferred Stock") was traded on Nasdaq during 1995 under the symbol "CLDRP."
The Company converted 1,115,988 shares of its 1,150,000 issued and outstanding
shares of Preferred Stock on January 17, 1996. The Company issued 2,113,557
shares of Common Stock upon conversion of the Preferred Stock. The remaining
34,012 shares of Preferred Stock were redeemed for cash in the amount of $25.69
per share plus $.22 per share in accrued and unpaid dividends thereon through
the redemption date at a cost to the Company of approximately $.9 million.
Holders of shares of the Preferred Stock had the option to convert any or all of
such shares of Preferred Stock into fully paid and nonassessable shares of
Common Stock of the Company prior to the redemption date at a rate of 1.89394
shares of Common Stock for each full share of Preferred Stock. No payment or
adjustment was made upon any conversion of shares of Preferred Stock on account
of any dividends on the shares surrendered for conversion, and the holder lost
any right to payment of dividends on the shares surrendered for conversion. No
fractional shares of Common Stock were issued upon conversion but, in lieu
thereof, an appropriate amount was paid in cash by the Company based upon the
reported last sales price for the shares of Common Stock on the date of
conversion. The right of holders of Preferred Stock to convert shares of
Preferred Stock into Common Stock terminated on the redemption date.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information of the Company. The amounts as of and for each of the five years in
the period ended December 31, 1996 have been derived from audited consolidated
financial statements of the Company. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere herein. The selected consolidated financial data
provided below are not necessarily indicative of the future results of
operations or financial performance of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues............................. $ 133,109 $ 83,289 $ 83,693 $ 65,538 $ 76,838
Costs and Expenses:
Operating Expenses................ 91,984 67,713 50,907 35,171 57,646
Depreciation, Depletion and
Amortization.................... 10,388 7,271 14,008 17,438 12,883
Contract Termination Provision.... -- -- 5,193 577 --
Write-down in Carrying Value of
Oil Gas Properties.............. -- -- -- -- 1,500
General and Administrative
Expense......................... 6,300 5,289 5,114 4,807 4,512
--------------- --------------- --------------- --------------- ---------------
Operating Income..................... 24,437 3,016 8,471 7,545 297
Other Income (Expense)(1)............ (10,015) 2,430 (2,415) (3,919) 2,721
--------------- --------------- --------------- --------------- ---------------
Net Income........................... 14,422 5,446 6,056 3,626 3,018
Dividends Applicable to Preferred
Stock(2).......................... (31) (2,659) (2,659) (2,659) (2,659)
--------------- --------------- --------------- --------------- ---------------
Net Income Applicable to Common and
Common Equivalent Shares.......... $ 14,391 $ 2,787 $ 3,397 $ 967 $ 359
=============== =============== =============== =============== ===============
Net Income per Share................. $ 2.08 $ 0.68 $ 0.80 $ 0.21 $ 0.11
=============== =============== =============== =============== ===============
Weighted Average Number of Common and
Common Equivalent Shares
Outstanding(2).................... 6,926 4,108 4,223 4,514 3,257
SUMMARY BALANCE SHEET DATA:
Working Capital...................... $ 68,221 $ 33,859 $ 19,331 $ 20,402 $ 24,830
Property and Equipment, Net.......... 216,474 65,950 71,248 86,506 101,178
Total Assets......................... 339,546 128,962 120,167 133,523 150,203
Notes Payable, Long-Term............. -- -- -- 13,108 28,348
10.25% Senior Notes (3).............. 150,000 -- -- -- --
Redeemable Preferred Stock (2)....... -- 28,750 28,750 28,750 28,750
Total Shareholders' Equity
(2)(4)(5)......................... $ 142,168 $ 74,015 $ 70,881 $ 72,494 $ 71,446
</TABLE>
- ---------------
(1) Includes items of other income and expense, interest expense and income
taxes. Includes net gains on disposition of assets of $3.7 million, interest
income of $2.7 million and interest expense of $9.3 million in 1996, net
gains on disposition of assets of $2.7 million and net exchange rate gains
of $2.6 million in 1995, net exchange rate losses of $1.2 million in 1994,
litigation settlement and expenses of $3.7 million in 1993 and net gains on
disposition of assets of $5.0 million in 1992.
(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 issued and outstanding
shares of Preferred Stock. The remaining 34,012 shares of Preferred Stock
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) In part to finance the acquisition of the Southwestern Rigs, the Company
sold $150 million of Senior Notes.
(4) The Company issued 1,200,000 shares of Common Stock in connection with the
acquisition of the Southwestern Rigs.
(5) The Company has not paid any cash dividends on its Common Stock.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K regarding the
Company's financial position, business strategy, budgets and 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 the captions "General" and "Liquidity and
Capital Resources" within this item and elsewhere in this Form 10-K. 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.
GENERAL
Activity in the contract drilling industry and related oil service
businesses has improved over the last two years due to increased worldwide
demand stemming from higher levels of pricing 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 increases in worldwide
utilization rates. The financial condition and results of operations of the
Company and other drilling contractors are dependent upon the price of oil and
natural gas, as demand for their services is primarily dependent upon the level
of spending by oil and gas companies for exploration, development and production
activities. Crude oil and natural gas prices have continued to fluctuate over
the last several years. This price volatility creates some market uncertainties,
despite the overall improvement in oil and gas market fundamentals.
The oil and gas industry has experienced extreme market cycles over the
past decade. The Company has endeavored to mitigate the effect of this
volatility by diversifying its scope of operations. To achieve its strategic
objective, the Company established separate but related lines of business in
daywork drilling, engineering services and MOPU operations. The Company also has
pursued foreign drilling and production opportunities in order to expand
geographically. Each of the Company's business segments will continue to be
affected, however, by the unsettled energy markets, which are influenced by a
variety of factors, including general economic conditions, the extent of
worldwide oil and gas production and demand therefor, government regulations and
environmental concerns.
RESULTS OF OPERATIONS
Year 1996 Versus 1995
The Company recognized net income, before preferred dividends, of $14.4
million in 1996 compared to net income of $5.4 million in 1995. Revenues
increased $49.8 million and operating income increased $21.4 million from 1995
to 1996. Improved operating results from the Company's daywork drilling and
engineering services business segments contributed to the increases in revenues
and operating income.
12
<PAGE> 14
<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
-------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling..................................... $ 77,882 $26,363 $51,519
Engineering Services................................. 60,517 56,970 3,547
MOPU Operations...................................... 4,329 4,920 (591)
Oil and Gas.......................................... 1,156 2,788 (1,632)
Eliminations......................................... (10,775) (7,752) (3,023)
-------- ------- -------
Consolidated................................. $133,109 $83,289 $49,820
======== ======= =======
Operating Income (Loss):
Daywork Drilling..................................... $ 23,048 $ 2,761 $20,287
Engineering Services................................. 8,036 2,609 5,427
MOPU Operations...................................... 2,872 2,492 380
Oil and Gas.......................................... (3,108) 541 (3,649)
Corporate Office..................................... (6,411) (5,387) (1,024)
-------- ------- -------
Consolidated................................. $ 24,437 $ 3,016 $21,421
======== ======= =======
</TABLE>
Daywork Drilling
Daywork drilling revenues increased $51.5 million and operating income
increased $20.3 million in 1996 compared to 1995. Of the $20.3 million increase
in operating income, $14.3 million was generated from 10 of 11 jack-up drilling
rigs acquired in May, 1996. Operating income also increased due to improved
dayrates for the Company's jack-up drilling rigs and land rigs. In addition,
Cliffs Drilling 54 worked the entire year in 1996 compared to approximately one
quarter of the year in 1995. Cliffs Drilling 12 worked the majority of 1996,
while it was stacked during all of 1995. These improvements in operating income
were partially reduced by the loss of income associated with the Marquette. See
"Year 1995 Versus 1994 -- Daywork Drilling."
On May 23, 1996, the Company completed the acquisition of 9 jack-up
drilling rigs and a 50% interest in the WINDJV which owns an additional jack-up
drilling rig, and their related assets operated by Southwestern. In addition, on
May 10, 1996, the Company acquired a jack-up drilling rig from Diamond and
renamed it Cliffs Drilling 155. Seven of the 11 acquired jack-up drilling rigs
are currently operating in the Gulf of Mexico and one jack-up rig is operating
in each of Venezuela, Qatar and Trinidad. The other jack-up rig acquired in May,
1996 commenced refurbishment activities during the fourth quarter of 1996 and is
expected to begin operations in the second quarter of 1997.
13
<PAGE> 15
The Company operates its drilling rigs on both a term and a spot
(well-to-well) basis. Drilling rigs contracted on a term basis generally work in
various international locations, while drilling rigs contracted on a spot basis
generally work in the U.S. Gulf of Mexico. The following table summarizes
revenues, utilization and average dayrates for significant classes of the
Company's drilling rigs:
<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Daywork Drilling Revenues(1):
Jack-up Rigs:
International...................................... $17,989 $12,183 $ 5,806
Domestic........................................... 33,984 -- 33,984
Land Rigs............................................. 20,403 14,152 6,251
Other(2).............................................. 5,506 28 5,478
------- ------- -------
Total......................................... $77,882 $26,363 $51,519
======= ======= =======
Average Rig Utilization(3):
Jack-up Rigs:
International...................................... 100% 100%
Domestic........................................... 96% N/A
Land Rigs............................................. 100% 100%
Average Dayrates(4):
Jack-up Rigs:
International...................................... $25,724 $20,133
Domestic........................................... 22,667 N/A
Land Rigs............................................. 9,085 7,335
</TABLE>
- ---------------
(1) Includes revenues earned from affiliates.
(2) Includes Cliffs Drilling 12, which was stacked during all of 1995, but was
bareboat chartered to a third party for use as a workover rig during most
of 1996, and 2 labor maintenance contracts.
(3) Utilization rates are based upon the number of actively marketed rigs in the
fleet and exclude rigs which are unavailable for operations during periods
of refurbishment and upgrade.
(4) Daywork drilling revenues less non-recurring revenues divided by aggregate
contract days, adjusted to exclude days under contract at zero dayrate.
On September 30, 1996, the Company acquired an additional land rig for $2.9
million. The Company has refurbished the drilling rig and expects to mobilize
the unit to Venezuela and commence operations during the second quarter of 1997.
On January 24, 1997, the Company completed the AGP Acquisition which
included one jack-up drilling rig and 4 land rigs for a purchase price of $28.5
million in cash. The jack-up rig ATENA, renamed Cliffs Drilling 156, is
currently operating in Venezuela. The Company expects to refurbish at least 2 of
the 4 land drilling rigs for operations in Venezuela during 1997. See "Liquidity
and Capital Resources."
Engineering Services
Engineering services revenues increased $3.5 million and operating income
increased $5.4 million in 1996 compared to 1995. The Company completed 13
turnkey contracts in 1996 compared to 15 turnkey contracts in 1995. Five of the
13 contracts completed during 1996 were international contracts in Venezuela,
which were completed at improved margins from wells drilled in prior years.
International operating margins increased during 1996 due to improved drilling
efficiencies and a reduction in lost time well activities. Domestic turnkey
contractors continue to bid wells very aggressively, resulting in intense
competition which has adversely affected the Company's domestic turnkey margins.
14
<PAGE> 16
The Company had 3 turnkey wells in progress at December 31, 1996, all of
which were completed by February, 1997. The Company provided well engineering
and management services during 1996 and 1995, primarily in Venezuela. These
activities contributed operating income of $.4 million and $.7 million in 1996
and 1995, respectively.
MOPU Operations
MOPU revenues decreased $.6 million and operating income increased $.4
million in 1996 compared to 1995. The decrease in revenues was primarily due to
3 MOPUs which were under operating or standby contracts during 1995 but were
idle in 1996. In addition, the Cliffs Drilling 11 was sold during June, 1996.
These decreases in revenue were partially offset by revenues associated with the
LANGLEY, which was under contract during all of 1996, while it was stacked
during most of 1995. Operating income associated with the LANGLEY offset the
decreases in operating income associated with the other MOPUs.
The Company currently owns 5 MOPUs. All of the units are under contract and
4 are currently operating. The other MOPU is expected to commence operations
during the second quarter of 1997.
Oil and Gas
Oil and gas revenues decreased $1.6 million and operating income decreased
$3.6 million in 1996 compared to 1995. The decrease in revenues was primarily
due to a $1.4 million settlement of a contractual dispute with Columbia Gas
Transmission Corp., a subsidiary of Columbia Gas System Inc. ("Columbia Gas")
recorded during 1995. The decrease in operating income was primarily due to
approximately $2.9 million in costs associated with an unsuccessful well drilled
during the fourth quarter of 1996. The Company does not expect any significant
activity related to oil and gas exploration and production activities during
1997.
Corporate Overhead
Corporate overhead increased $1.0 million in 1996 compared to 1995. The
increase was primarily due to increased costs associated with the Southwestern
operations and an increase in employment-related costs.
Other Income (Expense) and Income Taxes
The Company recognized $10.0 million of other expense in 1996 compared to
$2.4 million of other income in 1995. The net change resulted primarily from a
$9.1 million increase in interest expense associated with the Senior Notes, an
increase in income taxes of $4.6 million and a decrease in exchange rate gains
of $2.6 million, offset in part by an increase in interest income and gains on
disposition of assets. See "Liquidity and Capital Resources."
The increase in income taxes relates primarily to the overall increase in
income from 1995 to 1996. The effective tax rates were 33% and 31% in 1996 and
1995, respectively, with the majority of the recorded expense constituting
deferred taxes. At December 31, 1996, the Company had various tax assets that
were recorded as a reduction of the tax liability related to taxable temporary
differences, a portion of which were reserved. The Company's realization of
these assets is primarily dependent upon the mix of foreign source and other
income. The Company's current mix of operations appears sufficient to enable the
Company to realize the majority of these tax assets. See Note 6 of Notes to
Consolidated Financial Statements.
15
<PAGE> 17
Year 1995 Versus 1994
The Company recognized net income, before preferred dividends, of $5.4
million in 1995 compared to net income of $6.1 million in 1994. Operating income
decreased $5.5 million from 1994 to 1995. The decrease in operating income was
primarily due to a reduction in foreign daywork drilling operating income of
$4.4 million, a reduction in MOPU operating income of $1.9 million, a reduction
in engineering services operating income of $1.0 million, and an increase in
corporate overhead of $.2 million, offset in part by an increase in oil and gas
operating income of $2.0 million.
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling.................................... $ 26,363 $ 32,481 $ (6,118)
Engineering Services................................ 56,970 36,079 20,891
MOPU Operations..................................... 4,920 16,020 (11,100)
Oil and Gas......................................... 2,788 2,470 318
Eliminations........................................ (7,752) (3,357) (4,395)
-------- -------- ---------
Consolidated..................................... $ 83,289 $ 83,693 $ (404)
======== ======== =========
Operating Income (Loss):
Daywork Drilling.................................... $ 2,761 $ 7,100 $ (4,339)
Engineering Services................................ 2,609 3,581 (972)
MOPU Operations..................................... 2,492 4,415 (1,923)
Oil and Gas......................................... 541 (1,439) 1,980
Corporate Office.................................... (5,387) (5,184) (203)
Eliminations........................................ -- (2) 2
-------- -------- ---------
Consolidated..................................... $ 3,016 $ 8,471 $ (5,455)
======== ======== =========
</TABLE>
Daywork Drilling
Daywork drilling revenues decreased $6.1 million and operating income
decreased $4.3 million in 1995 compared to 1994. Daywork drilling operating
results reflect decreased revenues and operating income primarily due to the
stacking of one of the Company's jack-up drilling rigs which completed
operations in Mexico during the fourth quarter of 1994 for CNCTI. The Company's
other 2 jack-up drilling rigs operated in Venezuela through April, 1995 on a
well-to-well basis at reduced dayrates from those received in 1994. Subsequent
to expiration of the contracts, one of the jack-up rigs was demobilized to the
U.S. Gulf of Mexico. The other jack-up rig was demobilized to an offshore
location outside Venezuela and contracted to drill a turnkey well. The turnkey
portion of the well was completed during the third quarter of 1995, and the rig
completed operations on a daywork basis offshore Venezuela during the first
quarter of 1996.
16
<PAGE> 18
The Company operates its drilling rigs on both a term and a spot basis.
Drilling rigs contracted on a term basis generally work in various international
locations, while drilling rigs contracted on a spot basis generally work in the
U.S. Gulf of Mexico. The following table summarizes revenues, utilization and
average dayrates for the Company's significant classes of drilling rigs:
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Daywork Drilling Revenues(1):
Jack-up Rigs:
International....................................... $12,183 $21,997 $ (9,814)
Domestic............................................ -- -- --
Land Rigs........................................... 14,152 10,465 3,687
Other.................................................. 28 19 9
------- ------- --------
Total.......................................... $26,363 $32,481 $ (6,118)
======= ======= ========
Average Rig Utilization(2):
Jack-up Rigs:
International....................................... 100% 93%
Domestic............................................ N/A N/A
Land Rigs.............................................. 100% 100%
Average Dayrates (3):
Jack-up Rigs:
International.......................................... $20,133 $21,499
Domestic............................................... N/A N/A
Land Rigs.............................................. 7,335 6,608
</TABLE>
- ---------------
(1) Includes revenues earned from affiliates.
(2) Utilization rates are based upon the number of actively marketed rigs in the
fleet and exclude rigs which are unavailable for operations during periods
of refurbishment and upgrade.
(3) Daywork drilling revenues less non-recurring revenues divided by aggregate
contract days, adjusted to exclude days under contract at zero dayrate.
On July 2, 1995, the jack-up drilling rig MARQUETTE suffered hull damage
during demobilization from Venezuela to the U.S. Gulf of Mexico. During an
inspection of the hull damage by the Company and its insurance adjusters, other
damage was discovered which was attributed to an earthquake in Venezuela in May,
1994. The rig was declared a compromised total loss by the Company's insurance
underwriters. The Company received $14.6 million from its insurance underwriters
for these damages. The Company scrapped the rig and salvaged various rig
equipment for use on other rigs or to sell. See "Liquidity and Capital
Resources."
Contracts on 2 of the 5 land drilling rigs working for Corpoven were
extended to September, 1996 at increased dayrates. The other 3 land drilling
rigs have contracts or agreements which extended into February, 1997. The
Company acquired, renovated and mobilized an additional land rig to Venezuela
which began drilling operations during September, 1995.
Engineering Services
Engineering services revenues increased $20.9 million and operating income
decreased $1.0 million in 1995 compared to 1994. Fifteen turnkey contracts were
completed in both 1995 and 1994. The revenue increase is primarily attributable
to the mix of turnkey wells drilled during 1995 and 1994. One of the 15 turnkey
wells completed in 1995 and 5 of the 15 turnkey wells completed in 1994 were
drilled by CNCTI and recorded under the equity method. One of the 15 turnkey
wells completed in 1994 was drilled by Cliffs Neddrill Turnkey International, a
joint venture in which the Company had a 50% interest, and also recorded under
the equity method. See Note 4 of Notes to Consolidated Financial Statements.
Despite the change in the mix of turnkey wells drilled, overall operating
margins have decreased. Domestic turnkey operators have been very aggressive in
pricing Gulf of Mexico turnkeys, and competition is intense. Various operational
problems also caused turnkey margins to decline. Five of the turnkey wells
completed in 1995 and
17
<PAGE> 19
one turnkey well in progress at December 31, 1995 encountered downhole problems
and as a result, the Company recorded losses of $3.7 million in the 1995 results
of operations on these 6 contracts. Two of the wells which completed in 1994
encountered downhole problems and as a result, the Company recorded losses of
$3.2 million in the 1994 results of operations on these contracts.
The Company provided well engineering and management services during 1995
and 1994, primarily in Venezuela and Mexico. These activities contributed
operating income of $.7 million and $1.0 million in 1995 and 1994, respectively.
MOPU Operations
MOPU revenues decreased $11.1 million and operating income decreased $1.9
million in 1995 compared to 1994. The decrease in revenues and operating income
was primarily due to the expirations in May and September, 1994 of the two-year
contracts on the 3 MOPUs which worked in Venezuela. The 3 MOPUs which worked in
Venezuela contributed revenues of $11.9 million and operating income of $1.6
million during 1994. After completing its contract in Venezuela, the LANGLEY was
demobilized to the United States during the second quarter of 1994 and was idle
until the fourth quarter of 1995. The unit was subsequently bareboat chartered
for a five-year term for use as a MOPU offshore Nigeria. The rig was mobilized
to Nigeria in midyear 1996 following modifications. The charterer exercised
buyout options and purchased the other 2 units which worked in Venezuela for a
total of $4.0 million in the fourth quarter of 1994. No gain or loss was
recognized upon buyout of the 2 units. See "Liquidity and Capital Resources."
Oil and Gas
Oil and gas revenues increased $.3 million and operating income increased
$2.0 million in 1995 compared to 1994. The increases were primarily due to a
$1.4 million settlement of a contractual dispute with Columbia Gas and decreased
depreciation, depletion and amortization and operating expenses, offset in part
by reduced gas revenues resulting from production declines and lower gas prices
during 1995 compared to 1994.
Corporate Overhead
Corporate overhead increased $.2 million in 1995 compared to 1994. The
increase was primarily due to an overall increase in employment-related costs.
Other Income (Expense)
The Company recognized $2.4 million of other income in 1995 compared to
$2.4 million of other expense in 1994. The net change resulted primarily from an
increase in net exchange rate gains and net gains on disposition of assets,
offset in part by an increase in income taxes. See "Liquidity and Capital
Resources."
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $12.8 million from $26.4 million at
December 31, 1995 to $39.2 million at December 31, 1996. The increase resulted
from net cash provided by financing activities of $145.3 million and net cash
provided by operating activities of $7.1 million, offset in part by net cash
used in investing activities of $139.6 million.
Operating Activities
Net cash of $7.1 million provided by operating activities included $21.3
million used for working capital and other requirements. "Accounts Receivable"
increased from December 31, 1995 to December 31, 1996 due primarily to daywork
drilling receivables associated with the Southwestern Rigs acquired on May 23,
1996, drilling operations in Colombia, Mexico and Qatar and the timing of cash
receipts related to international daywork and turnkey operations. "Notes and
Other Receivables, Current" increased primarily due to an insurance claim
related to an underground blowout on a domestic turnkey well. "Prepaid
Insurance" increased due to an extension of the policy period of insurance
coverage from the prior year and increased insurance premiums. "Other Prepaid
Expenses" increased primarily due to a deposit related to the AGP Acquisition
which closed on January 24, 1997. "Accounts Payable" and "Other Accrued
Expenses" increased due to increased domestic and international operations and
the timing of payments.
18
<PAGE> 20
Investing Activities
Net cash of $139.6 million used to fund investing activities included
$144.5 million of acquisition costs and related capital expenditures associated
with the jack-up drilling rig acquisitions completed during May, 1996 and the
land drilling rig acquisition completed in September, 1996. In addition, cash
was used for upgrade and renovation activities on other drilling rigs and MOPUs.
On January 24, 1997, the Company completed the AGP Acquisition for a
purchase price of $28.5 million in cash. The ATENA, renamed Cliffs Drilling 156,
is currently operating in Venezuela. The Company expects to refurbish at least 2
of the 4 land drilling rigs for operations in Venezuela during 1997.
In addition to the rig acquisitions completed in January, 1997, the Company
has capital expenditure requirements totaling approximately $48 million during
1997. Of this total, approximately $19 million relates to projects commenced in
1996 which will complete in 1997, $7 million relates to refurbishment of the
land rigs obtained in the AGP Acquisition, $11 million relates to upgrades which
will be funded by customers through improved dayrates or contract terms and
approximately $11 million relates to other capital expenditures, including drill
pipe. The Company intends to fund these capital expenditure requirements with
available cash, internally-generated cash flow and amounts currently available
under its Revolving Credit Facility.
"Investment in and Advances to Unconsolidated Affiliates" increased from
December 31, 1995 to December 31, 1996 due primarily to $3.2 million paid for
the acquisition of an equity interest in the WINDJV.
On June 19, 1996, Cliffs Drilling 11 completed its two-year bareboat
charter as a workover rig in the U.S. Gulf of Mexico. The charterer exercised
its option to purchase the unit for $5.4 million. The Company recognized a $2.7
million gain on disposition of the unit during June, 1996.
Financing Activities
Cash of $145.3 million was provided by financing activities and included
$150.0 million generated from the placement of Senior Notes, offset in part by
cash used to fund debt issue costs which are reported as "Deferred Charges and
Other" in the Consolidated Balance Sheets.
In conjunction with the acquisition of the Southwestern Rigs, the Company
issued the Senior Notes in the aggregate principal amount of $150.0 million.
Interest on the Senior Notes is payable semi-annually during each May and
November. The Senior Notes do not require any payments of principal prior to
their stated maturity on May 15, 2003, but the Company is required to make
offers to purchase Senior Notes upon the occurrence of certain events as defined
in the indenture, such as asset sales or a change of control of the Company. The
Senior Notes are not redeemable at the option of the Company prior to May 15,
2000. See Note 5 of Notes to Consolidated Financial Statements. The Senior Notes
are senior unsecured obligations of the Company, ranking pari passu in right of
payment with all senior indebtedness and senior to all subordinated
indebtedness, and are guaranteed by the Company's direct and indirect
subsidiaries. The indenture under which the Senior Notes are issued imposes
significant operating and financial restrictions on the Company. Such
restrictions affect, and in many respects limit or prohibit, among other things,
the ability of the Company to incur additional indebtedness, create liens, sell
assets and make dividends or other payments.
On June 27, 1996, the Company and ING modified and amended the Company's
$20 million Revolving Credit Facility to, among other things, increase the
amount available under such facility to $35 million. The Revolving Credit
Facility matures on May 31, 1998. At December 31, 1996, the Company had no
indebtedness outstanding under the Revolving Credit Facility.
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 issued and outstanding
shares of Preferred Stock. The remaining 34,012 shares of Preferred Stock 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.
The Company from time to time purchases its Common Stock in the open
market. During 1996, the Company purchased 43,000 shares of its Common Stock at
an aggregate purchase price of $.7 million, or approximately $15.38 per share.
All of the acquired shares are held as Common Stock in treasury, less shares
issued under certain benefit plans.
19
<PAGE> 21
Exchange Rate Gains and Losses
Approximately 42% of the Company's revenues and a substantial portion of
its operating income were sourced from its Venezuelan operations during 1996.
These operations are subject to customary political and foreign currency risks
in addition to operational risks. The Company has attempted to reduce these
risks through insurance and the structure of its contracts. The Company may be
exposed to the risk of foreign currency losses in connection with its foreign
operations. Such losses are the result of holding net monetary assets (cash and
receivables in excess of payables) denominated in foreign currencies during
periods of a strengthening U.S. dollar. The Company's foreign exchange gains and
losses are primarily attributable to the Venezuelan Bolivar. Venezuela
instituted currency exchange controls during June, 1994, which continued through
all of 1995 and substantially eliminated exchange losses attributable to the
Company's Venezuelan operations during most of 1995. The Company realized $1.2
million in gains in connection with Venezuelan Brady Bond transactions during
the first quarter of 1996; however, the Venezuelan government allowed the
Bolivar to "float" relative to other currencies on April 22, 1996. Significant
devaluation of the Bolivar occurred at that date, which subjected the Company to
exchange rate losses on its net monetary assets. Foreign currency exchange rate
losses of $1.2 million incurred during 1996 offset exchange rate gains realized
during the first quarter of 1996. The effects of these transactions are reported
as "Exchange Rate Gain (Loss)" in the Consolidated Statements of Operations. The
Company does not speculate in foreign currencies or maintain significant foreign
currency cash balances. The Company will continue to be exposed to future
foreign currency gains and losses if the currency continues to be volatile.
Despite the political and economic risks in Venezuela, the Company believes that
the country continues to be a favorable market for its services.
Cautionary Statements
The ability of the Company to fund working capital, capital expenditures
and debt service in excess of cash on hand will be dependent upon the success of
the Company's domestic and foreign operations. To the extent that internal
sources are insufficient to meet those cash requirements, the Company can draw
on its available credit facility or seek other debt or equity financing;
however, the Company can give no assurance that such other debt or equity
financing would be available on terms acceptable to the Company.
In any case, the satisfaction of long-term capital requirements will depend
upon successful implementation by the Company of its business strategy and
future results of operations. Management believes it has successfully
implemented the strategy to achieve results of operations commensurate with its
immediate and near-term liquidity requirements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
appear on pages 26 through 45 hereof and are incorporated by reference into this
Item 8. Selected quarterly financial data is set forth in Note 14 of Notes to
Consolidated Financial Statements, which is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
accountants regarding accounting principles or practices for financial statement
disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for its 1997 Annual
Meeting of Shareholders, which is to be filed with the Securities and Exchange
Commission (the "Commission"), describes the directors and executive officers of
the Company and is incorporated herein by reference.
20
<PAGE> 22
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders, which is to be filed with the Commission, sets forth information
regarding management compensation and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under captions "Principal Shareholders" and
"Security Ownership of Management" in the Company's definitive proxy statement
for its 1997 Annual Meeting of Shareholders, which is to be filed with the
Commission, describes the security ownership of certain beneficial owners and
management and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the
Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders, which is to be filed with the Commission, sets forth information
regarding certain relationships and related transactions and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) and (2) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Schedules" on
page 24.
(3) Exhibits
See Exhibit Index on pages 47 to 50.
The management contracts and compensatory plans or arrangements required to
be filed as Exhibits to this report are as follows:
<TABLE>
<C> <S>
10.7 -- Cliffs Drilling Company 1988 Incentive Equity Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.7.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.1 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.7.2 -- Amendment No. 2 dated May 20, 1993 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.2 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.7.3 -- Amendment No. 3 dated May 22, 1996 to the Cliffs Drilling
Company 1988 Incentive Equity Plan.
10.8 -- Cliffs Drilling Company Incentive Bonus Plan
(incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.9 -- Cliffs Drilling Company Retention Plan for Salaried
Employees (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
</TABLE>
21
<PAGE> 23
<TABLE>
<S> <C>
10.9.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.1 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.9.2 -- Amendment No. 2 dated May 21, 1992 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.2 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.10 -- Form of Indemnification Agreement between the Company and
its officers and directors (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1, No. 33-23508, filed under the Securities Act).
10.11 -- Form of Restricted Stock Award Agreement entered into
between the Company and certain key executive officers
(incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1,
No.33-23508, filed under the Securities Act).
10.11.1 -- Form of Restricted Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.10.1 to the Company's Form 10-K for the
fiscal year ended December 31, 1992).
10.11.2 -- Form of Deferred Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.11.2 to the Company's Form 10-K for the
fiscal year ended December 31, 1993).
10.16 -- Form of Executive Agreement dated as of July 20, 1994
(incorporated by reference to Exhibit 10.20 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1994).
</TABLE>
(b) Reports on Form 8-K
None.
22
<PAGE> 24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
March 5, 1997 CLIFFS DRILLING COMPANY
By: /s/ DOUGLAS E. SWANSON
-----------------------------------
Douglas E. Swanson
Chairman of the Board and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <C>
/s/ DOUGLAS E. SWANSON Chairman of the Board and March 5, 1997
- ----------------------------------------------------- President (Principal
Douglas E. Swanson Executive Officer)
/s/ M. M. CONE Director March 5, 1997
- -----------------------------------------------------
M. M. Cone
/s/ ROBERT M. MCINNES Director March 5, 1997
- -----------------------------------------------------
Robert M. McInnes
/s/ JOSEPH E. REID Director March 5, 1997
- -----------------------------------------------------
Joseph E. Reid
/s/ JOHN D. WEIL Director March 5, 1997
- -----------------------------------------------------
John D. Weil
/s/ H. ROBERT HIRSCH Director March 5, 1997
- -----------------------------------------------------
H. Robert Hirsch
/s/ EDWARD A. GUTHRIE Vice President-Finance (Principal March 5, 1997
- ----------------------------------------------------- Financial Officer)
Edward A. Guthrie
/s/ CINDY B. TAYLOR Vice President-Controller March 5, 1997
- ----------------------------------------------------- (Principal Accounting Officer)
Cindy B. Taylor
</TABLE>
23
<PAGE> 25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Auditors.............................. 25
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1996............... 26
Consolidated Balance Sheets, December 31, 1996 and 1995..... 27
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1996............... 28
Consolidated Statements of Changes in Shareholders' Equity
for Each of the Three Years in the Period Ended December
31, 1996.................................................. 29
Notes to Consolidated Financial Statements.................. 30
Schedule:
For Each of the Three Years in the Period Ended
December 31, 1996:
II Valuation and Qualifying Accounts.......... 46
</TABLE>
All other schedules for which provision is made in the applicable rules and
regulations of the Securities and Exchange Commission have been omitted as the
schedules are not required under the related instructions, are not applicable or
the information required thereby is set forth in the Consolidated Financial
Statements or the Notes thereto.
24
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS
CLIFFS DRILLING COMPANY
We have audited the accompanying consolidated balance sheets of Cliffs
Drilling Company as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cliffs Drilling Company at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the Consolidated Financial Statements, in 1995
the Company adopted a new method of accounting for impairment of long-lived
assets.
ERNST & YOUNG LLP
Houston, Texas
February 21, 1997
25
<PAGE> 27
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Revenues.............................................. $132,341 $84,156 $81,508
Income (Loss) from Equity Investments................. 768 (867) 2,185
-------- ------- -------
133,109 83,289 83,693
COSTS AND EXPENSES:
Operating Expenses.................................... 91,984 67,713 50,907
Depreciation, Depletion and Amortization.............. 10,388 7,271 14,008
Contract Termination Provision........................ -- -- 5,193
General and Administrative Expense.................... 6,300 5,289 5,114
-------- ------- -------
108,672 80,273 75,222
-------- ------- -------
OPERATING INCOME........................................ 24,437 3,016 8,471
OTHER INCOME (EXPENSE):
Gain on Disposition of Assets......................... 3,694 2,666 665
Interest Income....................................... 2,725 1,065 815
Interest Expense...................................... (9,265) (199) (826)
Exchange Rate Gain (Loss)............................. -- 2,554 (1,168)
Other, net............................................ (173) (1,250) (1,111)
-------- ------- -------
INCOME BEFORE INCOME TAXES.............................. 21,418 7,852 6,846
INCOME TAX EXPENSE...................................... 6,996 2,406 790
-------- ------- -------
NET INCOME.............................................. 14,422 5,446 6,056
DIVIDENDS APPLICABLE TO PREFERRED STOCK................. (31) (2,659) (2,659)
-------- ------- -------
NET INCOME APPLICABLE TO COMMON AND COMMON EQUIVALENT
SHARES................................................ $ 14,391 $ 2,787 $ 3,397
-------- ------- -------
NET INCOME PER SHARE.................................... $ 2.08 $ 0.68 $ 0.80
======== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING.................................... 6,926 4,108 4,223
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 39,181 $ 26,405
Accounts Receivable, net of allowance for doubtful
accounts of $797 at December 31, 1996 and 1995.......... 28,866 11,170
Notes and Other Receivables, Current...................... 4,922 1,812
Inventories............................................... 5,807 4,114
Drilling Contracts in Progress............................ 17,669 11,339
Prepaid Insurance......................................... 7,408 957
Other Prepaid Expenses.................................... 6,349 2,400
-------- --------
Total Current Assets............................... 110,202 58,197
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment................................ 283,223 122,777
Oil and Gas Properties ("successful efforts" method)...... 22,830 23,497
Other..................................................... 3,986 3,201
-------- --------
310,039 149,475
Less: Accumulated Depreciation, Depletion and
Amortization............................................ (93,565) (83,525)
-------- --------
Net Property and Equipment......................... 216,474 65,950
NOTES AND OTHER RECEIVABLES, LONG-TERM...................... 3,510 4,441
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED
AFFILIATES................................................ 4,434 269
DEFERRED CHARGES AND OTHER.................................. 4,926 105
-------- --------
TOTAL ASSETS....................................... $339,546 $128,962
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable.......................................... $ 30,545 $ 20,392
Accrued Interest.......................................... 2,007 1
Other Accrued Expenses.................................... 9,429 3,945
-------- --------
Total Current Liabilities.......................... 41,981 24,338
10.25% SENIOR NOTES......................................... 150,000 --
DEFERRED INCOME TAXES....................................... 5,028 1,447
DEFERRED INCOME AND OTHER................................... 369 412
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
$2.3125 Convertible Exchangeable Preferred Stock,
3,000,000 shares authorized; 1,150,000 shares issued and
outstanding at December 31, 1995 ($28,750 liquidation
value).................................................. -- 28,750
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares
authorized; 7,996,436 and 4,518,104 shares issued and
7,566,504 and 4,113,067 shares outstanding at December
31, 1996 and 1995, respectively......................... 80 45
Paid-in Capital........................................... 153,513 99,186
Retained Earnings (Deficit)............................... (5,717) (20,108)
Less: Notes Receivable from Officers for Restricted
Stock............................................... (186) (232)
Restricted Stock..................................... (223) (32)
Treasury Stock, at cost, 429,932 and 405,037 shares
at December 31, 1996 and
1995, respectively................................. (5,299) (4,844)
-------- --------
Total Shareholders' Equity........................... 142,168 74,015
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $339,546 $128,962
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income............................................... $ 14,422 $ 5,446 $ 6,056
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Depreciation, Depletion and Amortization.............. 10,388 7,271 14,008
Deferred Income Tax Expense (Benefit)................. 5,184 1,848 (400)
Impairment of Oil and Gas Leasehold Cost.............. 1,017 -- --
Contract Termination Provision........................ -- -- 5,193
Mobilization Expense Amortization..................... 314 519 544
Gain on Disposition of Assets......................... (3,694) (2,666) (665)
Amortization of Debt Issue Costs...................... 462 -- --
Other................................................. 279 71 (829)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable................................. (19,907) (3,728) 9,690
Inventories......................................... (1,667) 1,612 (3,597)
Drilling Contracts in Progress...................... (6,324) (6,261) (4,722)
Prepaid Insurance and Other Prepaid Expenses........ (10,688) 2,500 (1,583)
Investments in and Advances to Unconsolidated
Affiliates....................................... (928) 3,767 (2,184)
Deferred Charges and Other.......................... -- -- (454)
Accounts Payable and Other Accrued Expenses......... 18,256 4,546 2,667
--------- -------- --------
Net Cash Provided By Operating Activities........ 7,114 14,925 23,724
INVESTING ACTIVITIES:
Capital Expenditures..................................... (36,027) (11,687) (9,100)
Acquisition of Rigs and Related Equipment................ (108,477) (1,750) --
Acquisition of Equity Interest in Rig and Related
Equipment............................................. (3,237) -- --
Proceeds from Sale of Property and Equipment............. 6,856 372 5,917
Insurance Proceeds from Loss of Rig and Related
Equipment............................................. 292 14,308 --
Collection of Notes Receivable........................... 977 1,576 1,027
--------- -------- --------
Net Cash Provided By (Used In) Investing
Activities..................................... (139,616) 2,819 (2,156)
FINANCING ACTIVITIES:
Proceeds from Borrowings................................. 150,000 7,000 17,000
Payments on Borrowings................................... -- (7,000) (30,108)
Debt Issue Costs......................................... (5,309) -- --
Acquisition of Treasury Stock............................ (661) -- (5,096)
Proceeds from Exercise of Stock Options.................. 2,129 -- --
Payments for Redemption of Preferred Stock............... (850) -- --
Preferred Stock Dividends................................ (31) (2,659) (2,659)
--------- -------- --------
Net Cash Provided By (Used In) Financing
Activities..................................... 145,278 (2,659) (20,863)
--------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 12,776 15,085 705
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............. 26,405 11,320 10,615
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR................... $ 39,181 $ 26,405 $ 11,320
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM
COMMON STOCK OFFICERS
----------------- RETAINED FOR
PAR PAID-IN EARNINGS RESTRICTED RESTRICTED TREASURY
SHARES VALUE CAPITAL (DEFICIT) STOCK STOCK STOCK
--------- ----- -------- --------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993.................. 4,513,104 $45 $ 99,133 $(26,292) $(232) $(103) $ (57)
Net Income.................................. -- -- -- 6,056 -- -- --
Treasury Stock Acquired..................... (427,000) -- -- -- -- -- (5,096)
Preferred Stock Dividends Declared.......... -- -- -- (2,659) -- -- --
Amortization of Restricted Stock............ -- -- -- -- -- 46 --
Employer Contributions to 401(k) Savings
Plan...................................... 3,343 -- 2 -- -- -- 38
--------- --- -------- -------- ----- ----- -------
BALANCE AT DECEMBER 31, 1994.................. 4,089,447 45 99,135 (22,895) (232) (57) (5,115)
========= === ======== ======== ===== ===== =======
Net Income.................................. -- -- -- 5,446 -- -- --
Preferred Stock Dividends Declared.......... -- -- -- (2,659) -- -- --
Amortization of Restricted Stock............ -- -- -- -- -- 25 --
Employer Contributions to 401(k) Savings
Plan...................................... 23,620 -- 51 -- -- -- 271
--------- --- -------- -------- ----- ----- -------
BALANCE AT DECEMBER 31, 1995.................. 4,113,067 45 99,186 (20,108) (232) (32) $(4,844)
========= === ======== ======== ===== ===== =======
Net Income.................................. -- -- -- 14,422 -- -- --
Preferred Stock Conversion.................. 2,113,557 21 27,879 -- -- -- --
Preferred Stock Dividends Declared.......... -- -- -- (31) -- -- --
Common Stock Issued in Connection with
Offshore Rig Acquisitions................. 1,200,000 12 22,203 -- -- -- --
Restricted Stock Issuance................... 6,750 -- 220 -- -- (220) --
Acquisition of Treasury Stock............... (43,000) -- -- -- -- -- (661)
Collection of Officers' Notes Receivable.... -- -- -- -- 46 -- --
Amortization of Restricted Stock............ -- -- -- -- -- 29 --
Exercise of Stock Options................... 158,025 2 2,127 -- -- -- --
Tax Benefit Associated with Exercise of
Stock Options............................. -- -- 1,603 -- -- -- --
Employer Contributions to 401(k) Savings
Plan...................................... 18,105 -- 295 -- -- -- 206
--------- --- -------- -------- ----- ----- -------
BALANCE AT DECEMBER 31, 1996.................. 7,566,504 $80 $153,513 $(5,717) $(186) $(223) $(5,299)
========= === ======== ======== ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure and Principles of Consolidation
The accompanying consolidated financial statements include the activities
and accounts of Cliffs Drilling Company (the "Company"), all wholly-owned
subsidiaries of the Company and the Company's Venezuelan activities, which are
organized as a foreign branch. The Company uses the equity method to account for
affiliates in which it does not have control. All significant intercompany
transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company's policy is to invest cash in short-term investments.
Uninvested cash balances are kept at minimum levels. Investments are valued at
cost, which approximates market. The Company considers all highly liquid cash
investments with a maturity date of three months or less when purchased to be
cash equivalents.
Inventories
Inventories, consisting principally of tubular goods consumed in turnkey
drilling operations and spare drilling parts, are carried at cost, specific
identification method.
Drilling Contracts in Progress
The Company recognizes revenues and expenses related to its turnkey
drilling contracts when all terms and conditions of the contract have been
fulfilled. Consequently, the costs related to in-progress turnkey drilling
contracts are deferred as drilling contracts in progress until the contract is
completed and revenue is realized. The amount of drilling contracts in progress
is dependent on the volume of contracts, the duration of the contract at the end
of the reporting period and the contract amount. Provision for losses on
incomplete contracts is made when such losses are anticipated.
Rig Mobilization Costs
The Company defers costs of moving a drilling unit to a new area of
operation. The deferred mobilization costs are amortized on a straight-line
basis over the term of the applicable drilling contract. Unamortized
mobilization costs were $24,000 and $338,000 at December 31, 1996 and 1995,
respectively.
Revenue Recognition
The Company recognizes revenues from its daywork drilling and MOPU
operations based upon the contracted daily rate multiplied by the number of
operating days in the period. Turnkey drilling contract revenues are recognized
when all terms and conditions of the contract have been fulfilled. The Company
recognizes oil and gas revenues from its interests in producing wells based upon
the sales method.
Each of the 3 MOPUs which worked in Venezuela had an initial contract term
of two years expiring in 1994, subject to certain buyout options. The buyout
options could have been exercised at any time during the contract term. Because
the Company believed there was a reasonable likelihood that the buyout options
on 2 of the units would be exercised in 1994, the Company deferred income
recognition on these 2 units to the extent of potential losses that could occur
upon exercise of the options. The deferral of income recognition is reflected as
"Contract Termination Provision" in the Consolidated Statements of Operations.
30
<PAGE> 32
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are carried at original cost or at adjusted net
realizable value, as applicable. Major renewals and betterments are capitalized
in the property accounts, while the cost of repairs and maintenance is charged
to operating expenses in the period incurred.
The Company records expenditures made on significant projects as
construction in progress ("CIP") until the assets are ready for their intended
use. No depreciation expense is recorded on amounts included in CIP.
Interest on funds borrowed for construction of qualifying assets is
capitalized during the construction period. Amortization of capitalized interest
is included in "Depreciation, Depletion and Amortization" in the Consolidated
Statements of Operations.
Cost and accumulated depreciation, depletion and amortization are removed
from the accounts when assets are sold or retired, and the resulting gains or
losses are included in the Consolidated Statements of Operations.
Depreciation of property and equipment is provided on the straight-line
basis at rates based upon expected useful lives of the various classes of
assets.
To provide for any deterioration that may occur while the rigs are not
operating for an extended period of time, a minimum depreciation charge is
provided at a reduced rate of 25% of the normal depreciation rate.
Costs related to the exploration and development of oil and gas properties
are accounted for under the "Successful Efforts" method of accounting. Lease
acquisition costs related to oil, gas and mineral properties are capitalized
when incurred. The acquisition costs of unproved properties, which are
individually significant, are assessed on a property-by-property basis, and a
loss is recognized by provision of a valuation allowance when the assessment
indicates an impairment in value. Exploration costs, excluding exploratory
wells, are charged to expense as incurred. Costs of drilling exploratory wells
are capitalized pending determination as to whether the wells have proved
reserves which justify commercial development. If commercial reserves are not
found, the drilling costs are charged to dry hole expense. Tangible and
intangible drilling costs applicable to productive exploratory wells and to the
development of oil and gas reserves are capitalized.
The cost of productive leaseholds is amortized by field on the unit of
production basis by applying the ratio of produced oil and gas to estimated
proved reserves. Lease and well equipment and intangible drilling costs
associated with productive wells are amortized based on proved developed
reserves.
Impairment of Long-Lived Assets
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") which
requires that certain long-lived assets be reviewed for impairment whenever
events indicate that the carrying amount of an asset may not be recoverable, and
that an impairment loss be recognized under certain circumstances in the amount
by which the carrying value exceeds the fair value of the asset. The adoption of
SFAS No. 121 resulted in a write down of oil and gas properties by $737,000 in
1995 based upon the belief that remaining property reserves would be uneconomic
to produce. The impairment loss is included in "Depreciation, Depletion and
Amortization" in the Consolidated Statements of Operations.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." Deferred
income taxes are provided on items recognized in different periods for financial
and tax reporting purposes. See Note 6 of Notes to Consolidated Financial
Statements.
31
<PAGE> 33
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
Primary earnings per share computations are based on net income less
dividends on the Company's $2.3125 Convertible Exchangeable Preferred Stock
("Preferred Stock"), divided by the average number of common shares and
equivalents outstanding during the respective years. Common stock equivalents
include the number of shares issuable upon exercise of stock options, less the
number of shares that could have been repurchased with the exercise proceeds
using the treasury stock method. The Preferred Stock was not included in the
primary earnings per share computation as it was not a common stock equivalent.
Fully diluted earnings per share is not presented for any period because it is
either anti-dilutive or is not materially different than primary earnings per
share.
The Company converted 1,115,988 shares of its 1,150,000 issued and
outstanding shares of Preferred Stock on January 17, 1996. The Company issued
2,113,557 shares of common stock, $.01 par value ("Common Stock"), upon
conversion of the Preferred Stock. See Note 10 of Notes to Consolidated
Financial Statements. Primary earnings per share in 1995 would have been $0.88
if the conversions had taken place at the beginning of 1995.
Stock Options
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. Under APB 25, no compensation expense is
recognized for an employee stock option when the exercise price equals the
market price of the underlying stock on the date of grant. Effective January 1,
1996, the Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). As provided in the
statement, the Company elected to continue to measure compensation expense using
the guidelines of APB 25 and to include disclosures of net income and earnings
per share as if the fair value based method of accounting were utilized. See
Note 9 of Notes to Consolidated Financial Statements.
Foreign Currency Translation
The U.S. dollar is the functional currency for all of the Company's
operations. Foreign currency gains and losses are included in the Consolidated
Statements of Operations during the period incurred.
Concentration of Credit Risk
The market for the Company's services is the oil and gas industry, and the
Company's customers consist primarily of integrated and government-owned
international oil companies and independent oil and gas producers. Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of trade receivables. The Company has in place insurance
to cover certain exposure in its foreign operations and provides allowances for
potential credit losses when necessary. Accordingly, management considers such
credit risk to be limited.
Change in Presentation
Certain financial statement items have been reclassified in prior years to
conform with the current year presentation.
2. NOTES AND OTHER RECEIVABLES, LONG-TERM
Effective January 1, 1993, the Company sold its 4 inland posted barge
drilling rigs and rights to certain oil and gas production payment proceeds
generated from a proceeds-of-production drilling program for an aggregate sales
price of $13,500,000, consisting of $5,000,000 in cash and $8,500,000 in notes.
The first note had a face amount of $1,000,000, with interest calculated at the
base rate on corporate loans as quoted by the Wall Street Journal, and was
repaid in March, 1995. Interest was due and payable semi-annually and commenced
June 30, 1993. The second note has a face amount of $7,500,000, bears interest
at the base rate on corporate loans as quoted by the Wall Street Journal plus
one and one-half percent (1 1/2%), and matures on January 1, 1998. Principal and
interest on the $7,500,000 note
32
<PAGE> 34
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is payable on a monthly basis solely from the proceeds of the oil and gas
production payment which secures the note. At December 31, 1996, the remaining
note receivable balance was $3,510,000.
3. PROPERTY AND EQUIPMENT
On January 24, 1997, the Company completed the acquisition of the stock of
a subsidiary of Andrade Gutierrez Perfuracao Ltda. owning the jack-up drilling
rig ATENA, four 1,500 HP land drilling rigs, miscellaneous drilling equipment
and a contract to operate a platform rig in Brazil (the "AGP Acquisition"). The
purchase price was $28,500,000 in cash.
On June 19, 1996, Cliffs Drilling 11 completed its two-year bareboat
charter as a workover rig in the U.S. Gulf of Mexico and the charterer exercised
its option to purchase the unit for $5,392,000, resulting in a gain of
$2,684,000. On May 23, 1996, the Company completed the acquisition of 9 jack-up
drilling rigs and a 50% interest in the West Indies Drilling Joint Venture (the
"WINDJV"), a joint venture between Cliffs Drilling Trinidad Limited and Well
Services (Marine) Limited, which owns an additional jack-up drilling rig, and
their related assets (collectively referred to as the "Southwestern Rigs")
operated by Southwestern Offshore Corporation ("Southwestern"). The purchase
price of the Southwestern Rigs was (a) $103,800,000 in cash (after reductions of
$6,200,000 for required refurbishments of certain Southwestern Rigs not made
prior to closing) plus (b) issuance of 1,200,000 shares of the Company's Common
Stock, and (c) assumption of certain contractual liabilities, including the
Company's guarantee of $4,250,000 in indebtedness of the WINDJV to Citibank N.A.
related to the refurbishment of the jack-up drilling rig owned by it (together
with accrued but unpaid interest thereon and costs of collection). In addition,
on May 10, 1996, the Company acquired the jack-up drilling rig OCEAN MAGALLANES
from Diamond Offshore Southern Company ("Diamond") for $4,500,000. The Company
renamed this unit Cliffs Drilling 155, which is currently operating in
Venezuela. On September 30, 1996, the Company acquired a land rig from Quarles
Drilling Corp. for $2,850,000, which has been refurbished and is expected to
commence operations in Venezuela during the second quarter of 1997.
During 1995, the Company purchased and renovated a 3000 HP land rig, Cliffs
Drilling 54, for $9,101,000. The unit is currently operating in Venezuela on a
daywork basis. On July 2, 1995, the jack-up drilling rig MARQUETTE suffered hull
damage during demobilization from Venezuela to the U.S. Gulf of Mexico. During
an inspection of the hull damage by the Company and its insurance adjusters,
other damage was discovered which was attributed to an earthquake in Venezuela
in May, 1994. The rig was declared a constructive total loss by the Company's
insurance underwriters. The Company received $14,600,000 from its insurance
underwriters for damages to the MARQUETTE. The Company has scrapped the rig and
salvaged various rig equipment for use on other rigs or to sell. The Company
recognized a $2,715,000 pre-tax gain on the disposition of the unit during 1995.
Interest capitalization associated with rig refurbishments during the year
ended December 31, 1996 totaled $730,000.
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Cliffs Neddrill Central Turnkey International ("CNCTI"), a joint venture
among the Company, Neddrill Turnkey Drilling B.V. and Perforadora Central, S.A.
de C.V., was awarded a contract for one turnkey bid package to drill 4 turnkey
wells in the Bay of Campeche, Mexico. Drilling operations commenced in February,
1993. CNCTI was subsequently awarded 2 turnkey bid packages for 2 wells each in
the Bay of Campeche and the Bay of Tampico, Mexico. One and 5 turnkey contracts
were completed by CNCTI during the years ended December 31, 1995 and 1994,
respectively. The Company's one-third interest in CNCTI is recorded under the
equity method. CNCTI
33
<PAGE> 35
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
completed drilling operations in Mexico during 1995. The following information
summarizes the unaudited Statements of Operations and Balance Sheets of CNCTI:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------ --------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................................ $(10) $24,052 $66,717
Operating expenses...................................... (18) 26,638 58,338
---- ------- -------
Operating income (loss)............................... 8 (2,586) 8,379
Other, net.............................................. (77) 433 (1,525)
---- ------- -------
Net income (loss)..................................... $(69) $(2,153) $ 6,854
==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
---- ------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Current assets.............................................. $844 $3,819
Noncurrent assets........................................... -- 16
---- ------
Total assets.............................................. $844 $3,835
==== ======
Current liabilities......................................... $ 34 $2,580
Equity...................................................... 810 1,255
---- ------
Total liabilities and equity.............................. $844 $3,835
==== ======
</TABLE>
5. NOTES PAYABLE
Long-term debt at December 31, 1996 consists solely of 10.25% Senior Notes
due 2003 (the "Senior Notes") in the aggregate principal amount of $150,000,000.
Interest on the Senior Notes is payable semi-annually during each May and
November. The Senior Notes do not require any payments of principal prior to
their stated maturity on May 15, 2003, but the Company is required to make
offers to purchase Senior Notes upon the occurrence of certain events as defined
in the indenture, such as asset sales or a change of control of the Company.
On or after May 15, 2000, the Senior Notes are redeemable at the option of
the Company, in whole or in part, at a price of 105% of principal if redeemed
during the twelve months beginning May 15, 2000, at a price of 102.5% of
principal if redeemed during the twelve months beginning May 15, 2001, or at a
price of 100% of principal if redeemed after May 15, 2002, in each case together
with interest accrued to the redemption date. Notwithstanding the foregoing, the
Company may at its option use all or a portion of the proceeds from a public
equity offering consummated on or prior to May 15, 1999, to redeem up to
$37,500,000 principal amount of the Senior Notes at a redemption price equal to
110% of the principal amount.
The Senior Notes are senior unsecured obligations of the Company, ranking
pari passu in right of payment with all senior indebtedness and senior to all
subordinated indebtedness and are guaranteed by the Company's direct and
indirect subsidiaries. The Senior Notes are effectively subordinated to all
secured indebtedness, including amounts outstanding under the Revolving Credit
Facility. The indenture under which the Senior Notes are issued imposes
significant operating and financial restrictions on the Company. Such
restrictions affect, and in many respects limit or prohibit, among other things,
the ability of the Company to incur additional indebtedness, make capital
expenditures, create liens, sell assets and make dividends or other payments.
The Senior Notes had a fair value of $159,525,000 at December 31, 1996, or
a 6.35% premium to carrying value, based upon the quoted market price of the
debt.
34
<PAGE> 36
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company executed the Second Restated Credit Agreement with
International Nederlanden (U.S.) Capital Corporation, now known as ING (U.S.)
Capital Corporation ("ING") during the first quarter of 1994, thereby converting
its $10,000,000 working capital credit facility to a $20,000,000 revolving line
of credit ("Revolving Credit Facility") subject to certain borrowing base
limitations. All advances to the Company from the Revolving Credit Facility bear
interest at one-quarter of one percent ( 1/4%) per annum plus the greater of the
prevailing Federal Funds Rate plus one-half percent ( 1/2%) or a referenced
average prime rate; or at the adjusted LIBOR rate plus two percent (2%) per
annum. The foregoing rates are subject to an increase of one-half percent
( 1/2%) in the event certain financial criteria are not met. The Company is also
obligated to pay ING (i) a commitment fee equal to one-half percent ( 1/2%) per
annum on the average daily unadvanced portion of the commitments and (ii) a
letter of credit fee of two percent (2%) per annum on the average daily undrawn
and unexpired amount of each letter of credit during the period that sum remains
outstanding.
On June 27, 1996, the Company and ING modified and amended the $20,000,000
Revolving Credit Facility to, among other things, increase the amount available
under such facility to $35,000,000. The Revolving Credit Facility matures on May
31, 1998. At December 31, 1996, the Company had no indebtedness outstanding
under the Revolving Credit Facility.
The Revolving Credit Facility is secured by accounts receivable, rig
inventory, equipment, certain oil and gas properties and the stock of certain
subsidiaries of the Company. Under the Second Restated Credit Agreement with
ING, as amended, the Company is required to comply with various covenants
including, but not limited to, the maintenance of various financial ratios, and
is restricted from declaring, making or paying any dividends on the Common
Stock.
Availability and borrowings under the Revolving Credit Facility are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Line of credit available................................ $32,583 $19,460
Short-term borrowings outstanding....................... -- --
Letters of credit outstanding........................... 2,417 540
</TABLE>
Interest payments on all indebtedness amounted to $7,527,000, $198,000 and
$919,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
6. INCOME TAXES
In prior years, the Company incurred net operating losses resulting in tax
net operating loss carryforwards which were available to offset taxable income
in future years. The Company utilized its net operating loss carryforwards in
1995 and 1996 and at December 31, 1996, the Company had net operating loss
carryforwards of $1,407,000 for regular tax purposes and $4,290,000 for
alternative minimum tax purposes which expire during the years 1998 through
2009. In addition, the Company has $3,811,000 of foreign tax credit
carryforwards at December 31, 1996 which expire during the years 1998 through
2001. For financial reporting purposes, a valuation allowance of $1,589,000 and
$2,309,000 at December 31, 1996 and 1995, respectively, is provided to reduce
the deferred tax assets related to these tax carryforward and credit items to a
level which, more likely than not, will be realized. The valuation allowance was
reduced by $720,000 from December 31, 1995 to December 31, 1996 to reflect the
expected use of foreign tax credits which were previously reserved as well as
the use of tax assets in the reduction of current year liabilities.
35
<PAGE> 37
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company provided for $6,996,000 of income taxes for the year ended
December 31, 1996. This amount is comprised of a current provision of $1,812,000
for U.S. alternative minimum taxes and taxes paid in foreign jurisdictions and
deferred income taxes of $5,184,000. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for income tax
purposes. The significant components of deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................ $ 7,235 $ 5,434
Section 461(H) prepaid expenses........................... 2,593 --
Undistributed earnings of subsidiaries.................... 250 --
------- -------
Total deferred tax liabilities.................... 10,078 5,434
Deferred tax assets:
Foreign tax credits....................................... 3,811 2,450
Minimum tax credits....................................... 641 500
Accounts receivable reserves.............................. 279 279
Net operating loss carryforwards.......................... 492 1,568
Unused investment tax credits............................. -- 482
Percentage depletion carryforward......................... 678 678
Other, net................................................ 738 339
------- -------
Total deferred tax assets......................... 6,639 6,296
Valuation allowance for deferred tax assets................. (1,589) (2,309)
------- -------
Net deferred tax assets................................... 5,050 3,987
------- -------
Net deferred tax liabilities........................... $ 5,028 $ 1,447
======= =======
</TABLE>
The deferred tax liability balance at December 31, 1996 totaled $5,028,000,
net of $1,603,000 related to the tax benefit associated with the exercise of
non-qualified stock options during 1996, which is reflected as a component of
shareholders' equity.
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes:
United States......................................... $ 992 $ 125 $ 807
Foreign............................................... 20,426 7,727 6,039
------- ------ ------
Total......................................... $21,418 $7,852 $6,846
======= ====== ======
</TABLE>
36
<PAGE> 38
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................ $ 144 $ 100 $ --
Foreign................................................ 1,668 458 1,190
------ ------ ------
Total Current.................................. 1,812 558 1,190
Deferred:
Federal................................................ 5,184 1,848 (400)
Foreign................................................ -- -- --
------ ------ ------
Total Deferred................................. 5,184 1,848 (400)
------ ------ ------
$6,996 $2,406 $ 790
====== ====== ======
</TABLE>
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at U.S. statutory rates........................... $ 7,496 $2,748 $ 2,396
Foreign tax provision................................. 1,668 458 1,190
Foreign tax credits available......................... (1,361) -- (1,190)
Foreign tax credits available from equity
investments......................................... -- -- (537)
Alternative minimum tax provision..................... 144 100 --
Alternative minimum credits available................. (144) (100) --
Percentage depletion available........................ -- -- (506)
Change in valuation allowance......................... (720) (368) (466)
Safe harbor lease termination......................... -- (897) --
Other, net............................................ (87) 465 (97)
------- ------ -------
Income tax expense.......................... $ 6,996 $2,406 $ 790
======= ====== =======
</TABLE>
Income tax payments amounted to $1,854,000, $531,000 and $982,000 for the
years ended December 31, 1996, 1995 and 1994.
7. PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to the
acquisition of the Southwestern Rigs using the purchase method of accounting
given the related assumptions and adjustments, the offering of $150,000,000 of
Senior Notes and the issuance of 1,200,000 shares of the Company's Common Stock
valued at an average price of $18.51 per share in connection with the
Southwestern Rigs acquisition.
The pro forma financial information is based upon the historical
consolidated financial statements of the Company and Southwestern for the years
ended December 31, 1996 and 1995. The historical financial statements of
Southwestern include the operating results of the Southwestern Rigs during the
periods indicated to the date of acquisition, May 23, 1996. However, the
financial statements of Southwestern exclude depreciation expense related to the
Southwestern Rigs because Southwestern managed, rather than owned, the rigs. 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, 40% of the Southwestern Rigs were not available for
service as a result of being cold stacked or refurbished.
37
<PAGE> 39
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma financial information for the year ended December 31, 1996
was prepared assuming that the transactions described above were consummated as
of January 1, 1995. The pro forma financial information has been prepared based
upon assumptions deemed appropriate by the Company and may not be indicative of
actual results. The historical results of Southwestern's operations are included
with the Company's results beginning May 23, 1996. The unaudited Pro Forma
Consolidating Statements of Operations for the year ended December 31, 1995 are
included in the Company's current report on Form 8-K dated May 23, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $147,672 $108,854
Net Income (Loss)...................................... 10,273 (7,937)
Net Income (Loss) Per Share............................ $ 1.38 $ (2.00)
</TABLE>
8. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan ("401(k) Plan"). Under the
401(k) Plan, an employee who has reached age 21 and completed 90 days of service
is eligible to participate in the plan through contributions that range in one
percent multiples up to 16% of salary, with a 1996 dollar maximum of $9,500. In
addition, the Company contributes (or "matches") on behalf of each participant
an amount equal to 100% of the portion of each participant's contribution which
does not exceed 6% of the participant's annual salary. Employer contributions
for certain highly compensated employees may be further limited through the
operation of the non-discrimination requirements found in Sections 401(k) and
401(m) of the Internal Revenue Code.
Employee contributions can be invested in any or all of 6 investment
options in multiples of 5%. Employer contributions are invested in the Company's
Common Stock. Employee contributions are 100% vested and non-forfeitable.
Employer contributions are subject to a graded vesting schedule, with
participants becoming fully vested upon completion of five years employment
service with the Company. Distributions from the 401(k) Plan are made upon
retirement, death, disability or separation of service. Participants may borrow
up to one-half ( 1/2) of their vested interest in the plan, limited to a maximum
of $50,000. Contributions to the 401(k) Plan and earnings on contributions are
not included in a participant's gross income until distributed to the
participant. Contributions to the 401(k) Plan by the Company were $413,000,
$365,000 and $302,000 for the years 1996, 1995 and 1994, respectively.
9. CAPITAL STOCK
The Company's Revolving Credit Facility and the indenture governing the
Senior Notes of the Company restrict payment of dividends on the Common Stock.
Specifically, the indenture restricts the payment of dividends based on (i)
availability of funds under a formula based on previously unapplied cumulative
net income since April 1, 1996 plus certain stock sale proceeds raised after May
15, 1996 plus $10,000,000, (ii) satisfaction of the then applicable minimum
interest coverage ratio for debt incurrence. Cumulative net income for purposes
of the test excludes gains or losses on asset sales and certain other
non-recurring charges or credits as specified in the indenture. Although the
Company was not prohibited from paying cash dividends under the terms of the
indenture as of December 31, 1996, management does not intend to declare any
cash dividends in the foreseeable future.
The Company has a 1988 Incentive Equity Plan under which stock options,
stock appreciation rights, restricted stock and deferred stock awards for up to
650,000 shares of the Company's Common Stock may be awarded to officers,
directors and key employees. The Company's 1988 Incentive Equity Plan is
designed to attract and reward key executive personnel.
Stock options granted pursuant to the 1988 Incentive Equity Plan expire not
more than ten years from the date of grant and typically vest over three years,
with 50% vesting after one year and 25% vesting in each of the next two
38
<PAGE> 40
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
succeeding years. All of the options granted by the Company were granted at an
option price equal to the fair market value of the Common Stock at the date of
grant.
Changes in the number of outstanding options on the Company's Common Stock
are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES UNDER EXERCISE PRICE
OPTION (PER SHARE)
------------ --------------
<S> <C> <C>
Outstanding Options at December 31, 1993.......... 265,700 $13.42
Granted......................................... 7,500 $12.00
Canceled........................................ (11,000) $13.98
--------
Outstanding Options at December 31, 1994.......... 262,200 $13.36
Canceled........................................ (2,200) $13.69
--------
Outstanding Options at December 31, 1995.......... 260,000 $13.36
Granted......................................... 184,000 $27.64
Exercised....................................... (158,025) $13.47
Canceled........................................ (250) $12.88
--------
Outstanding Options at December 31, 1996.......... 285,725 $22.49
========
Exercisable, December 31,
1994............................................ 215,950 $13.51
1995............................................ 237,625 $13.42
1996............................................ 99,850 $13.20
</TABLE>
At December 31, 1996, the following options were outstanding and
exercisable and had the indicated remaining contractual life:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE REMAINING
SHARES SHARES EXERCISE PRICE EXERCISE PRICE CONTRACTUAL
OUTSTANDING EXERCISABLE (PER SHARE) (PER SHARE) LIFE
- ----------- ----------- --------------- ---------------- -----------
<C> <C> <C> <C> <C>
22,500 22,500 $13.80 - $14.25 $14.14 1 - 4
75,475 75,475 $12.13 - $13.25 $12.95 5 - 7
187,750 1,875 $12.00 - $28.00 $27.32 7 - 10
------- ------
285,725 99,850
======= ======
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1996 1995
----- ----
<S> <C> <C>
Weighted Average Risk-Free Interest Rate.................... 6.3% N/A
Dividend Yield.............................................. 0.0% N/A
Weighted Average Stock Price Volatility Factor.............. 41.7% N/A
Expected Life of the Options (Years)........................ 4 N/A
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective
39
<PAGE> 41
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The calculated weighted
average fair value of options granted during 1996 was $11.33.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' expected life. This pro forma
financial information is calculated in accordance with SFAS 123, but is not
likely to be representative of the effects on reported net income in future
years. The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
-------- -----
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNT)
<S> <C> <C>
Pro Forma Net Income........................................ $13,973 N/A
Pro Forma Net Income Per Share.............................. $ 2.02 N/A
</TABLE>
The Company's Board of Directors has awarded restricted stock to the
Company's officers and key employees from time to time. One award of 5,000
shares was made in the three-year period ended December 31, 1996. Restrictions
on the 1996 award lapse with respect to 33 1/3% of the entire award after one
year and after each of the succeeding two years. Expense related to amortization
of restricted stock was $29,000, $25,000 and $46,000 for the years 1996, 1995
and 1994, respectively. Deferred compensation expense relative to non-vested
shares of restricted stock, measured by the market value of the stock on the
date of grant, is being amortized on a straight-line basis over the restriction
period. The unamortized deferred compensation expense, which has been deducted
from equity in the Consolidated Balance Sheets, amounted to $223,000 and $32,000
at December 31, 1996 and 1995, respectively.
Effective December 31, 1992, the Company's Board of Directors approved the
sale of 17,500 shares of restricted Common Stock to certain key executives. The
price paid for the restricted stock was $13.25 per share. The Company extended
full recourse, interest-bearing loans to the key executives in the aggregate
amount of $232,000. The promissory notes bear interest at seven and one-half
percent (7 1/2%) per annum payable quarterly as it accrues on the last day of
March, June, September and December until the notes are due on December 31,
1997. Additional shares of deferred stock will be awarded on December 31, 1997
if certain performance criteria are attained by the Company. Compensation
expense related to the deferred stock awards will be accrued in future years if
it becomes probable the Company performance criteria will be met. No such
compensation expense was accrued during the years ended December 31, 1996, 1995
and 1994.
10. REDEEMABLE PREFERRED STOCK
The Company converted 1,115,988 shares of its 1,150,000 issued and
outstanding shares of Preferred Stock on January 17, 1996. The Company issued
2,113,557 shares of Common Stock upon conversion of the Preferred Stock. The
remaining 34,012 shares of Preferred Stock were redeemed for cash in the amount
of $25.69 per share plus $.22 per share in accrued and unpaid dividends thereon
through the redemption date at a cost to the Company of approximately $881,000.
Holders of shares of the Preferred Stock had the option to convert any or all of
such shares of Preferred Stock into fully paid and nonassessable shares of
Common Stock of the Company prior to the redemption date at a rate of 1.89394
shares of Common Stock for each full share of Preferred Stock. No payment or
adjustment was made upon any conversion of shares of Preferred Stock on account
of any dividends on the shares surrendered for conversion, and the holder lost
any right to payment of dividends on the shares surrendered for conversion. No
fractional shares of Common Stock were issued upon conversion but, in lieu
thereof, an appropriate amount was paid in cash by the Company based upon the
reported last sales price for the shares of Common Stock on the date of
conversion. The right of holders of Preferred Stock to convert shares of
Preferred Stock into Common Stock terminated on the redemption date.
40
<PAGE> 42
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its headquarters office, office equipment and other
items under operating leases expiring at various dates during the next five
years. Management expects that, in the normal course of business, leases that
expire will be renewed or replaced by other leases. Total rent expense under
operating leases was $856,000, $560,000 and $583,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Minimum future obligations under
non-cancelable operating leases at December 31, 1996 for the following five
years are $1,022,000, $762,000, $662,000, $177,000 and $8,000, respectively.
The Company has other contingent liabilities resulting from litigation,
claims and commitments incidental to the ordinary course of business. Management
believes that the probable resolution of such contingencies will not materially
affect the financial position or results of operations of the Company.
12. BUSINESS SEGMENTS
During the three years ended December 31, 1996, the Company conducted the
following business activities:
Daywork Drilling -- domestic and foreign drilling of oil and gas wells
on a dayrate basis for major and independent oil and gas companies on land,
inland waters and offshore.
Engineering Services -- domestic and foreign drilling of oil and gas
wells on a turnkey basis for major and independent oil and gas companies on
land, inland waters and offshore and foreign well engineering and
management services.
MOPU Operations -- domestic and foreign operation of mobile offshore
production units on a dayrate basis for major and independent oil and gas
companies.
Oil and Gas -- domestic exploration, development and production of
hydrocarbon reserves.
41
<PAGE> 43
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DEPRECIATION,
OPERATING DEPLETION
INCOME IDENTIFIABLE CAPITAL AND
REVENUES (LOSS) ASSETS EXPENDITURES AMORTIZATION
-------- --------- ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1996
Daywork Drilling.................. $ 77,882 $23,048 $257,555 $158,650 $ 9,021
Engineering Services.............. 60,517 8,036 42,521 -- 32
MOPU Operations................... 4,329 2,872 35,661 7,719 793
Oil and Gas....................... 1,156 (3,108) 3,809 350 654
Corporate Office.................. -- (6,411) -- -- 111
Eliminations...................... (10,775) -- -- -- (223)
-------- ------- -------- -------- -------
Consolidated...................... $133,109 $24,437 $339,546 $166,719 $10,388
======== ======= ======== ======== =======
December 31, 1995
Daywork Drilling.................. $ 26,363 $ 2,761 $ 56,639 $ 11,814 $ 4,193
Engineering Services.............. 56,970 2,609 37,302 -- 30
MOPU Operations................... 4,920 2,492 30,017 825 1,360
Oil and Gas....................... 2,788 541 5,004 798 1,732
Corporate Office.................. -- (5,387) -- -- 98
Eliminations...................... (7,752) -- -- -- (142)
-------- ------- -------- -------- -------
Consolidated...................... $ 83,289 $ 3,016 $128,962 $ 13,437 $ 7,271
======== ======= ======== ======== =======
December 31, 1994
Daywork Drilling.................. $ 32,481 $ 7,100 $ 64,004 $ 5,692 $ 6,535
Engineering Services.............. 36,079 3,581 19,195 -- 18
MOPU Operations................... 16,020 4,415 31,854 3,263 4,617
Oil and Gas....................... 2,470 (1,439) 5,115 146 2,785
Corporate Office.................. -- (5,184) -- -- 70
Eliminations...................... (3,357) (2) (1) (1) (17)
-------- ------- -------- -------- -------
Consolidated...................... $ 83,693 $ 8,471 $120,167 $ 9,100 $14,008
======== ======= ======== ======== =======
</TABLE>
Intersegment sales were $10,775,000, $7,752,000 and $3,357,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Such intersegment
sales were accounted for at prices comparable to unaffiliated customer sales.
Identifiable assets by industry segment include assets directly identified
with those operations. Capital expenditures for the year ending December 31,
1996 include $22,215,000 of non-cash investing activity related to 1,200,000
shares of Common Stock issued in connection with the acquisition of the
Southwestern Rigs.
42
<PAGE> 44
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company derived a significant amount of its revenues from a few
customers in each of the three years ended December 31, 1996. The following
table summarizes information with respect to these major customers.
<TABLE>
<CAPTION>
% OF
CONSOLIDATED
CUSTOMER REPORTING SEGMENT REVENUES
-------- ----------------- ------------
<S> <C> <C>
December 31, 1996
Daywork Drilling and Engineering
Corpoven, S.A........................ Services 31%
December 31, 1995
Daywork Drilling and Engineering
Corpoven, S.A........................ Services 35%
Daywork Drilling and Engineering
Maraven, S.A......................... Services 19%
Texaco Exploration &
Production, Inc. ................. Engineering Services 12%
December 31, 1994
Daywork Drilling and Engineering
Corpoven, S.A........................ Services 32%
Maraven, S.A......................... Daywork Drilling 18%
Dresser-Rand......................... MOPU Operations 14%
Daywork Drilling and Engineering
CNCTI................................ Services 14%
</TABLE>
The Company settled its take-or-pay litigation with Columbia Gas
Transmission Corp., a subsidiary of Columbia Gas System Inc. ("Columbia Gas")
during 1995. The Company received $1,377,000 related to the settlement, which is
included in oil and gas revenues.
43
<PAGE> 45
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. DISTRIBUTION OF EARNINGS AND ASSETS
The following table sets forth financial information with respect to the
Company and its subsidiaries on a consolidated basis by geographical area.
<TABLE>
<CAPTION>
UNITED SOUTH
STATES AMERICA OTHER TOTAL
-------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1996
Revenues....................................... $ 59,961 $64,413 $ 8,735 $133,109
======== ======= ======= ========
Operating Income............................... $ 6,874 $19,499 $ 4,364 $ 30,737
======== ======= =======
Corporate Overhead.......................... (6,300)
--------
$ 24,437
========
Identifiable Assets at December 31, 1996....... $220,520 $79,628 $39,398 $339,546
======== ======= ======= ========
December 31, 1995
Revenues....................................... $ 30,783 $51,930 $ 576 $ 83,289
======== ======= ======= ========
Operating Income............................... $ 2,178 $ 6,081 $ 46 $ 8,305
======== ======= =======
Corporate Overhead.......................... (5,289)
--------
$ 3,016
========
Identifiable Assets at December 31, 1995....... $ 82,934 $45,434 $ 594 $128,962
======== ======= ======= ========
December 31, 1994
Revenues....................................... $ 18,092 $53,816 $11,785 $ 83,693
======== ======= ======= ========
Operating Income............................... $ 1,523 $ 4,417 $ 7,645 $ 13,585
======== ======= =======
Corporate Overhead.......................... (5,114)
--------
$ 8,471
========
Identifiable Assets at December 31, 1994....... $ 55,034 $53,623 $11,510 $120,167
======== ======= ======= ========
</TABLE>
44
<PAGE> 46
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for the years ended December 31, 1996 and 1995
are summarized as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996:
Revenues.............................. $29,078 $13,778 $43,497 $46,756(1)
Operating Income...................... 4,331 2,461 9,585 8,060(1)
Net Income............................ 3,700 1,985 4,309 4,428(1)
Net Income Applicable to Common and
Common Equivalent Shares............ 3,669 1,985 4,309 4,428(1)
Net Income per Share:
Primary............................. $ 0.62 $ 0.29 $ 0.57 $ 0.58(1)
1995:
Revenues.............................. $14,282 $13,953 $20,036 $35,018(2)
Operating Income (Loss)............... 1,418 (1,010) 917 1,691(2)(3)
Net Income (Loss)..................... 1,120 (785) 1,646 3,465(2)(3)
Net Income (Loss) Applicable to Common
and Common Equivalent Shares........ 455 (1,450) 981 2,801(2)(3)
Net Income (Loss) per Share:
Primary............................. $ 0.11 $ (0.35) $ 0.24 $ 0.68(2)(3)
Assuming Full Dilution.............. $ 0.11 $ (0.35) $ 0.24 $ 0.55(2)(3)
</TABLE>
- ---------------
(1) During the second quarter of 1996, the Company did not complete any turnkey
wells in its Engineering Services division. Fourth quarter 1996 results
include $2,941,000 in costs associated with an unsuccessful well drilled by
the Company's oil and gas business segment.
(2) Fourth quarter 1995 results include oil and gas revenues of $1,377,000
related to the Columbia Gas settlement.
(3) Fourth quarter 1995 results include net exchange rate gains of $1,169,000,
net gains on disposition of assets of $2,713,000, primarily related to the
constructive total loss of the jack-up drilling rig MARQUETTE and impairment
expenses of $737,000 related to oil and gas property write-downs.
45
<PAGE> 47
SCHEDULE II
CLIFFS DRILLING COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
BALANCE CHARGED
AT TO COSTS BALANCE
BEGINNING AND AT END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
--------- -------- ---------- -------
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
1996............................................... $797 $ -- $ -- $797
==== ==== ===== ====
1995............................................... $408 $400 $ (11) $797
==== ==== ===== ====
1994............................................... $697 $200 $(489) $408
==== ==== ===== ====
</TABLE>
46
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 -- Reorganization and Distribution Agreement dated as of
June 8, 1988 among Cleveland- Cliffs Inc ("Cleveland"),
The Cleveland-Cliffs Iron Company, Cliffs Drilling
Company, now Cliffs Resources, Inc. ("Predecessor"),
Cliffs Exploration Company, now Cliffs Oil and Gas
Company ("COGC"), Cliffs Drilling International, Inc.
("International") and New Cliffs Drilling Company, now
Cliffs Drilling Company, the Registrant (the "Company")
(incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
2.2 -- Acquisition Agreement dated as of May 13, 1996 by and
among Southwestern Offshore Corporation, Viking Supply
Ships A.S., Ocean Master III Inc., Production Partner
Inc., Trivium Investments Limited, Helge Ringdal and the
Company, Cliffs Drilling Asset Acquisition Company and
Cliffs Drilling Merger Company (incorporated by reference
to Exhibit 2.2 to the Company's Current Report on Form
8-K filed June 6, 1996).
*2.3 -- Stock Purchase Agreement dated as of December 6, 1996 by
and among Delavney-Gestao E Consultadoria LDA.,
Construtora Andrade Gutierrez S.A., Andrade Gutierrez
Perfuracao LTDA., Driltech Inc. and the Company.
*2.3.1 -- Amendment No. 1 dated as of January 24, 1997 to Stock
Purchase Agreement dated as of December 6, 1996 by and
among Delavney-Gestao E Consultadoria LDA., Construtora
Andrade Gutierrez S.A., Andrade Gutierrez Perfuracao
LTDA., Driltech Inc. and the Company.
3.1 -- Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
3.2 -- By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-1, No. 33-23508, filed under the Securities Act).
4.1 -- Certificate of Incorporation of the Company (included as
Exhibit 3.1).
4.2 -- By-Laws of the Company (included as Exhibit 3.2).
4.3 -- Certificate of Designations of the Company's $2.3125
Convertible Exchangeable Preferred Stock (incorporated by
reference to Exhibit 4.3 to the Company's Form 10-K for
the fiscal year ended December 31, 1988).
4.3.1 -- Form of Notice of Redemption for the Holders of the
Company's $2.3125 Convertible Exchangeable Preferred
Stock (incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K filed December 22, 1995).
4.4 -- Form of Indenture between the Company and MTrust Corp.,
N.A., as Trustee, relating to the Company's 9 1/4%
Convertible Subordinated Debentures due 2013
(incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
4.5 -- Specimen form of 9 1/4% Convertible Subordinated
Debenture due 2013 (incorporated by reference to pages 13
to 20 of Exhibit 4.6 to the Company's Registration
Statement on Form S-1, No. 33-23508, filed under the
Securities Act).
4.6 -- Indenture dated as of May 15, 1996 among the Company, as
issuer, Cliffs Drilling Asset Acquisition Company, Cliffs
Drilling Merger Company, International and COGC, as
subsidiary guarantors, and Fleet National Bank, as
trustee (incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K filed June 6, 1996).
</TABLE>
47
<PAGE> 49
<TABLE>
<S> <C>
4.6.1 -- Supplemental Indenture dated as of July 11, 1996 among
the Company, as issuer, Southwestern Offshore Corporation
(f/k/a Cliffs Drilling Asset Acquisition Company), Cliffs
Drilling Merger Company, International, COGC and DRL,
Inc., as subsidiary guarantors, and Fleet National Bank,
as trustee (incorporated by reference to Exhibit 4.3.1 to
the Company's Registration Statement on Form S-4, No.
333-08273 filed July 17, 1996).
*4.6.2 -- Second Supplemental Indenture dated as of January 24,
1997 among the Company, as issuer, Southwestern Offshore
Corporation (f/k/a Cliffs Drilling Asset Acquisition
Company), Cliffs Drilling Merger Company, International,
COGC, DRL, Inc. and Greenbay Drilling Company Ltd., as
subsidiary guarantors, and Fleet National Bank, as
trustee.
4.7 -- Registration Rights Agreement dated as of May 23, 1996 by
and among the Company, Cliffs Drilling Acquisition
Company, Cliffs Drilling Merger Company, International
and COGC, Jefferies & Company, Inc. and ING Baring (U.S.)
Securities, Inc. (incorporated by reference to Exhibit
4.4 to the Company's Current Report on Form 8-K filed
June 6, 1996).
4.8 -- Registration Rights Agreement dated as of May 23, 1996 by
and among the Company, Viking Supply Ships A.S. and
Production Partner Inc. (incorporated by reference to
Exhibit 4.5 to the Company's Current Report on Form 8-K
filed June 6, 1996).
10.1 -- Reorganization and Distribution Agreement dated as of
June 8, 1988 (incorporated by reference to Exhibit 2.1 to
the Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.2 -- Tax Sharing Agreement dated as of June 21, 1988 between
Cleveland, Predecessor, COGC, International and the
Company (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.3 -- Benefits Agreement dated as of June 21, 1988 between
Cleveland, Predecessor and the Company (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1, No. 33-23508, filed under the
Securities Act).
10.4 -- Drilling Agreement dated January 17, 1986 between
Predecessor and TransAmerican Natural Gas Corporation,
Debtor and Debtor-in-Possession and Certain of its
Affiliates (incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement on Form 10, File No.
0-16703).
10.5 -- Agreement dated April 28, 1987, as amended by Additional
Agreements dated August 26, 1987, and February 12, 1988,
between Predecessor and Neddrill Nederland B.V.
(incorporated by reference to Exhibit 10.7 in the
Company's Registration Statement on Form 10, File No.
0-16703).
10.6 -- Agreement dated June 1, 1990, between International and
Neddrill Turnkey Drilling B.V. (incorporated by reference
to Exhibit 10.7.3 to the Company's Form 10-K for the
fiscal year ended December 31, 1990).
10.7 -- Cliffs Drilling Company 1988 Incentive Equity Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.7.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.1 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.7.2 -- Amendment No. 2 dated May 20, 1993 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.2 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
</TABLE>
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*10.7.3 -- Amendment No. 3 dated May 22, 1996 to the Cliffs Drilling
Company 1988 Incentive Equity Plan.
10.8 -- Cliffs Drilling Company Incentive Bonus Plan
(incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.9 -- Cliffs Drilling Company Retention Plan for Salaried
Employees (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.9.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.1 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.9.2 -- Amendment No. 2 dated May 21, 1992 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.2 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.10 -- Form of Indemnification Agreement between the Company and
its officers and directors (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1, No. 33-23508, filed under the Securities Act).
10.11 -- Form of Restricted Stock Award Agreement entered into
between the Company and certain key executive officers
(incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.11.1 -- Form of Restricted Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.10.1 to the Company's Form 10-K for the
fiscal year ended December 31, 1992).
10.11.2 -- Form of Deferred Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.11.2 to the Company's Form 10-K for the
fiscal year ended December 31, 1993).
10.12 -- Exploration and Development Agreement dated as of May 25,
1988 among the Company, Mosbacher Offshore, Inc. and COGC
(incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.12.1 -- Letter Agreement dated February 15, 1991 extending
Exploration and Development Agreement (incorporated by
reference to Exhibit 10.13.1 to the Company's Form 10-K
for the fiscal year ended December 31, 1990).
10.13 -- Second Restated Credit Agreement dated as of March 28,
1994 by and among the Company, COGC, International and
Internationale Nederlanden (U.S.) Capital Corporation,
now ING (U.S.) Capital Corporation ("ING") (incorporated
by reference to Exhibit 10.14.1 to the Company's Form
10-Q for the fiscal quarter ended March 31, 1994).
10.13.1 -- First Amendment to Second Restated Credit Agreement dated
as of May 17, 1994, by and among the Company, COGC,
International and ING (incorporated by reference to
Exhibit 10.13.1 to the Company's Form 10-K for the fiscal
year ended December 31, 1994).
10.13.2 -- Second Amendment to Second Restated Credit Agreement
dated as of September 26, 1995, by and among the Company,
COGC, International and ING (incorporated by reference to
Exhibit 10.13.2 to the Company's Form 10-K for the fiscal
year ended December 31, 1995).
</TABLE>
49
<PAGE> 51
<TABLE>
<S> <C>
10.13.3 -- Third Amendment to Second Restated Credit Agreement dated
as of December 19, 1995, by and among the Company, COGC,
International and ING (incorporated by reference to
Exhibit 10.13.3 to the Company's Form 10-K for the fiscal
year ended December 31, 1995).
10.13.4 -- Fourth Amendment to Second Restated Credit Agreement
dated as of June 27, 1996, by and among the Company,
COGC, International, Southwestern Offshore Corporation,
DRL, Inc. and ING (incorporated by reference to Exhibit
10.13.3 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1996).
10.14 -- Cliffs Neddrill Central Turnkey International Joint
Venture Agreement dated December 15, 1992, by and among
International, Neddrill Turnkey Drilling B.V. and
Perforadora Central S.A. de C.V. (incorporated by
reference to Exhibit 10.22 to the Company's Form 10-K for
the fiscal year ended December 31, 1992).
10.15 -- Asset Purchase and Sale Agreement dated March 30, 1993,
between the Company, as seller, and Cerrito Investment
Corporation (incorporated by reference to Exhibit 10.23
to the Company's Form 10-Q for the fiscal quarter ended
March 31, 1993).
10.16 -- Form of Executive Agreement dated as of July 20, 1994
(incorporated by reference to Exhibit 10.20 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1994).
10.17 -- Acquisition Agreement dated as of May 13, 1996 (included
as Exhibit 2.2).
10.18 -- Stock Purchase Agreement dated as of December 6, 1996
(included as Exhibit 2.3).
10.18.1 -- Amendment No. 1 dated as of January 24, 1997 to Stock
Purchase Agreement dated December 6, 1996 (included as
Exhibit 2.3.1).
10.19 -- Indenture dated as of May 15, 1996 (included as Exhibit
4.6).
10.19.1 -- Supplemental Indenture dated as of July 11, 1996
(included as Exhibit 4.6.1).
10.19.2 -- Second Supplemental Indenture dated as of January 24,
1997 (included as Exhibit 4.6.2).
*21.1 -- Subsidiaries of the Registrant.
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Huddleston & Co., Inc.
*27 -- Financial Data Schedule.
99.1 -- Joint Venture Agreement dated as of April 18, 1996
between Well Services (Marine) Limited and Viking
Trinidad Limited, as Partners, and Well Services (Marine)
Limited, as Operator, establishing the West Indies
Drilling Joint Venture (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed June 6, 1996).
99.1.1 -- First Amendment dated effective as of April 1, 1996 to
Joint Venture Agreement between Well Services (Marine)
Limited and Viking Trinidad Limited, as Partners, and
Well Services (Marine) Limited, as Operator (incorporated
by reference to Exhibit 99.1.1 to the Company's Current
Report on Form 8-K filed June 6, 1996).
</TABLE>
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* Filed herewith
All other exhibits are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or Notes thereto.
50
<PAGE> 1
EXHIBIT 2.3
STOCK PURCHASE AGREEMENT
BY AND AMONG
DELAVNEY-GESTAO E CONSULTADORIA LDA.
CONSTRUTORA ANDRADE GUTIERREZ S.A.,
ANDRADE GUTIERREZ PERFURACAO LTDA.
DRILTECH INC.
AND
CLIFFS DRILLING COMPANY
DECEMBER 6, 1996
<PAGE> 2
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of this 6th day of December, 1996 by and between DELAVNEY-GESTAO E
CONSULTADORIA LDA., a corporation organized under the laws of the Madeira
Islands ("Seller"), CONSTRUTORA ANDRADE GUTIERREZ S.A., a corporation organized
under the laws of Brazil ("Construtora"), ANDRADE GUTIERREZ PERFURACAO LTDA., a
corporation organized under the laws of Brazil ("Andrade"), DRILTECH INC., a
corporation organized under the laws of the Cayman Islands ("Driltech"),
(Construtora, Andrade and Driltech being collectively referred to herein as
"Parent"), and CLIFFS DRILLING COMPANY, a corporation organized under the laws
of the State of Delaware ("Buyer").
W I T N E S S E T H:
WHEREAS, Andrade and Driltech collectively own all of the issued and
outstanding shares of capital stock of Seller; and
WHEREAS, Seller owns all of the issued and outstanding shares of
capital stock of GREENBAY DRILLING COMPANY LTD., a corporation organized under
the laws of the British Virgin Islands ("BVI"); and
WHEREAS, Seller desires to sell to Buyer the BVI Shares (as
hereinafter defined), and Buyer desires to acquire the BVI Shares on the terms
and conditions hereinafter set forth; and
WHEREAS, Construtora, Andrade and Driltech desire to take such
actions as are necessary or appropriate to cause Seller to effect the
transactions described herein, and in connection therewith, to guarantee
certain of the agreements and obligations of Seller in and under this
Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual terms,
covenants and conditions herein contained, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
As used in this Agreement, the following terms have the following
respective meanings:
"Affiliate" means, as to the person specified, any person controlling,
controlled by or under common control with such person, with the concept of
control in such context meaning the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of
another, whether through the ownership of voting securities, by contract or
otherwise.
"Agreement" has the meaning specified in the preamble.
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<PAGE> 3
"Andrade" has the meaning specified in the preamble.
"Applicable Environmental Laws" means all Applicable Laws (as
hereinafter defined) pertaining to health, safety or the environment.
"Applicable Laws" means any applicable law, rule, regulation, code,
governmental determination, order, governmental certification requirement or
other public limitation.
"Assets" means, collectively, the following property, assets and
rights, tangible and intangible, which are to be indirectly acquired by Buyer
by way of purchase of the BVI Shares pursuant to this Agreement:
(a) (i) the following offshore drilling rig:
ATENA
(ii) the following land rigs:
REDENCAO
SOBERANA
PROMISSAO
NOVA ERA
as more particularly described in Schedule 1(a);
(b) the Inventory (as hereinafter defined);
(c) the benefit and burden, subsequent to the Closing Date, of all
right, title and interest of the lessee under that certain equipment lease
agreement more particularly described on Schedule 1(c) (the "Lease Agreement")
existing on the Closing Date;
(d) the benefit and burden, subsequent to the Closing Date, of all
right, title and interest as drilling contractor under all the drilling
contracts or other charters or arrangements and any amendments thereto for the
employment of the Drilling Rigs (the "Drilling Contracts") existing on the
Closing Date, including without limitation the Drilling Contracts identified on
Schedule 1(d) existing on the Closing Date;
(e) the benefit and burden, subsequent to the Closing Date, of all
right, title and interest of Parent (all of which benefit and burden having
been transferred to BVI), under all other contracts relating to the Drilling
Rigs or the Business (the "Other Contracts") existing on the Closing Date,
including without limitation the Other Contracts identified on Schedule 1(e)
existing on the Closing Date;
(f) the following tangible and intangible assets used or held for
use by Parent (all of which benefit and burden having been transferred to BVI)
in connection with the Business, to the extent assignable by law:
(i) all patents, copyrights, trade secrets, know-how, inventions,
computer
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<PAGE> 4
software (including documentation and object and source codes) and
similar rights (including all registrations, applications, licenses
and rights with respect thereto) relating to, or used in connection
with the operation of, the Drilling Rigs (collectively referred to
herein as "Intellectual Property"), including without limitation the
Intellectual Property described on Schedule 1(f)(i), and all rights to
recover for infringement thereon;
(ii) the certificates, licenses, permits, consents,
operating authorities, orders, exemptions, franchises, approvals,
registrations and other authorizations and applications therefor
specifically associated with the maintenance and operation of the
Drilling Rigs as listed on Schedule 1(f)(ii) ("Permits");
(iii) all books, records, papers and instruments of BVI of
whatever nature and wherever located, including records which shall be
acquired by BVI from Parent as prior owners of any of the Assets, that
relate to ownership or operation of the Assets, including without
limitation all financial and accounting records, all records
physically located on the Drilling Rigs on the Closing Date and all
books and records relating to any employees of BVI, the purchase of
materials, supplies and services, research and development,
engineering drawings, designs, schematics, blueprints, instruction
manuals, flowsheets, models, maintenance schedules and similar
technical records, and dealings with customers, vendors and suppliers,
and including computerized books and records and other computerized
storage media and the software (including documentation and object and
source codes) used in connection therewith; and
(iv) computer inventory and maintenance programs and
computer models used in connection with the maintenance and operation
of the Drilling Rigs; and
(g) any and all insurance proceeds received or receivable
associated with or attributable to damage to the Offshore Drilling Rig prior to
the Closing Date.
"BVI" has the meaning specified in the preamble.
"BVI Shares" means all of the outstanding shares, par value US $10.00
per share, of BVI.
"Benefit Plan" means any employee benefit plan, policy, agreement or
arrangement, including without limitation, pension, stock option, share saving,
deferred compensation, profit sharing, incentive, bonus or severance pay plans
or arrangements, whether legally enforceable or not.
"Best Efforts" means a party's best efforts in accordance with
reasonable commercial practice and without the incurrence of unreasonable
expense.
"Business" means the contract drilling and production related service
businesses engaged in by Parent (as assigned to BVI) prior to the Closing Date,
only insofar as it relates to the Assets, including any business relationships
between BVI and Parent.
"Business Day" means a day on which national banks are generally open
for the transaction of business in New York, New York.
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<PAGE> 5
"Buyer" has the meaning specified in the preamble.
"Buyer Basket" has the meaning specified in Section 10.2(a).
"Claims" means any and all losses, liabilities, claims, demands,
damages, costs and expenses (including reasonable attorney's fees and
disbursements) of every kind, nature and description.
"Closing" means the consummation of the transactions contemplated by
Article II of this Agreement in accordance with the terms and upon the
conditions set forth in Article II.
"Closing Date" means the date on which the Closing is required to take
place as specified in Section 3.1.
"Consent Required Contract" has the meaning specified in Section
8.2(a).
"Construtora" has the meaning specified in the preamble.
"Contract Management Agreement" has the meaning specified in Section
8.2(b).
"Drilling Contracts" has the meaning specified in paragraph (d) of the
definition of Assets.
"Drilling Rigs" means the offshore drilling rig "ATENA", and the land
rigs "REDENCAO", "SOBERANA", "PROMISSAO" and "NOVA ERA", and related Inventory.
"Driltech" has the meaning specified in the preamble.
"Encumbrances" means liens (including without limitation maritime
liens), charges, pledges, options, mortgages, security interests, claims and
other encumbrances of every type and description, whether imposed by law,
agreement, understanding or otherwise.
"Governmental Entity" means any court or tribunal in any jurisdiction
or any public, governmental, or regulatory body, agency, department,
commission, board, bureau, or other authority or instrumentality.
"Intellectual Property" has the meaning specified in paragraph (f)(i)
of the definition of Assets.
"Inventory" means any and all drilling machinery and equipment
(including without limitation, floor tools and blow-out preventers), engines,
machinery, equipment, mooring systems and equipment, riser tensioner systems
and equipment, boots, covers, anchors, chains, cables, tackle, rigging,
apparel, furniture, computers and computer equipment, computer software,
fittings and equipment, tools, pumps and pumping equipment, living quarters
located thereon, spare components and parts, tubulars, drill pipe, drill
collars, bunkers and lubricating oils, racking, supporting inventory and
stores, and all other appurtenances thereto appertaining or belonging to one of
the Drilling Rigs or, to the extent such items are owned by BVI (or Parent, in
which case same shall be transferred to BVI), appertaining or belonging to the
Leased Drilling Rig, whether
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<PAGE> 6
located on the Drilling Rigs or the Leased Drilling Rig or located elsewhere;
and the top drive and related equipment owned by BVI and used in connection
with the Leased Drilling Rig; including without limitation that set forth in
Schedule 2; excluding, however, equipment and stores owned by third-party
suppliers (such as catering consumables, cement units or logging equipment)
described in Schedule 3, and equipment for which rental agreements are listed
on Schedule 1(e).
"Lease Agreement" has the meaning specified in paragraph (c) of the
definition of Assets.
"Leased Drilling Rig" means the drilling rig and related equipment
referenced in the Lease Agreement.
"Nonassigned Contract" has the meaning specified in Section 8.2(b).
"Offshore Drilling Rig" means the Drilling Rig specified in paragraph
(a)(i) of the definition of Assets.
"Other Contracts" has the meaning specified in paragraph (e) of the
definition of Assets.
"Permits" has the meaning specified in paragraph (f)(ii) of the
definition of Assets.
"Permitted Encumbrances" means (i) Encumbrances for taxes, assessments
and governmental charges not yet due and payable or the validity of which are
being diligently contested in good faith by appropriate proceedings; (ii)
statutory and maritime liens arising in the ordinary course of business
relating to obligations as to which there is no default on the part of BVI or
any prior owner of an Asset, excluding any mortgage; (iii) the Drilling
Contracts; (iv) the Other Contracts; and (v) any other Encumbrances, title
defects or imperfections or irregularities in title which in the aggregate do
not exceed $50,000; provided, however, that at the Closing "Permitted
Encumbrances" shall not include any Encumbrances for taxes, assessments or
governmental charges filed of record against the Assets, or statutory or
maritime liens filed of record against the Assets, unless any such
Encumbrances are being diligently contested in good faith by appropriate
proceedings.
"Petrobras" means Petroleo Brasileiro S.A. - Petrobras.
"Purchase Price" has the meaning specified in Section 2.2.
"Seller" has the meaning specified in the preamble.
"Seller Basket" has the meaning specified in Section 10.1(a).
"Taxes" means any income taxes or similar assessments, any social
security premiums or any sales, excise, occupation, use, ad valorem, property,
production, severance, transportation, employment, payroll, franchise,
municipal, value added or other tax imposed by any taxing authority, including
any interest, penalties or additions attributable thereto.
"Tax Return" means any return or report with respect to Taxes.
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<PAGE> 7
ARTICLE II
ACQUISITION TRANSACTIONS
2.1 Stock Purchase. Upon the terms and subject to the conditions
set forth in this Agreement, on the Closing Date, Seller shall sell, assign,
transfer, deliver and convey to Buyer, and Buyer shall purchase, acquire,
accept and pay for, as hereinafter provided, all of the BVI Shares, and Seller
shall deliver to Buyer certificates representing the BVI Shares, duly endorsed
for transfer.
2.2 Purchase Price. The aggregate purchase price for the BVI
Shares shall be U.S.$28,500,000 (the "Purchase Price"). At the Closing, Buyer
shall pay the Purchase Price to Seller in immediately available funds by wire
transfer to the account designated by Seller.
2.3 Earnest Money Deposit. Within seven (7) business days of
execution and delivery of this Agreement by all parties, Buyer shall deposit
with an escrow agent designated by Seller and reasonably acceptable to Buyer,
the sum of $2,850,000 as earnest money. At Buyer's option, the earnest money
deposit, plus interest earned thereon, if any, may be applied toward payment of
the Purchase Price at Closing. Except as otherwise provided in Section 9.3(a)
with respect to the forfeiture of earnest money as liquidated damages, the
earnest money deposit, plus interest earned thereon, if any, shall be refunded
to Buyer in the event of termination of this Agreement pursuant to Section 9.1
by Buyer or Seller. Buyer shall bear and pay all escrow fees and expenses
associated with the escrow arrangement described in this Section 2.3.
2.4 Limitation of Liabilities. Notwithstanding anything herein to
the contrary, Buyer shall not assume or in any way be liable or responsible for
any liabilities or obligations of Seller or Parent, except as specifically
provided herein, it being expressly acknowledged that it is the intention of
the parties hereto that all liabilities that Seller and Parent have or may have
in the future, whether fixed or contingent, and whether known or unknown, shall
be and remain the liabilities of Seller or Parent, as applicable.
ARTICLE III
THE CLOSING
3.1 Time and Place of Closing. The Closing shall take place at
the offices of Griggs & Harrison P.C., 1301 McKinney, Suite 3200, Houston,
Texas 77010, at 9:00 a.m., local time, or at such other place or time as the
parties may agree in writing, on a date on or before January 31, 1997 mutually
agreed upon by Buyer, Seller and Parent.
3.2 Deliveries by Seller. At the Closing, Seller shall deliver or
cause to be delivered to Buyer the following, dated as of the Closing Date:
(a) Stock certificate representing the BVI Shares, duly endorsed
for transfer.
(b) Written resignations of all officers and directors of BVI.
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<PAGE> 8
(c) the certificate and opinion of counsel contemplated by
Sections 7.3 and 7.4, respectively; and
(d) such other certificates, instruments and documents as may be
reasonably requested by Buyer prior to the Closing Date to carry out the intent
and purposes of this Agreement.
3.3 Deliveries by Buyer. At the Closing, Buyer shall deliver to
Seller the following:
(a) the Purchase Price by wire transfer of immediately available
funds to a bank account designated by Seller;
(b) the certificate and opinion of counsel contemplated by
Sections 6.3 and 6.4, respectively; and
(c) such other certificates, instruments and documents as may be
reasonably requested by Seller prior to the Closing Date to carry out the
intent and purposes of this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller and Parent hereby jointly and severally represent and warrant
to Buyer as follows:
4.1 Organization, Existence and Qualification.
(a) BVI is a corporation duly organized, validly existing and in
good standing under the laws of the British Virgin Islands, with all necessary
corporate power and authority to own and lease the assets it currently owns and
leases and to carry on its business as such business is currently conducted.
Seller is a corporation duly organized, validly existing and in good standing
under the laws of the Madeira Islands, with all necessary corporate power and
authority to own and lease the assets it currently owns and leases and to carry
on its business as such business is currently conducted. Construtora is a
corporation duly organized, validly existing and in good standing under the
laws of Brazil, with all necessary corporate power and authority to own and
lease the assets it currently owns and leases and to carry on its business as
such business is currently conducted. Andrade is a corporation duly organized,
validly existing and in good standing under the laws of Brazil, with all
necessary corporate power and authority to own and lease the assets it
currently owns and leases and to carry on its business as such business is
currently conducted. Driltech is a corporation duly organized, validly
existing and in good standing under the laws of the Cayman Islands, with all
necessary corporate power and authority to own and lease the assets it
currently owns and leases and to carry on its business as such business is
currently conducted.
(b) Each of BVI, Seller and Parent is duly qualified or licensed
to transact business as a foreign corporation and is in good standing in each
jurisdiction in which the character of the assets currently owned or leased by
it or the nature of the business currently conducted by it requires it to be
qualified or licensed, unless the failure to qualify or be licensed would not
reasonably be expected to have a material adverse effect on the Business taken
as a whole or create an Encumbrance on any of the Assets.
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<PAGE> 9
(c) BVI (i) has not been dissolved, and no resolution to dissolve
such company has been adopted and there is no action or request pending to
accomplish such a dissolution; (ii) is not a party to a merger, consolidation
or other amalgamation which has not become effective; (iii) has not been
declared bankrupt, and no action or request is pending to declare such company
bankrupt; or (iv) has not filed for or been granted an official moratorium.
4.2 Ownership of Shares. The BVI Shares are owned beneficially
and of record by Seller, and shall be transferred to Buyer free and clear of
all liens, mortgages, pledges, security interests, restrictions, prior
assignments, encumbrances and claims of any kind or nature whatsoever. The BVI
Shares are not subject to any restriction with respect to their
transferability.
4.3 Capitalization. The authorized capital of BVI consists solely
of 3,000,000 shares, par value US $10.00 per share, of which 2,540,000 shares
are issued and outstanding and which are owned beneficially and of record by
Seller. All of the BVI Shares have been duly authorized, validly issued (free
of all past, present and future preemptive rights), and are fully paid and
non-assessable. There are no outstanding or authorized options, warrants,
subscriptions, calls, puts, conversion or other rights, contracts, agreements,
commitments or understandings of any kind obligating either BVI or Seller to
issue, sell, purchase, return, redeem or pay any distribution or dividend with
respect to any shares of the capital of BVI or any other securities convertible
into, exchangeable for or evidencing the right to subscribe for any shares in
the capital of or other ownership interest in BVI. Seller has made available
to Buyer accurate and complete copies of the memorandum and articles of
association of BVI (certified by an appropriate official of such entity's
jurisdiction of incorporation and the secretary or an assistant secretary of
such entity, respectively) as currently in effect.
4.4 Authority, Etc. Each of Seller and Parent has all necessary
corporate power and authority to execute and deliver this Agreement and all
agreements, instruments and documents to be executed and delivered hereunder by
it, to consummate the transactions contemplated hereby and to perform all terms
and conditions hereof to be performed by it. The execution and delivery of
this Agreement and all agreements, instruments and documents to be executed and
delivered by Seller and Parent hereunder, the performance by Seller and Parent
of all the terms and conditions hereof and thereof to be performed by it, and
the consummation of the transactions contemplated hereby and thereby, have been
duly authorized by all necessary corporate action, including without limitation
by all necessary action of the board of directors (or similar body) and
shareholders of BVI, Seller and Parent, and no other corporate proceedings are
necessary with respect thereto. All persons who have executed and delivered
this Agreement, and all persons who will execute and deliver the other
agreements, documents and instruments to be executed and delivered hereunder by
Seller and Parent have been duly authorized to do so by all necessary actions
on the part of Seller or Parent, as applicable.
4.5 Enforceable Agreements. This Agreement constitutes, and each
other agreement or instrument to be executed hereunder by Seller or Parent,
when so executed and delivered, will constitute, the legal, valid and binding
obligation of Seller and Parent, enforceable against it in accordance with its
terms, except to the extent the enforceability hereof and thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or other laws
relating to or affecting creditors' rights generally or by general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
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4.6 No Violations. Except as set forth on Schedule 4.6, the
execution and delivery of this Agreement by Seller and Parent, the fulfillment
of and compliance by them with the terms and conditions hereof and the
consummation of the transactions contemplated hereby will not:
(a) violate any of the terms of the memorandum and articles of
association, articles of incorporation, bylaws or other charter documents of
BVI, Seller or Parent;
(b) (i) result in a breach of or constitute a default under
(whether with notice or the lapse of time or both) any note, bond, mortgage,
loan agreement, indenture or other instrument evidencing borrowed money to
which BVI, Seller or Parent is a party or by which BVI, Seller or Parent is
bound or to which any of the Assets is subject, which breach or default would
reasonably be expected to have a material adverse effect on the ownership of
the Assets or the operation of the Business, or (ii) result in the creation of
any Encumbrance on any of the Assets, or otherwise give any person the right to
terminate any Lease Agreement, Drilling Contract, Permit or Other Contract; or
(c) to the knowledge of Seller or Parent, violate any national or
local law, statute, rule or administrative regulation or any judgment, order,
injunction or decree of any Governmental Entity applicable to or binding upon
Seller or Parent, or the assets of BVI, Seller or Parent, which violation would
reasonably be expected to have a material adverse effect on the ownership or
operation of the Assets or the operation of the Business.
4.7 Ownership of Assets. As of the date of this Agreement, BVI
owns good and marketable title to the Assets, free and clear of all
Encumbrances except for Permitted Encumbrances and Encumbrances described in
Schedule 8.8. As of the Closing Date, BVI will own good and marketable title
to the Assets, free and clear of all Encumbrances except for Permitted
Encumbrances and Encumbrances, if any, created or permitted to be imposed by
Buyer.
4.8 Drilling Rig Classifications and Certifications.
(a) The classification of each Drilling Rig and, if applicable,
the flag under which it is documented is set forth on Schedule 1(a). Set forth
on Schedule 4.8 is a summary of the recommendations to class for each of the
Drilling Rigs based on the most recent survey of such Drilling Rig as of the
date of this Agreement, as well as a listing of required certifications and the
expiration date for each such certification. Each of the Drilling Rigs has or
will have at Closing in full force and effect in the name of BVI all required
certifications necessary for its present operations (with the exception of any
thereof that may be affected by any loss or damage referred to in Section 8.5).
(b) The Leased Drilling Rig has been maintained in, and at Closing
will be in, the same good order, condition and repair as existed upon
commencement of the Lease Agreement, ordinary wear and tear excepted. The
Leased Drilling Rig has or will have at Closing in full force and effect such
permits, class certifications and approval requirements as existed upon
commencement of the Lease Agreement and as may be required in the jurisdiction
in which the Leased Drilling Rig presently operates.
(c) Except as disclosed to Buyer in writing at or prior to the
Closing, to the knowledge of Seller, none of the Drilling Rigs or the Leased
Drilling Rig has suffered any material damage to its condition (excepting
normal wear and tear) since November 5, 1996, the date of completion of
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Buyer's inspection of the Drilling Rigs and the Leased Drilling Rig. For
purposes of the preceding sentence, material damage is defined as any item of
damage not covered by insurance that would require the expenditure of more than
$100,000 to repair.
4.9 Inventory.
(a) As of the date of this Agreement, BVI owns good and
marketable title to the Inventory, free and clear of all Encumbrances except
for Permitted Encumbrances and Encumbrances described in Schedule 8.8. As of
the Closing Date, BVI will own good and marketable title to the Inventory, as
such Inventory may be reduced through the consumption thereof, or increased
through replacement thereof or additions thereto, in the ordinary course of the
maintenance and operation of the Drilling Rigs through the Closing Date, free
and clear of all Encumbrances except for Permitted Encumbrances and
Encumbrances, if any, created or permitted to be imposed by Buyer.
(b) On the date of this Agreement, BVI maintained Inventory with
respect to the Drilling Rigs as specified on Schedule 2, which Inventory is in
such amounts and of such quality (i) as would comply with any applicable
Drilling Contract or Other Contract and (ii) as is consistent with past
practice.
4.10 Certain Property on Drilling Rigs. Since November 5, 1996,
the date of completion of Buyer's inspection of the Drilling Rigs and the
Leased Drilling Rig, subject to normal wear and tear and consumption in the
ordinary course of business, neither Seller nor Parent has removed or permitted
to be removed any tangible property from any of the Drilling Rigs or the Leased
Drilling Rig, which tangible property has a value equal to or greater than
$50,000 in the aggregate for all the Drilling Rigs and the Leased Drilling Rig,
except for any such tangible property relocated from one Drilling Rig to
another Drilling Rig or transferred to Inventory or consumed in the operation
of the Business.
4.11 Contracts. Seller has made available to Buyer for review
complete and correct copies of the Lease Agreement, Drilling Contracts and
Other Contracts, and all assignments thereof. Except as set forth on Schedule
4.11, all consents of any person required to complete transfer to BVI of each
of the Lease Agreement, Drilling Contracts and Other Contracts have been
received by BVI. As of the Date of this Agreement, each of the Lease
Agreement, Drilling Contracts and Other Contracts is valid, binding and in full
force and effect against BVI (or, with respect to certain Consent Required
Contracts, Andrade or Driltech), and, to the knowledge of Seller and Parent, is
valid, binding and in full force and effect against the other party thereto.
As of the Closing Date, each of the Lease Agreement, Drilling Contracts and
Other Contracts will be valid, binding and in full force and effect against BVI
(or, with respect to certain Non-Assigned Contracts, Andrade or Driltech), and
to the knowledge of Seller and Parent, valid, binding and in full force and
effect against the other party thereto. Except as set forth on Schedule 4.11,
neither BVI, Andrade, nor Driltech, as applicable, is in default in any
material respect, and no notice of alleged default has been received by Seller,
Parent or BVI under any of the Lease Agreement, Drilling Contracts or Other
Contracts, and no other party thereto is, to the knowledge of Seller and
Parent, in default thereunder in any material respect, and to the knowledge of
Seller and Parent, there exists no condition or event which, with or without
notice or lapse of time or both, would (i) constitute a material default under
any of the Lease Agreement, Drilling Contracts or Other Contracts by Seller,
Andrade, Driltech or BVI or any other parties thereto, or (ii) otherwise give
any other party to such a contract the right to charge penalties to Seller,
Andrade, Driltech or BVI or
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reduce the rates that would otherwise be payable to Seller, Andrade, Driltech
or BVI under such a contract.
4.12 Intellectual Property. Except for the Intellectual Property
set forth on Schedule 1(f)(i), Seller and BVI do not own, hold, use or have
pending any material Intellectual Property in connection with the operation of
the Assets or the Business. As of the Date of this Agreement, BVI owns or has
rights to use, and as of the Closing Date, BVI will own or have rights to use,
all Intellectual Property, free from burdensome restrictions, that are
necessary for the operation of the Assets and the Business as presently
operated. Neither Seller nor BVI is infringing upon the Intellectual Property
of any third party or has received any written notice or claim of any
infringement, violation, misuse or misappropriation in connection with the
operation of the Assets or the Business of any Intellectual Property owned or
purported to be owned by any other person.
4.13 Performance Bonds; Letters of Credit. Set forth on Schedule
4.13 is a listing of all performance and similar bonds and letters of credit
currently posted by, or any certificate of financial responsibility or similar
evidence of financial accountability obtained or procured by, Seller, Parent or
BVI for the purpose of operating the Drilling Rigs or otherwise conducting the
Business.
4.14 Insurance. Seller, Parent and BVI, as applicable, maintain
with sound and reputable insurers, and there are currently in full force and
effect, policies of insurance with respect to the Assets and Business against
such casualties and contingencies of such types and in such amounts as are
customary for drilling contractors of similar size engaged in similar
operations. All premiums due and payable with respect to such policies have
been timely paid. No notice of cancellation of, or indication of any intention
not to renew, any such policy has been received by Seller, Parent or BVI. Set
forth on Schedule 4.14 is a summary description of (i) the insurance maintained
by Seller, Parent and BVI covering each of the Drilling Rigs and/or the
operation of the Business and (ii) all outstanding insurance claims associated
with each of the Drilling Rigs.
4.15 Litigation.
(a) Except for litigation described on Schedule 4.15(a), there is
no litigation and there are no arbitration proceedings or governmental
proceedings, claims, suits or investigations pending, instituted or, to the
knowledge of Seller and Parent, overtly threatened against any of the Assets or
against Seller, Parent or BVI relating to the ownership of the Assets or
operation of the Business. None of such litigation, proceedings, claims, suits
or investigations (i) seeks permanent injunctive relief, (ii) if adversely
determined would delay or prevent the consummation of the transactions
contemplated by this Agreement, or (iii) would reasonably be expected to have a
material adverse effect on BVI or create an Encumbrance, or otherwise affect
the ownership or operation of, any of the Assets.
(b) Except for matters described on Schedule 4.15(b), neither
Seller, Parent, BVI nor the Assets, is subject to any judicial or
administrative judgment, order, decree or restraint in a manner that is
material and adverse to Seller, Andrade, Driltech, BVI or the Business taken as
a whole, or that would create an Encumbrance, or otherwise affect the ownership
or operation of, any of the Assets. Except as referred to on Schedule 4.15(b),
neither Seller, Andrade, Driltech, BVI, nor any Affiliate of Seller, Parent or
BVI, has received any notifications or charges in writing from any Governmental
Entity involving alleged violations of or alleged obligations to remediate
under
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occupational safety and health or water quality or other environmental matters
that materially and adversely affect the conduct by Seller, Andrade, Driltech
or BVI of its operations or that have not been finally dismissed or otherwise
disposed of.
4.16 Governmental Approval. Except as provided in Schedule 4.16,
no consent, approval, waiver, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required to be obtained
or made in connection with the execution and delivery of this Agreement by
Seller and Parent or the consummation by any Seller and Parent of the
transactions contemplated hereby.
4.17 Compliance With Laws.
(a) Except as set forth on Schedule 4.17(a), neither Seller,
Parent nor BVI is in violation of or in default under any Applicable Law
relating to the ownership of the Assets or operation of the Business,
including, without limitation, any applicable maritime law relating to the
Offshore Drilling Rig, which violation or default materially and adversely
affects the ownership of the Assets or operation of the Business, and no claim
is pending or, to the knowledge of Seller and Parent, overtly threatened with
respect to any such matters which if determined adversely to Seller, Parent or
BVI would have such effect.
(b) Without limiting Section 4.17(a) and except as set forth on
Schedule 4.17(b), Seller, Parent and BVI, as applicable, have conducted the
Business in accordance with Applicable Environmental Laws, and neither Seller,
Parent nor BVI is subject to any pending or, to the knowledge of Seller and
Parent, overtly threatened investigation or inquiry by any Governmental Entity,
or to any remedial obligations, under any Applicable Environmental Laws.
4.18 Absence of U.S. Nexus. No sales in or into the United States
by Parent, Seller or any of their Affiliates during Parent's most recent fiscal
year were attributable to the Assets. BVI neither (i) holds assets located in
the United States having an aggregate book value of $15 million or more, nor
(ii) made aggregate sales in or into the United States of $25 million or more
during its most recent fiscal year.
4.19 Employees and Employee Benefits. Except as set forth on
Schedule 4.19, BVI has no employees and no employee Benefit Plans.
4.20 Labor Relations.
(a) Except as disclosed on Schedule 4.20(a), (i) there are no
collective bargaining agreements or other similar agreements, arrangements, or
understandings, written or oral, with employees as a group to or by which
Seller, Andrade, Driltech or BVI is a party or is bound; (ii) no employees of
Seller, Andrade, Driltech or BVI are represented by any labor organization,
collective bargaining representative or group of employees; (iii) no labor
organization, collective bargaining representative or group of employees claims
to represent a majority of the employees of Seller, Andrade, Driltech or BVI;
(iv) neither Seller, Andrade, Driltech nor BVI has been involved with any
representational campaign by any union or other organization or group seeking
to become the collective bargaining representative of any of its employees, or
been subject to or, to the knowledge of Seller, Andrade and Driltech,
threatened with any strike or other concerted labor activity or dispute; and
(v) neither Seller, Andrade, Driltech nor BVI is obligated to bargain
collectively with respect to wages, hours and other terms and conditions of
employment with any recognized or
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certified labor organization, collective bargaining representative or group of
employees.
(b) Each of Seller, Andrade, Driltech and BVI is in compliance
with all Applicable Laws pertaining to employment and employment practices and
wages, hours, and other terms and conditions of employment in respect of its
employees, and neither Seller, Andrade, Driltech nor BVI is engaged in any
unfair labor practices or unlawful employment practices. There is no pending
or, to the knowledge of Seller, Andrade and Driltech, threatened action, claim,
investigation or inquiry by or before, and neither Seller, Andrade, Driltech
nor BVI is subject to any judgment, order, writ, injunction or decree of or
inquiry from, any Governmental Entity in connection with any current, former or
prospective employee.
4.21 Tax Matters. Except as disclosed on Schedule 4.21:
(a) Each of Seller, Parent and BVI has (and as of the Closing Date
will have) duly filed all federal, state, local and foreign Tax Returns
required to be filed by or with respect to it with the applicable taxing
authority, and no extensions with respect to such Tax Returns have (or as of
the Closing Date will have) been requested or granted;
(b) Each of Seller, Parent and BVI has (and as of the Closing Date
will have) paid all Taxes due, or claimed by any taxing authority to be due,
from or with respect to it, except Taxes that are being contested in good faith
by appropriate legal proceedings;
(c) There has been no issue raised or adjustment proposed (and
none is pending) by any taxing authority in connection with any of the Tax
Returns of Seller, Parent or BVI that has not been resolved or paid, and no
such issues raised could reasonably be expected to result in a proposed tax
deficiency to Seller, Parent or BVI for any other period not so examined;
(d) All Taxes that are required to be withheld or collected by
Seller, Parent or BVI have been duly withheld or collected and to the extent
required, have been paid or properly segregated or deposited as required by
Applicable Law. Each of Seller, Parent and BVI has (and as of the Closing Date
will have) made all deposits required with respect to Taxes;
(e) Neither Seller, Parent nor BVI has waived the statute of
limitations on the right of any taxing authority in connection with its Tax
Returns or otherwise made any special arrangements with any taxing authority.
4.22 Financial Statements. On the Closing Date, Seller will have
delivered to Buyer accurate and complete copies of BVI's unaudited balance
sheet as of the Closing Date, and the related unaudited consolidated statements
of income, stockholders' equity, and cash flows/changes in financial position
for the period of inception through the Closing Date, and the notes and
schedules thereto. The financial statements will (i) have been prepared from
the books and records of BVI in conformity with generally accepted accounting
principles applied on a basis consistent throughout the periods involved, and
(ii) accurately, completely and fairly present consolidated financial position
of BVI as of the respective dates thereof and its consolidated results of
operations and cash flows/changes in financial position for each of the periods
then ended.
4.23 Liabilities and Commitments.
(a) Seller was incorporated on November 4, 1996. Since the date
of its incorporation,
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Seller has conducted no business other than to acquire and hold the BVI Shares.
Seller has no liabilities, obligations, contracts or commitments (whether
accrued, absolute, contingent, unliquidated, or otherwise, whether or not known
and whether due or to become due), except liabilities, obligations, contracts
and commitments reflected on Schedule 4.23(a).
(b) BVI was incorporated on November 12, 1996. Since the date of
its incorporation, BVI has conducted no business other than to acquire, own and
operate the Assets. BVI has no liabilities, obligations, contracts or
commitments (whether accrued, absolute, contingent, unliquidated, or otherwise,
whether or not known and whether due or to become due), except liabilities,
obligations, contracts and commitments reflected on Schedule 4.23(b).
4.24 Ordinary Course; Absence of Material Adverse Change. Since
the date of the most recent financial statements of BVI delivered to Buyer
pursuant to Section 4.22, each of Seller and BVI has conducted its business
only in the ordinary and usual course, and there has been no material adverse
change in the Business, Assets, operations, prospects or condition (financial
or otherwise) of such Seller, Parent or BVI. There is no fact, development or
threatened development known to Seller or Parent that would materially
adversely affect the Business, Assets, operations, or prospects of Seller,
Parent or BVI other than such conditions as may affect the economy generally.
4.25 No Brokers. Except for Bassoe Offshore (whose fee in respect
of transactions contemplated hereby shall be paid solely by Seller), neither
Seller nor Parent has employed or authorized anyone to represent it as a broker
or finder in connection with the transactions contemplated by this Agreement,
and no broker or other person is entitled to any commission or finder's fee
from Seller or Parent in connection with such transactions. Seller and Parent
jointly and severally agree to indemnify and hold harmless BVI and Buyer from
and against any and all losses, claims, demands, damages, costs and expenses,
including, without limitation, reasonable attorneys' fees and expenses, which
BVI or Buyer may sustain or incur as a result of any claim for a commission or
fee by a broker or finder acting on behalf of Seller or Parent.
4.26 Disclosure. No representation or warranty made by Seller or
Parent in this Agreement and no statement of Seller or Parent or its
representatives contained in any document, certificate or other writing
furnished or to be furnished by Seller or Parent pursuant hereto or in
connection herewith, contains or will contain, at the time of delivery, any
untrue statement of a material fact or omits or will omit, at the time of
delivery, to state any material fact (other than those facts generally
recognized to be industry risks normally associated with the contract drilling
business) necessary in order to make the statements contained therein, in light
of the circumstances under which they are made, not misleading. Any
information furnished in any schedule with reference to any heading or with
reference to any section of this Agreement, shall be deemed to modify,
supplement and clarify each provision of this Agreement to which such
disclosure could be applicable.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
5.1 Organization, Existence and Qualification. Buyer is a
corporation duly organized, validly existing and in good standing under the
laws of Delaware, with all necessary corporate
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power and authority to own and lease the assets it currently owns and leases
and to carry on its business as such business is currently conducted. Buyer is
duly qualified or licensed to transact business as a foreign corporation and is
in good standing in all jurisdictions in which the character of the assets
currently owned or leased by it or the nature of the business currently
conducted by it requires it to be qualified or licensed, unless the failure to
qualify or be licensed would not reasonably be expected to have a material
adverse effect on the business or financial condition of such Buyer and its
subsidiaries taken as a whole.
5.2 Authority; Etc. Buyer has all necessary corporate power and
authority to execute and deliver this Agreement and all agreements, instruments
and documents to be executed and delivered hereunder by it, to consummate the
transactions contemplated hereby and to perform all terms and conditions hereof
to be performed by it. The execution and delivery of this Agreement and all
agreements, instruments and documents to be executed and delivered by Buyer
hereunder, the performance by Buyer of all the terms and conditions hereof and
thereof to be performed by it, and the consummation of the transactions
contemplated hereby and thereby have been duly authorized and approved by all
necessary corporate action, including without limitation by all necessary
action of the board of directors of Buyer, and no other corporate proceedings
of Buyer are necessary with respect thereto. All persons who have executed and
delivered this Agreement, and all persons who will execute and deliver the
other agreements, documents and instruments to be executed and delivered by
Buyer hereunder, have been duly authorized to do so by all necessary actions on
the part of Buyer.
5.3 Enforceable Agreement. This Agreement constitutes, and each
other agreement or instrument to be executed by Buyer hereunder, when so
executed and delivered, will constitute, the legal, valid and binding
obligation of Buyer, enforceable against it in accordance with its terms,
except to the extent the enforceability hereof and thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization or other laws relating to or
affecting creditors' rights generally or by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
5.4 No Violations. The execution and delivery of this Agreement
by Buyer, the fulfillment of and compliance by it with the terms and conditions
hereof and the consummation by it of the transactions contemplated hereby will
not:
(a) violate any of the terms of the certificate of incorporation
or bylaws of Buyer;
(b) result in a breach of or constitute a default under (whether
with notice or the lapse of time or both) any note, bond, mortgage, loan
agreement, indenture or other instrument evidencing borrowed money to which
Buyer is a party or by which Buyer is bound or to which any of its assets is
subject or result in the creation of any Encumbrance on any of its assets,
which breach or default would reasonably be expected to have a material adverse
effect on Buyer's business or financial condition or the results of its
operations or on its ability to perform its obligations hereunder; or
(c) to knowledge of Buyer, violate any federal or state law,
statute, rule or administrative regulation or any judgment, order, injunction
or decree of any Governmental Entity applicable to or binding upon Buyer or any
of its subsidiaries, except that no representation is made as to the
application of any United States antitrust law or regulation to the
transactions contemplated by this Agreement, which violation would reasonably
be expected to have a material adverse effect on Buyer's business or financial
condition or the results of its operations or on its
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ability to perform its obligations hereunder.
5.5 Governmental Approval. No consent approval, waiver, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required to be obtained or made in connection with the execution and
delivery of this Agreement by Buyer or the consummation by Buyer of the
transactions contemplated hereby.
5.6 Litigation. There is no litigation and there are no
arbitration proceedings or governmental proceedings, suits or investigations
pending, instituted or, to the knowledge of Buyer overtly threatened against
any Buyer or its subsidiaries that, if adversely determined, would delay or
prevent the consummation of the transactions contemplated by this Agreement.
5.7 No Brokers. Buyer has not employed or authorized anyone to
represent it as a broker or finder in connection with the transactions
contemplated by this Agreement, and no broker or other person is entitled to
any commission or finder's fee from Buyer in connection with such transactions.
Buyer agrees to indemnify and hold harmless Seller and Parent from and against
any and all losses, claims, demands, damages, costs and expenses, including,
without limitation, reasonable attorneys' fees and expenses, which Seller or
Parent may sustain or incur as a result of any claim for a commission or fee by
a broker or finder acting on behalf of Buyer.
5.8 Disclosure. No representation or warranty made by Buyer in
this Agreement and no statement of Buyer or its representatives contained in
any document, certificate or other writing furnished or to be furnished by
Buyer pursuant hereto or in connection herewith, contains or will contain, at
the time of delivery, any untrue statement of a material fact or omits or will
omit, at the time of delivery, to state any material fact (other than those
facts generally recognized to be industry risks normally associated with the
contract drilling business) necessary in order to make the statements contained
therein, in light of the circumstances under which they are made, not
misleading.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF SELLER
The obligations of Seller and Parent to proceed with the Closing
contemplated by this Agreement are subject to the satisfaction, on or before
the Closing Date, of all the following conditions, any one or more of which may
be waived, in whole or in part, by Seller:
6.1 Accuracy of Representations and Warranties. The
representations and warranties of Buyer contained in this Agreement shall be
true and correct in all material respects as of the Closing Date with the same
effect as though made on the Closing Date, except as otherwise specifically
contemplated by this Agreement.
6.2 Covenants and Agreements Performed. Buyer shall have complied
on or before the Closing Date in all material respects with each of its
covenants or agreements contained in this Agreement to be performed on or
before the Closing Date.
6.3 Officer's Certificate. Seller shall have received a
certificate in the form of Exhibit 6.3 hereto, dated as of the Closing Date, of
the President or a Vice President of Buyer certifying as
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to the matters specified in Sections 6.1 and 6.2.
6.4 Legal Opinion. Seller shall have received from Griggs &
Harrison P.C., counsel to Buyer, an opinion dated the Closing Date,
substantially in the form of Exhibit 6.4 hereto.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF BUYER
The obligations of Buyer to proceed with the Closing contemplated by
this Agreement are subject to the satisfaction, on or before the Closing Date,
of all the following conditions, any one or more of which may be waived, in
whole or in part, by Buyer:
7.1 Accuracy of Representations and Warranties. The
representations and warranties of Seller and Parent contained in this Agreement
shall be true and correct in all material respects as of the Closing Date with
the same effect as though made on the Closing Date, except as otherwise
specifically contemplated by this Agreement.
7.2 Covenants and Agreements Performed. Seller and Parent shall
have complied on or before the Closing Date in all material respects with each
of its covenants or agreements contained in this Agreement to be performed on
or before the Closing Date.
7.3 Officer's Certificate.
(a) Buyer shall have received a certificate in the form of Exhibit
7.3(a) hereto, dated as of the Closing Date, of the President or a Vice
President of Seller certifying as to the matters specified in Sections 7.1 and
7.2.
(b) Buyer shall have received a certificate in the form of Exhibit
7.3(b) hereto, dated as of the Closing Date, of the President or a Vice
President of Construtora certifying on behalf of Parent as to the matters
specified in Sections 7.1 and 7.2.
7.4 Legal Opinion. Buyer shall have received from counsel to
Seller and Parent, an opinion dated the Closing Date, substantially in the form
of Exhibit 7.4 hereto.
7.5 Absence of Material Adverse Change. Since the date of this
Agreement, there shall not have occurred a material adverse change (other than
such conditions as may affect the economy generally) in the Business, Assets,
operations, prospects or condition (financial or otherwise) of Seller, Parent
or BVI, including without limitation (i) an actual, constructive, arranged or
compromised total loss (as determined by the insurance underwriter's marine
surveyor) of the Offshore Drilling Rig, or (ii) a cancellation, termination or
recision by Petrobras or Maraven of either of the currently existing Drilling
Contracts regarding the Offshore Drilling Rig or the HERCULES RIG 1.
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ARTICLE VIII
COVENANTS AND AGREEMENTS OF THE PARTIES BEFORE,
RELATING TO AND SUBSEQUENT TO THE CLOSING
Seller and Buyer hereby covenant and agree as follows:
8.1 Actions with Respect to Closing. Seller and Parent will each
use its Best Efforts to obtain the satisfaction of the conditions to Closing
applicable to Seller and Parent set forth in Article VII as soon as
practicable. Buyer will use its Best Efforts to obtain the satisfaction of the
conditions to Closing applicable to Buyer set forth in Article VI as soon as
practicable.
8.2 Third Party Consents.
(a) Notwithstanding any other provision hereof, if the assignment
or attempted assignment by Parent to BVI of any Lease Agreement, Drilling
Contract, Other Contract, Permit, license or other right without the consent of
any party would constitute a breach thereof or a violation of any law or any
judgment, decree, order, writ, injunction, rule or regulation of any
Governmental Entity (a "Consent Required Contract"), each of Seller and Parent
agrees that between the date hereof and the Closing Date it will use its Best
Efforts to obtain or cause to be obtained the necessary consents to the
transfer of any Consent Required Contract.
(b) In the event that Seller and Parent are unable prior to the
Closing Date to obtain consents to the transfer from Parent to BVI or its
designee of any Consent Required Contract, the terms of this Section 8.2(b)
shall govern the transfer of the benefits of each such contract. Seller and
Parent shall use their Best Efforts after the Closing Date to obtain any
required consent to the assignment to, and assumption by, BVI or its designee
of each Consent Required Contract that is not transferred to BVI or its
designee on or before the Closing Date (a "Nonassigned Contract"). Parent and
BVI shall enter into an agreement on the Closing Date with respect to each
Nonassigned Contract ("Contract Management Agreement") providing that until the
rights and obligations of Parent thereunder are transferred to or assumed by
BVI or its designee, or, if earlier, until termination of such Nonassigned
Contract, Parent shall continue to perform its obligations thereunder and BVI
shall provide such assistance, at the sole expense of BVI, as Parent may
reasonably request for such purpose, including without limitation the use of
personnel and assets (by lease or otherwise) of BVI and its Affiliates of the
type and quantity that Parent would have used to perform such Nonassigned
Contract had the transactions contemplated by this Agreement not been
consummated. Such agreement shall also provide that in consideration of the
provision of such assistance, Parent shall, promptly after payment of any
amounts to Parent by the other party to a Nonassigned Contract, pay such
amounts to BVI or its designee after subtracting therefrom the costs and
expenses as described in the Contract Management Agreement.
(c) In the event that Seller and Parent are unable to obtain
consent of Petrobras to the transfer from Parent to BVI or its designee of any
Drilling Contract between Parent and Petrobras within three months of the
Closing Date, then notwithstanding the provisions of Section 8.2(b), (i) the
term "Assets" shall be deemed not to include such Drilling Contract(s), the
related Lease Agreement, or the top drive and related equipment associated with
the Leased Drilling Rig; (ii) Buyer shall reassign or cause BVI to reassign to
Seller or Parent all right, title and interest of lessee in and to the Lease
Agreement and the top drive and related equipment associated with the Leased
Drilling Rig; and (iii) if the inability to obtain consent of Petrobras is not
due to the absence of a
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Brazilian Affiliate of Buyer acceptable to Petrobras, then Seller and/or Parent
shall pay to Buyer liquidated damages in the amount of US $1,500,000. Any and
all receipts and disbursements associated with such Drilling Contract and the
related Lease Agreement during such three-month period shall be for the account
of Seller or Parent. Accordingly, Buyer agrees to promptly remit or cause BVI
to promptly remit to Seller or Parent, and Seller and Parent agree to promptly
remit to Buyer or BVI, as the case may be, such amounts as may be required to
cause the economic benefits and losses associated with such Drilling Contract
and the related Lease Agreement during such three-month period to be borne by
and to accrue to Seller and/or Parent.
8.3 Access; Confidentiality. Until Closing, Seller and Parent
shall give the officers, attorneys, accountants and other authorized
representatives of Buyer full access, during normal business hours upon Buyer's
reasonable prior notice, to all of the records, properties and personnel of
Seller, BVI and Parent; provided however that access to records of Seller and
Parent shall be limited to those records related to the Assets. Seller and
Parent will furnish the representatives of Buyer during such period with all
information as such representatives may reasonably request regarding BVI, the
Business and the Assets and shall use its Best Efforts to cause the employees,
accountants and attorneys of Seller and Parent to cooperate fully with such
representatives in connection with such review and examination and to make full
disclosure to Buyer of all material facts known to them regarding BVI, the
Assets and the Business; provided, however, that Buyer will hold in strict
confidence and not use for purposes other than those contemplated by this
Agreement the documents and information furnished concerning Seller, Parent,
the Business or the Assets. Such confidence shall be maintained for a least
four years. If the transactions contemplated by this Agreement shall not be
consummated, all such documents and all copies thereof shall immediately
thereafter be returned to Seller or Parent, as applicable. The confidentiality
obligations set forth in the preceding sentence shall not apply to information
(i) in the public domain, (ii) obtained by Buyer from a third party source with
the right to disclose such information, or (iii) with respect to which
disclosure is required by law in the opinion of Buyer's counsel.
8.4 Conduct of Business and Preservation of Assets. Until
Closing, Seller, Parent and Buyer agree to cooperate with each other to effect
an orderly transition of the ongoing operation of the Assets (including jointly
contacting customers of the Business and informing them of this Agreement and
the transfer to Buyer of the Business), and Seller and Parent shall use their
Best Efforts to preserve, maintain and protect the Business and the Assets, and
to maintain the relationships with existing employees, customers and suppliers
relating to the Business and the Assets. From and after the date of this
Agreement and until the Closing Date, and except as otherwise contemplated by
this Agreement, (a) Seller, Parent and BVI will conduct the Business only in
the ordinary course, and (b) without the prior express written consent of
Buyer, neither Seller nor Parent will, and neither Seller nor Parent will
permit any of its Affiliates (including BVI) to, (i) make any material change
in the conduct of the ongoing operation of the Business, (ii) enter into any
new drilling contracts with respect to the Drilling Rigs, unless such contracts
may reasonably be expected to have a duration of 90 days or less, enter into
any other contracts or agreements with respect to the Drilling Rigs other than
in the ordinary course of business, or amend, in any respect adverse to Seller,
Parent, BVI or Buyer, any Drilling Contract or Other Contract, (iii) move any
Drilling Rig to a different geographic region, (iv) merge or consolidate with
or into another person or entity, sell all or substantially all of its assets,
liquidate or dissolve or seek protection from creditors under applicable
bankruptcy law, or (v) commit itself to do any of the foregoing.
8.5 Drilling Rig Loss. Seller and Parent agree to maintain or
cause BVI to maintain
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insurance on each of the Drilling Rigs of a type and in an amount not less than
the amount set forth on Schedule 4.14 through the Closing Date. Subject to the
provisions of Sections 7.5 and 9.1(c)(ii):
(a) If the Offshore Drilling Rig shall become an actual,
constructive, arranged or compromised total loss (as determined by the
insurance underwriter's marine surveyor) prior to the Closing Date, Buyer shall
have the right to terminate this Agreement.
(b) If any Drilling Rig other than the Offshore Drilling Rig shall
become an actual, constructive, arranged or compromised total loss (as
determined by insurance underwriter's surveyor) prior to the Closing Date, (i)
the Purchase Price for the BVI Shares shall not be reduced by any amount, (ii)
Parent shall pay to Buyer at the Closing liquidated damages for each such lost
Drilling Rig in the amount of US $1,500,000 per unit with respect to the
REDENCAO and/or the SOBERANA and in the amount of US $2,000,000 per unit with
respect to the PROMISSAO and/or the NOVA ERA, (iii) the term "Assets" shall be
deemed not to include such Drilling Rig, and (iv) the other provisions of this
Agreement shall continue to be in effect and the Closing shall take place in
the manner contemplated herein.
(c) If any Drilling Rig sustains damage not amounting to an
actual, constructive, arranged or compromised total loss prior to the Closing
Date;
(i) Seller and Parent shall have the option but not the
obligation to repair or to cause to be repaired the damage to the
Drilling Rig and to receive the full amount of any insurance proceeds
recoverable with respect to such damage, in which event the Purchase
Price shall not be reduced and the Closing Date may be extended as
reasonably necessary for Seller and Parent to accomplish such repairs;
or
(ii) if Seller and Parent shall elect not to repair or to
cause to be repaired the damage to the Drilling Rigs, Buyer may at its
option
(A) terminate this Agreement; or
(B) require Seller and/or Parent to assign to BVI
immediately prior to Closing all rights to receive insurance
proceeds in respect of such loss or damage and to pay to Buyer
at Closing from the Purchase Price the amount of any
deductible or deductibles (not to exceed $750,000) under the
terms of the relevant policy or policies in force and effect
on the date of such damage; provided that such amount required
to be paid by Seller or Parent shall be offset by any amounts
paid through the Closing Date by Seller or Parent for such
repair; and further provided that nothing in this paragraph
(B) shall relieve Seller or Parent of the obligation to
maintain insurance coverage as provided in the first sentence
of Section 8.5.
8.6 Removal of Outstanding Recommendations. Seller and Parent
agree to remove or cause the removal at its expense of any outstanding
recommendations to class against any of the Drilling Rigs (including, without
limitation, those recommendations set forth on Schedules 1(a) or 4.8).
8.7 Maintenance of Inventory Levels. Seller and Parent agree that
through the Closing Date, Seller and Parent will maintain or cause to be
maintained Inventory with respect to each Drilling Rig, including spare
components and parts, supporting inventory and stores on board, in
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such amounts and of such quality as would be (i) in accordance with past
practice and comparable to historical levels, and (ii) sufficient to comply
with any applicable Drilling Contract or Other Contract.
8.8 Removal of Encumbrances. Seller and Parent shall cause the
Encumbrances referred to in Schedule 8.8 to be removed and terminated on or
before the Closing Date and shall furnish to Buyer at Closing evidence of such
removal and termination reasonably satisfactory to Buyer.
8.9 Litigation. Until Closing, Seller will promptly notify Buyer
of any action, suit, proceeding, claim or investigation that is threatened or
commenced against Seller, Parent or BVI which relates to or affects the
Business, the Assets or this Agreement or the transactions contemplated hereby,
and Buyer will promptly notify Seller of any action, suit, proceeding, claim or
investigation that is threatened or commenced against Buyer which relates to
and materially and adversely affects Buyer and its business taken as a whole or
affects this Agreement or the transactions contemplated hereby.
8.10 Employees.
(a) Between the date of this Agreement and Closing, (i) no change
will be made in the rate of remuneration or the emoluments or pension benefits
of any employee of the Business, and (ii) neither Seller nor Parent nor any of
their Affiliates (including BVI) will hire or terminate the employment of any
employee of the Business except (A) the termination by Seller and/or Parent and
simultaneous hiring by BVI of one or more employees of the Business, (B) as
required under a Drilling Contract, or (C) in the ordinary course of business
consistent with past practice.
(b) Seller or Parent, as applicable, shall pay or cause to be paid
directly to each employee of the Business that portion of all benefits arising
under any Benefit Plan that has been accrued on behalf of that employee (or is
attributable to expenses properly incurred by that employee) as of the Closing
Date, and BVI and Buyer shall assume no liability therefor. No portion of the
assets of any Benefit Plan, written or unwritten, heretofore sponsored or
maintained by Seller or Parent (and no amount attributable to any such Benefit
Plan) shall be transferred to BVI or Buyer, and BVI and Buyer shall not be
required to continue any such Benefit Plan after the Closing Date. The amounts
payable under any Benefit Plan shall be determined with reference to the date
of the event by reason of which such amounts become payable, without regard to
conditions subsequent, and neither BVI nor Buyer shall be liable for any claim
for insurance, reimbursement or other benefits payable by reason of any event
which occurs prior to the Closing Date. All amounts payable directly to
employees, or to any fund, program, arrangement or plan maintained by Seller or
Parent therefor shall be paid by Seller or Parent within thirty (30) days after
the Closing Date to the extent that such payment is not inconsistent with the
terms of such Benefit Plan.
(c) As of the Closing Date, Buyer or its Affiliates (including
BVI) shall offer, in Buyer's sole discretion, employment to certain employees
of Seller and Parent with experience in operating the Drilling Rigs, Seller and
Parent hereby consenting to same. Notwithstanding anything in this Agreement
to the contrary, nothing herein shall be construed as granting any employee of
the Business any right to employment with Buyer or its Affiliates (including
BVI) for any period of time or implying or creating any terms or conditions of
employment. Seller and Parent shall use their Best Efforts to assist Buyer or
its Affiliates (including BVI) in employing all
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such persons presently engaged in the Business that Buyer wishes to employ.
Seller and Parent, as applicable, shall terminate effective as of the Closing
Date the employment of all employees of the Business so employed by Buyer or
its Affiliates (including BVI). Seller and Parent shall be responsible for and
shall pay, and neither Buyer nor BVI shall have any liability for or obligation
to pay, any severance or other similar payment (including without limitation
obligations under social or labor contracts) to any employees or former
employees of Seller, Parent or BVI as a result of the transactions contemplated
by this Agreement.
8.11 Property Taxes. All ad valorem taxes, utility and other
service charges and other taxes, fees and expenses relating to the Business or
the Assets for all periods prior to the Closing shall be the obligation of
Seller and Parent, and for all periods following the Closing shall be the
obligation of BVI. All such Taxes relating to periods prior to the Closing
that have been assessed prior to Closing and that are not then being diligently
contested in good faith by appropriate proceedings shall be paid by Seller or
Parent, prior to the Closing. Seller and Parent shall promptly pay to Buyer
from time to time the prorated share of all such Taxes for which Seller or
Parent is responsible under this Section 8.11 upon Buyer's request accompanied
by appropriate documentation that such Taxes are due and payable. All such
Taxes relating to periods after the Closing that have been paid by Seller, BVI
or Parent prior to Closing shall be prorated and the portion related to the
time following Closing shall be paid by Buyer to Seller upon Seller's request
accompanied by appropriate documentation that such Taxes have been paid.
8.12 Other Taxes. Seller and Parent shall be liable for and shall
pay all applicable sales, use, transfer, stamp, recording, value added or
similar taxes and assessments required by applicable law to be paid by Seller
or Parent (regardless of whether such taxes are or could be assessed against
the Assets) resulting from the consummation of the transactions contemplated
hereby, including without limitation taxes payable by Seller, BVI or Parent by
reason of the transfer of the Assets from Parent to BVI and the transfer of the
BVI Shares to Buyer. Seller and Parent shall not have any responsibility for
the payment of any taxes with respect to the operations or earnings of BVI from
and after the Closing, including without limitation any taxes, fees, duties or
charges of any character related to any export or import of the Drilling Rigs
after the Closing. Seller, Parent and Buyer agree to cooperate to obtain all
available exemptions from such taxes and to reduce the amount of taxes, import
duties or other assessments imposed on or charged to as a result of the
consummation of the transactions contemplated by this Agreement; provided, that
neither party shall be obligated to take any action that it determines in its
sole discretion may subject it to additional taxes, liabilities or expenses;
and provided further that Buyer, Seller and Parent agree that the respective
values of the Drilling Rigs reported by Buyer or its Affiliates to Governmental
Entities in Venezuela upon the initial transfer of the Drilling Rigs by BVI to
Buyer or any Affiliate of Buyer shall be the same as the values of the
respective Drilling Rigs indicated on Schedule 1(f)(ii) reported to
Governmental Entities in Venezuela by Seller or its Affiliates for entrance and
clearance purposes as of the date of entry of such Drilling Rigs into the
country in which they are currently located.
8.13 Books and Records. Seller and Buyer shall have the right, at
their own expense, at any time or from time to time within five years after the
Closing Date during reasonable business hours upon reasonable notice to
inspect, and make copies of or extracts from, any of the books and records
directly relating to the ownership of the Assets or operation of the Business
prior to the Closing Date in the possession of Seller, Parent or Buyer or their
respective Affiliates, as the case may be. None of the books and records in
the possession of Seller or Parent, on the one hand, or BVI or Buyer, on the
other, shall be destroyed prior to December 31, 2001 or five years after
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generated, whichever is earlier, without the consent of the other unless first
reproduced by microfilm or any other similar process.
8.14 Post-Closing Collection, Payment and Administrative
Procedures. Subsequent to Closing, (i) Buyer and its Affiliates (including
BVI) agree to deliver to Seller, within three Business Days of the receipt
thereof by Buyer or any such Affiliate, any and all (A) monies paid to or
received by Buyer or any such Affiliate in respect of amounts due Seller or
Parent, including, but not limited to, payment of receivables, refunds,
rebates, and release of performance or similar bonds or letters of credit, and
(B) inquiries, correspondence or documents received by Buyer or any such
Affiliate related to such amounts; and (ii) Seller and Parent agree to deliver
to BVI, within three Business Days of Seller's or Parent's receipt of same, any
and all (A) monies paid to or received by Seller or Parent in respect of
amounts due Buyer or BVI, and (B) inquiries, correspondence or documents
received by Seller or Parent related to such amounts.
8.15 Post-Closing Use of Facilities. During the period commencing
on the Closing Date and continuing through (i) one year from the Closing Date,
or (ii) the date on which Parent sells such real property to a non- Affiliate,
whichever occurs first, Buyer and its Affiliates (including BVI) shall have the
right, without charge, to store in Parent's yard in Pajuca, Bahia, Brazil the
two Drilling Rigs currently located in Brazil; provided, however, that Buyer's
use of Parent's yard shall be at the sole risk of Buyer, and neither Seller nor
Parent shall have any obligation to provide security for such Drilling Rigs;
and provided further that Buyer shall maintain customary liability insurance
covering its use of the premises, and Buyer shall bear and pay utilities and
any and all use or other taxes associated with the premises during the period
of Buyer's use of any part of the premises.. For a one year period from and
after the Closing Date, Buyer and its Affiliates (including BVI) shall have the
first right and option to lease all or part of Parent's yard in Macae, Brazil,
upon terms acceptable to Buyer and Parent according to the terms of a rig yard
lease agreement; provided that any such lease shall terminate upon the sale of
such property by Parent to a non-Affiliate of Parent.
8.16 No Shop. Prior to the Closing Date, neither Seller, Parent,
nor any of their Affiliates, shall enter into or otherwise participate in
solicitations, negotiations or discussions either directly or through
representatives, with any other corporation, entity or person with respect to
(a) the sale by Parent of any of the Assets, (b) the sale of the BVI Shares to
any other party, or (c) the merger or consolidation of BVI with any other
entity. Seller and Parent agree that the remedy at law for a breach of this
Section 8.16 is inadequate and that Buyer shall be entitled to injunctive
relief for any breach of this Section 8.16.
8.17 Continued Effectiveness of Representations and Warranties.
Each of Seller, Parent and Buyer shall use its Best Efforts to cause the
representations and warranties made by it herein to continue to be true and
correct on and as of the Closing Date as if made on and as of the Closing Date.
Seller, Parent and Buyer shall each advise the other promptly in writing of any
condition or circumstance, including without limitation, items which are (or
which should be) disclosed in the Schedules, occurring after the date hereof up
to and including the Closing Date that would cause the representations and
warranties made by it herein to become untrue in any material respect.
8.18 Further Assurances. At and after the Closing Date, and
without further consideration, (i) Parent shall execute and deliver any
certificates, instruments or agreements, and shall take and do any other
actions and things, as Buyer may reasonably request, to vest, perfect or
confirm of record or otherwise in BVI or its designee any and all right, title
and interest in, to and
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under any of the Assets, and (ii) Seller shall execute and deliver any
certificates, instruments or agreements, and shall take and do any other
actions and things, as Buyer may reasonably request, to vest, perfect or
confirm of record or otherwise in Buyer, any and all right, title and interest
in, to and under the BVI Shares.
8.19 Export Obligations. Seller and Parent agree to assist Buyer
in the export of the REDENCAO and the SOBERANA from Brazil to Venezuela and
commence such assistance immediately after execution of this Agreement;
provided however that the physical export or transportation of such Drilling
Rigs shall not occur until after the Closing. Seller and Parent shall provide
to Buyer, as soon as possible, a schedule of estimated costs to export to
Venezuela such Drilling Rigs currently located in Brazil. These estimated
costs shall include export duties, import duties, document preparation fees,
shipping costs, insurance, and other third party costs and a fixed fee to
reimburse Seller or Parent for administrative assistance in such matters.
Buyer agrees to deposit with Seller the full amount of the estimated costs and
to pay on a timely basis any additional costs reasonably incurred with respect
to such activities; provided that the administrative fee to Seller and Parent
shall not be increased without the written consent of Buyer.
8.20 Expenses. Subject to the provisions of Section 9.3, each of
the parties hereto shall assume and bear all expenses, costs and fees incurred
or assumed by such party in the preparation and execution of this Agreement and
in compliance with and performance of the agreements and covenants contained in
this Agreement, regardless of whether the transactions contemplated hereby are
consummated.
8.21. Land Rig Refurbishments and Option. Prior to the Closing,
Seller, Parent and BVI shall give Buyer and its authorized representatives full
access, upon Buyer's reasonable prior notice, to the PROMISSAO and the NOVA ERA
for purposes of conducting, and shall permit Buyer and its authorized
representatives to conduct, refurbishments and upgrades deemed necessary or
desirable by Buyer in preparation for upcoming contracts for the employment of
such drilling units. In consideration for the refurbishments and/or upgrades,
if any, which may be conducted by Buyer prior to the Closing Date, Buyer shall
have the exclusive right and option, without additional charge, to purchase the
PROMISSAO and the NOVA ERA for a purchase price of US $2,000,000 per unit, in
the event of, and for the three-month period following, termination of this
Agreement pursuant to Article IX. Any such purchase and sale upon exercise of
the option shall be pursuant to a definitive agreement to be executed by
Andrade, Seller and Buyer in a form substantially the same as this Agreement.
8.22 Inspection of Drilling Rigs. Until Closing, Seller and Parent
shall give the authorized representatives of Buyer full access, during normal
business hours upon Buyer's reasonable notice, to the Drilling Rigs and the
Leased Drilling Rig. In the event that Buyer's reasonable inspection of the
type conducted on November 5, 1996 of the Drilling Rigs and/or the Leased
Drilling Rig reveals any change in the maintenance, state of repair, condition
or design of the Drilling Rigs or the Leased Drilling Rig (excluding any change
due to damage sustained by such Drilling Rig upon the occurrence of a casualty,
in which event, the provisions of Section 8.5(c) shall apply) from that which
existed in November 5, 1996, then Buyer shall give written notice to Seller
identifying any such change and:
(a) if expenditures in an aggregate amount of at least $100,000
but not more than $1,000,000 would be required to restore the Drilling Rigs
and/or the Leased Drilling Rig to their condition as of November 5, 1996, then
Seller and/or Parent shall, prior to the Closing, either (i)
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<PAGE> 26
restore or cause to be restored the Drilling Rigs and/or the Leased Drilling
Rig to their condition as of November 5, 1996, or (ii) pay to Buyer from the
Purchase Price at Closing cash in an amount required to complete such
restoration, or
(b) if expenditures in an aggregate amount of $1,000,000 or more
would be required to restore the Drilling Rigs and/or the Leased Drilling Rig
to their condition as of November 5, 1996, then Seller and/or Parent shall,
prior to Closing, either (i) restore or cause to be restored the Drilling Rigs
and/or the Leased Drilling Rig to a condition as close to their November 5,
1996 condition as may be accomplished with an expenditure of not more than
$1,000,000, or (i) pay to Buyer from the Purchase Price at Closing cash in an
amount equal to $1,000,000. Neither Seller nor Parent shall have any
obligation to incur expenditures in excess of $1,000,000 to restore the
Drilling Rigs and the Leased Drilling Rig to their prior condition; provided,
however, that if Seller and/or Parent fail to completely restore or make the
full restoration payment in the same manner as is specified in subsection (a)
of this Section 8.22 without regard to the $1,000,000 limitation within ten
days of Buyer's written notice to Seller, then Buyer shall have the right and
option to terminate this Agreement pursuant to Section 9.1(c)(iv).
ARTICLE IX
TERMINATION
9.1 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing:
(a) by mutual written consent of Buyer and Seller;
(b) by either Buyer or Seller, if there shall be any statute, rule
or regulation that makes consummation of the transactions contemplated hereby
illegal or otherwise prohibited or a Governmental Entity shall have issued an
order, decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the consummation of the transactions
contemplated hereby, and such order, decree, ruling or other action shall have
become final and nonappealable;
(c) by Buyer, if
(i) there has been a material breach by Seller or Parent
of any covenant or agreement, or a material inaccuracy of any
representation or warranty of Seller or Parent contained in this
Agreement which has rendered the satisfaction of any condition to the
obligations of Buyer impossible and such breach or inaccuracy has not
been waived by Buyer or cured by Seller or Parent within five Business
Days after receipt by Seller of notice thereof from Buyer; provided
that the five Business Day period shall be extended for a period of up
to ten additional Business Days with respect to any matter for which
Seller or Buyer have begun steps to cure but for which cure is not
practically possible within five Business Days; or
(ii) there shall have occurred a material adverse change
as described in Section 7.5;
(iii) the Closing shall not have occurred on or before
January 31, 1997 (provided
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that the right to terminate this Agreement under this clause (iii)
shall not be available to Buyer if Buyer's failure to fulfill any of
its obligations under this Agreement or its misrepresentation or
breach of warranty hereunder has been the sole cause thereof);
(iv) there shall have occurred a change in the
maintenance, state of repair, condition or design of the Drilling Rigs
and/or the Leased Drilling Rig from that which existed on November 5,
1996 which would require expenditures in an aggregate amount of
$1,000,000 or more to restore as described in Section 8.22(b) which
has not been restored and for which no restoration payment has been
received by Buyer; or
(v) there shall have occurred casualty damage for which
Buyer elects to terminate pursuant to Section 8.5(c)(ii);
(d) by Seller if
(i) there has been a material breach by Buyer of any
covenant or agreement, or a material inaccuracy of any representation
or warranty of Buyer contained in this Agreement which has rendered
the satisfaction of any condition to the obligations of Seller or
Parent impossible and such breach or inaccuracy has not been waived by
Seller or cured by Buyer within five Business Days after receipt by
Buyer of notice thereof from Seller; provided that the five Business
Day period shall be extended for a period of up to ten additional
Business Days with respect to any matter (other than Buyer's failure
to make available funds for payment of the Purchase Price on the
Closing Date) for which Buyer has begun steps to cure but for which
cure is not practically possible within five Business Days; or
(ii) the Closing shall not have occurred on or before
January 31, 1997 (provided that the right to terminate this Agreement
under this clause (iii) shall not be available to Seller if the
failure by either Seller or Parent to fulfill any of its obligations
under this Agreement or its misrepresentation or breach of warranty
hereunder has been the sole cause thereof).
9.2 Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 9.1 by Buyer or Seller, written notice
thereof shall forthwith be given to the other parties specifying the provision
hereof pursuant to which such termination is made, and this Agreement shall
become void and have no effect, except that the agreements contained in this
Section 9.2 and in Sections 4.25, 5.7, 8.3, 8.20, 8.21, and 9.3 shall survive
the termination hereof.
9.3 Liquidated Damages and Expense Reimbursement.
(a) Notwithstanding any other provision of this Agreement, if this
Agreement is terminated by Seller pursuant to Section 9.1(d)(i), then, unless
Buyer is then entitled to terminate this Agreement pursuant to Section
9.1(c)(i), (ii), (iv) or (v), the earnest money deposit (excluding any interest
earned thereon, which shall be for the account of Buyer) shall be forfeited to
Seller. Nothing contained in this Section 9.3(a) shall relieve Buyer from
liability for damages (excluding consequential damages) in excess of the amount
of the earnest money deposit actually incurred as a result of any breach by
Buyer of this Agreement.
(b) In the event that this Agreement is terminated by Buyer
pursuant to Section
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9.1(c)(i), then, unless Seller is then entitled to terminate this Agreement
pursuant to Section 9.1(d)(i), Seller and Parent shall pay to Buyer within ten
Business Days following a request therefor, such amount as will fully reimburse
Buyer for all documented legal, accounting, consulting and investment advisory
fees and expenses incurred and paid or payable by Buyer to third parties in
connection with the negotiation, execution and delivery of this Agreement.
Nothing contained in this Section 9.3(b) shall relieve Seller or Parent from
liability for damages (excluding consequential damages) actually incurred as a
result of any breach by Seller or Parent of this Agreement.
ARTICLE X
INDEMNIFICATION
10.1 Indemnification by Buyer.
(a) Except as otherwise provided in Article XI, Buyer agrees to
indemnify, defend and hold Seller and Parent and their Affiliates harmless from
and against any and all Claims sustained after Closing by Seller, Parent or any
of their Affiliates based upon, arising out of or otherwise in respect of (i)
the inaccuracy of any representation or warranty, or the breach of any covenant
or agreement, of Buyer contained in this Agreement or in any certificate,
agreement, document or instrument delivered pursuant to this Agreement, (ii)
the operation of the Business or the ownership, management or use of the Assets
after the Closing, unless and to the extent that such claim arises solely from
any action of Seller, Parent or any of their Affiliates after the Closing, or
(iii) any Claim of any fiscal authority relating to Taxes arising out of or
resulting from Buyer or its Affiliates reporting to any Governmental Entity in
Venezuela upon the initial transfer of the Drilling Rigs by BVI to Buyer or any
Affiliate of Buyer any value different than the values of the respective
Drilling Rigs indicated on Schedule 1(f)(ii) reported to Governmental Entities
in Venezuela by Seller or its Affiliates for entrance and clearance purposes as
of the date of entry of such Drilling Rigs into the country in which they are
currently located; provided, however, that Buyer shall have no liability
pursuant to this Section 10.1(a) for the first $50,000 of aggregate Claims in
respect of the matters described above incurred by Seller, Parent or their
Affiliates (the "Seller Basket") and Buyer shall be responsible only for such
amounts of such Claims as exceed the Seller Basket. The foregoing
indemnification is given solely for the purpose of protecting Seller, Parent
and their Affiliates and shall not be deemed extended to, or interpreted in a
manner to confer any benefit, right or cause of action upon, any third party.
(b) Seller or Parent shall notify Buyer within 30 Business Days of
the assertion of any Claim or the discovery of any fact (which fact has been
brought to the attention of a responsible executive officer of Seller or
Parent) upon which Seller or Parent intends to base a claim for indemnification
hereunder; provided, however, that the failure of Seller or Parent to so notify
Buyer shall not relieve Buyer from any liability under this Agreement to Seller
or Parent with respect to such Claim unless Buyer is prejudiced or damaged by
the failure to receive timely notice. In the event of any Claim, Buyer, at its
option, may assume (with legal counsel reasonably acceptable to Seller or
Parent, as applicable) the defense of any claim, demand, lawsuit or other
proceeding, which claim, demand, lawsuit or other proceeding may give rise to
the indemnity obligation of Buyer under this Section 10.1, and may assert any
defense of Seller, Parent or Buyer; provided, however, that Seller or Parent,
as applicable, shall have the right at its own expense to participate jointly
with Buyer in the defense of any claim, demand, lawsuit or other proceeding in
connection with which Seller or Parent claims indemnification hereunder.
Notwithstanding the right of Seller
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or Parent to participate, Buyer shall have the sole right to settle or
otherwise dispose of such claim, demand, lawsuit or other proceeding on such
terms as Buyer, in its sole discretion, shall deem appropriate with respect to
any issue involved in such claim, demand, lawsuit or other proceeding as to
which (i) Buyer shall have acknowledged the obligation to indemnify Seller or
Parent hereunder, or (ii) Seller or Parent, as applicable, shall have declined
to participate; provided, however, that no such Claim shall be settled by Buyer
in any manner that could reasonably be expected to have a material adverse
effect on the business of Seller or Parent taken as a whole without the prior
written consent of Seller or Parent, as applicable.
10.2 Indemnification by Seller and Parent.
(a) Except as otherwise provided in Article XI, Seller and Parent,
jointly and severally, agree to indemnify, defend and hold Buyer and its
Affiliates (including BVI) harmless from and against any and all Claims
sustained after Closing by Buyer or its Affiliates based upon, arising out of
or otherwise in respect of (i) the inaccuracy of any representation or
warranty, or the breach of any covenant or agreement, of Seller or Parent
contained in this Agreement or in any certificate, agreement, document or
instrument delivered pursuant to this Agreement, or (ii) the operation of the
Business or the ownership, management or use of the Assets prior to the Closing
unless and to the extent that such Claim shall have arisen solely from any
action of Buyer or any of its Affiliates (other than BVI) prior to the Closing;
provided, however, that neither Seller nor Parent shall have any liability
pursuant to this Section 10.2(a) for the first $50,000 of aggregate Claims in
respect of the matters described above incurred by Buyer or its Affiliates (the
"Buyer Basket") and Seller and Parent shall be responsible only for such
amounts of such Claims as exceed the Buyer Basket. The foregoing
indemnification is given solely for the purpose of protecting Buyer and its
Affiliates and shall not be deemed extended to, or interpreted in a manner to
confer any benefit, right or cause of action upon, any third party.
(b) Without limiting the generality of the indemnification
obligations set forth in subsection (a) of this Section 10.2, Seller and
Parent, jointly and severally, further agree to indemnify, defend and hold
Buyer and its Affiliates (including BVI) harmless from and against any and all
Claims sustained by Buyer or its Affiliates, irrespective of the amount of such
Claim (but subject to the Buyer Basket, except as otherwise provided in (ii)
below), based upon, arising out of or otherwise in respect of any of the
following:
(i) Any default under or breach by Seller, Parent or any
of their Affiliates of the terms, conditions or provisions of any
note, bond, mortgage, loan agreement, indenture or other instrument
evidencing borrowed money to which Seller, Parent or any such
Affiliate is a party or by which Seller, Parent or any such Affiliate
is bound or to which any of the Assets is subject;
(ii) Any Encumbrance (including any Permitted Encumbrance
and without regard to the Buyer Basket) affecting any Asset arising
from conditions existing before the Closing or resulting from the
conduct of Seller, Parent or any of their Affiliates after the
Closing;
(iii) Any termination prior to Closing by any person of any
Lease Agreement, Drilling Contract, Other Contract or Permit due to
breach of the terms thereof by Seller, Parent or any of their
Affiliates;
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(iv) Any violation by Seller, Parent or any of their
Affiliates of any law, statute, rule or administrative regulation or
any judgment, order, injunction or decree of any Governmental Entity
applicable to or binding upon Seller, Parent or any such Affiliate or
the Assets which affects the ownership or operation of the Assets;
(v) Any litigation, arbitration proceedings or
governmental proceedings, suits or investigations before any
Governmental Entity relating to facts that existed before the Closing
which affects the ownership or operation of the Assets;
(vi) Any violation by Seller, Parent or any of their
Affiliates of, or default by Seller, Parent or any such Affiliate
under, any Applicable Laws, including, without limitation, Applicable
Environmental Laws, which affects the ownership or operation of the
Assets, or any remedial obligation under any Applicable Environmental
Laws arising out of or related to the ownership or operation of the
Assets prior to Closing;
(vii) Any Claim by any person who is an employee of Seller,
Parent or any of their Affiliates prior to Closing that relates solely
to any employment of such employee by Seller, Parent or any of their
Affiliates prior to the Closing;
(viii) Any Claim of any fiscal authority relating to Taxes
due by Seller, Parent or Affiliates of Seller or Parent or by any
company or enterprise that belongs to the same group of companies and
enterprises to which Seller or Parent belongs, specifically including
without limitation, Taxes arising out of or resulting from any
reevaluation of Assets by any Government Authority; provided, however
that no indemnification by Seller or Parent shall be required to the
extent that any such Taxes result from Buyer or its Affiliates
reporting to any Governmental Entity in Venezuela upon the initial
transfer of the Drilling Rigs by BVI to Buyer or any Affiliate of
Buyer any value different than the values of the respective Drilling
Rigs indicated on Schedule 1(f)(ii) reported to Governmental Entities
in Venezuela by Seller or its Affiliates for entrance and clearance
purposes as of the date of entry of such Drilling Rigs into the
country in which they are currently located; or
(ix) Any Claim related to any of the matters set forth on
Schedules 4.11, 4.15(a), 4.15(b), 4.17(a), 4.17(b), 4.18, 4.19, or
4.20(a).
(c) Buyer shall notify Seller and Parent within 30 Business Days
of the assertion of any Claim or discovery of any fact (which fact has been
brought to the attention of a responsible executive officer of Buyer) upon
which Buyer or any of its Affiliates (including BVI) intends to base a claim
for indemnification hereunder; provided, however, that the failure of Buyer to
so notify Seller and Parent shall not relieve Seller or Parent from any
liability under this Agreement to Buyer or its Affiliates with respect to such
Claim unless Seller or Parent, as applicable, is prejudiced or damaged by the
failure to receive timely notice. In the event of any Claim, Seller or Parent,
at its option, may assume (with legal counsel reasonably acceptable to Buyer)
the defense of any claim, demand, lawsuit or other proceeding, which claim,
demand, lawsuit or other proceeding may give rise to the indemnity obligation
of Seller and Parent under this Section 10.2, and may assert any defense of
Seller, Parent or Buyer; provided, however, that Buyer shall have the right at
its own expense to participate jointly with Seller and Parent in the defense of
any claim, demand, lawsuit or other proceeding in connection with which Buyer
claims indemnification hereunder. Notwithstanding the right of Buyer to
participate, Seller and Parent shall have the sole right to settle or otherwise
dispose of such claim, demand, lawsuit or other proceeding on such terms as
Seller and Parent, in their sole discretion, shall deem appropriate with
respect to any issue involved in
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<PAGE> 31
such claim, demand, lawsuit or other proceeding as to which (i) Seller or
Parent shall have acknowledged the obligation to indemnify Buyer hereunder or
(ii) Buyer shall have declined to participate; provided, however, that no such
Claim shall be settled by Seller or Parent in a manner that could reasonably be
expected to have a material adverse effect on the business of Buyer or its
Affiliates taken as a whole without the prior written consent of Buyer.
10.3 Limitation of Remedies. The indemnification obligations of
Seller, Parent and Buyer set forth in this Agreement, including in this Article
X, shall be limited to indemnification for actual damages suffered and shall
not include incidental, consequential, special or indirect damages; provided,
however, that any such incidental, consequential, special or indirect damages
recovered by a third party against a party entitled to indemnity under this
Agreement shall be included in the damages recoverable pursuant to the
indemnities herein.
10.4 Applicability of Indemnification Obligation. EACH OF THE
AGREEMENTS TO INDEMNIFY, DEFEND OR HOLD HARMLESS CONTAINED IN SECTIONS 10.1 AND
10.2 SHALL APPLY IRRESPECTIVE OF WHETHER THE SUBJECT CLAIM IS BASED IN WHOLE OR
IN PART UPON THE SOLE OR CONTRIBUTORY NEGLIGENCE (WHETHER ACTIVE, PASSIVE OR
GROSS), BREACH OF WARRANTY, OR BREACH OR VIOLATION OF ANY DUTY IMPOSED BY ANY
LAW OR REGULATION, ON THE PART OF THE BENEFICIARY OF THE AGREEMENT, EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT.
ARTICLE XI
EXTENT AND SURVIVAL OF REPRESENTATIONS,
WARRANTIES, COVENANTS AND AGREEMENTS
11.1 Scope of Representations of Seller. NOTWITHSTANDING ANYTHING
HEREIN TO THE CONTRARY, NEITHER SELLER NOR PARENT MAKES ANY REPRESENTATION OR
WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE MAINTENANCE, REPAIR, CONDITION,
DESIGN OR MARKETABILITY OF THE DRILLING RIGS, THE LEASED DRILLING RIG AND THE
INVENTORY OR ANY PORTION THEREOF OR PROPERTY THEREON, INCLUDING, WITHOUT
LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, IT BEING THE EXPRESS AGREEMENT OF BUYER AND ITS AFFILIATES
(INCLUDING BVI), ON THE ONE HAND, AND SELLER AND PARENT, ON THE OTHER HAND,
THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, BVI WILL HAVE OBTAINED,
AND BUYER WILL OBTAIN THROUGH ACQUISITION OF THE BVI SHARES, THE DRILLING RIGS,
THE LEASED DRILLING RIG AND THE INVENTORY IN THEIR CONDITION AND STATE OF
REPAIR ON THE CLOSING DATE, "AS IS" AND "WHERE IS." Buyer acknowledges and
affirms that it will have had the opportunity to complete its own independent
investigation, analysis and evaluation of the Business and the prospects of the
Business and that it has been afforded the opportunity to inspect the Drilling
Rigs, Inventory and the other tangible Assets, including the Leased Drilling
Rig. The Closing of the transaction shall serve as Buyer's final and
unconditional acceptance of the condition of the Drilling Rigs, Leased Drilling
Rig and Inventory "AS IS" and "WHERE IS" and the termination of any
responsibility whatsoever of Seller, Parent or BVI with respect to the
condition of the Drilling Rigs, Leased Drilling Rig, Inventory and other
tangible assets, including any responsibility of Seller or Parent with respect
to any claims by the owner of the Leased Drilling Rig
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<PAGE> 32
or any other person for any loss, damage, deterioration or other change in
physical condition of the Leased Drilling Rig.
11.2 Survival. All representations, warranties and covenants
contained in this Agreement (except to the extent any such agreement is limited
by its terms) shall remain operative and in full force and effect and shall
survive consummation of the transactions contemplated hereby at the Closing,
including, without limitation, the delivery of the Assets to BVI and the
transfer of the BVI Shares to Buyer hereunder for a period of three years
following the Closing Date.
ARTICLE XII
MISCELLANEOUS
12.1 Notices. All notices and other communications required or
permitted to be given or made hereunder by either party hereto shall be in
writing and shall be deemed to have been duly given if delivered personally or
transmitted by first class registered or certified mail, postage prepaid,
return receipt requested, or sent by prepaid overnight delivery service, or
sent by cable, telegram, telefax or telex, to the parties at the following
addresses (or at such other addresses as shall be specified by the parties by
like notice):
If to Buyer:
Cliffs Drilling Company
1200 Smith Street, Suite 300
Houston, Texas 77002
Attention: Mr. Edward A. Guthrie
Telephone: (713) 651-9426
Telefax: (713) 951-0649
with a copy to:
Mr. W. Garney Griggs
Griggs & Harrison, P.C.
1301 McKinney, Suite 3200
Houston, Texas 77010
Telephone: (713) 651-0600
Telefax: (713) 651-1944
If to Seller or Parent:
Delavney-Gestao e Consultoria Lda.
Construtora Andrade Gutierrez S.A.
Andrade Gutierrez Perfuracao Ltda.
Driltech Inc.
Av. Rio Branco, 177-3o Andar - Centro
20040-007 - Rio de Janeiro - RJ - Brasil
Attention: Mr. Trajano A. Souza Carmo
Telephone: 55 21 533 3020
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<PAGE> 33
Telefax: 55 21 262 1772
with a copy to:
Mr. U. Grant Keener, Jr.
Brown, Parker & Leahy, L.L.P.
1200 Smith Street, Suite 3600
Houston, Texas 77002
Telephone: (713) 951-5888
Telefax: (713) 654-1871
12.2 Entire Agreement. This Agreement, including the Schedules,
Exhibits and other writings referred to herein or delivered pursuant hereto,
constitutes the entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
both written and oral, between the parties with respect to the subject matter
hereof.
12.3 Amendments and Waiver; Rights and Remedies. This Agreement
may be amended, superseded, canceled, renewed or extended, and the terms hereof
may be waived, only by a written instrument signed by the parties or, in the
case of a waiver, by the party waiving compliance. No delay on the part of
either party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part of either party
of any such right, power or privilege, or any single or partial exercise of any
such right, power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege. The rights and remedies
herein provided are cumulative and are not exclusive of any rights or remedies
that any party may otherwise have at law or in equity. The rights and remedies
of either party based upon, arising out of or otherwise in respect of any
inaccuracy in or breach of any representation, warranty, covenant or agreement
contained in this Agreement shall in no way be limited by the fact that the
act, omission, occurrence or other state of facts upon which any claim of any
such inaccuracy or breach is based may also be the subject matter of any other
representation, warranty, covenant or agreement contained in this Agreement (or
in any other agreement between the parties) as to which there is no inaccuracy
or breach.
12.4 Arbitration. Any dispute, controversy or claim arising out of
or relating to this Agreement shall be finally settled under the Commercial
Arbitration Rules of the American Arbitration Association as then in force, by
three arbitrators appointed in accordance with said rules. In rendering a
decision, the arbitrator(s) shall make specific findings of fact and take into
account all applicable judicial precedents and industry practice. All
disputes, controversies or claims, or any rights or obligations of the parties
hereto, shall be governed by and resolved in accordance with the laws,
excluding choice of law rules, of the State of Texas. The place of arbitration
shall be Houston, Texas. An award or determination of the arbitration tribunal
shall be final and conclusive upon the parties, judgment thereon may be entered
by any court of competent jurisdiction, and no appeal thereof shall be made by
the parties. The parties agree that the award of the arbitrator(s) (i) shall
provide that the prevailing party shall be entitled to recover from the other
party reasonable attorneys' fees and expenses in addition to any other relief
that may be awarded; (ii) shall be promptly payable free of any tax, deduction
or offset; (iii) shall provide that any cost, fees or taxes incident to
enforcing the award shall, to the maximum extent permitted by
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<PAGE> 34
law, be charged against the party resisting such enforcement; and (iv) shall
include interest from the date of any damages incurred, and from the date of
the award until paid in full, at a rate fixed by the arbitrator(s) but in no
event less than the "prime rate" per annum quoted for the corresponding period
by Texas Commerce Bank N.A., Houston, Texas.
12.5 Binding Effect; Assignment; No Third Party Benefit. This
Agreement and all the provisions hereof shall be binding upon and inure to the
benefit of the parties and their respective successors and permitted assigns;
provided, however, that neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by either of the parties hereto (by
operation of law or otherwise) without the prior written consent of the other
party. Except for Sections 10.1 and 10.2, nothing in this Agreement, express
or implied, is intended to or shall confer upon any person other than Buyer,
Seller and Parent any rights, benefits or remedies of any nature whatsoever
under or by reason of this Agreement.
12.6 No Specific Performance. The parties hereto represent and
acknowledge that the remedies provided at law for any violation by either party
of its obligations set forth in this Agreement would be adequate and, as a
result, each party hereto hereby disclaims and waives any right to seek or
obtain specific performance for any violation of its rights set forth in this
Agreement. Notwithstanding the preceding sentence, the liquidated damages and
expense reimbursements provided for by Section 9.3 shall constitute the sole
remedy available to the parties with respect to the matters covered thereby,
and either party may seek specific performance of any obligation of another
party to pay such liquidated damages or expense reimbursements.
12.7 Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same agreement.
12.8 References. All references in this Agreement to Articles,
Sections and other subdivisions refer to the Articles, Sections and other
subdivisions of this Agreement unless expressly provided otherwise. The words
"this Agreement," "herein," "hereof," "hereby," "hereunder" and words of
similar import refer to this Agreement as a whole and not to any particular
subdivision unless expressly so limited.
12.9 Severability of Provisions. If any provision of this
Agreement is held to be unenforceable, this Agreement shall be considered
divisible and such provision shall be deemed inoperative to the extent it is
deemed unenforceable, and in all other respects this Agreement shall remain in
full force and effect; provided, however, that if any such provision may be
made enforceable by limitation thereof, then such provision shall be deemed to
be so limited and shall be enforceable to the maximum extent permitted by
applicable law.
12.10 Currency. All dollar amounts in this Agreement are stated in
United States
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<PAGE> 35
dollars.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers hereunto duly authorized as of the date
first above written.
DELAVNEY-GESTAO E CONSULTADORIA LDA.
By:/s/ TRAJANO A. SOUZA CARMO
------------------------------------
Trajano A. Souza Carmo
Manager
CONSTRUTORA ANDRADE GUTIERREZ S.A.
By:/s/ TRAJANO A. SOUZA CARMO
------------------------------------
Trajano A. Souza Carmo
Attorney-in-fact
ANDRADE GUTIERREZ PERFURACAO LTDA.
By:/s/ TRAJANO A. SOUZA CARMO
------------------------------------
Trajano A. Souza Carmo
DRILTECH INC.
By:/s/ TRAJANO A. SOUZA CARMO
------------------------------------
Trajano A. Souza Carmo
Attorney-in-fact
CLIFFS DRILLING COMPANY
By:/s/ EDWARD A. GUTHRIE
------------------------------------
Edward A. Guthrie,
Vice President-Finance
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<PAGE> 1
EXHIBIT 2.3.1
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
This AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT (the "Amendment") is
made and entered into as of this 24th day of January, 1997, by and between
DELAVNEY-GESTAO E CONSULTADORIA LDA., a corporation organized under the laws of
the Madeira Islands ("Seller"), CONSTRUTORA ANDRADE GUTIERREZ S.A., a
corporation organized under the laws of Brazil ("Construtora"), ANDRADE
GUTIERREZ PERFURACAO LTDA., a corporation organized under the laws of Brazil
("Andrade"), DRILTECH INC., a corporation organized under the laws of the
Cayman Islands ("Driltech"), (Construtora, Andrade and Driltech being
collectively referred to herein as "Parent"), and CLIFFS DRILLING COMPANY, a
corporation organized under the laws of the State of Delaware ("Buyer").
W I T N E S S E T H:
WHEREAS, Seller, Construtora, Andrade, Driltech, and Buyer entered
into a Stock Purchase Agreement dated as of December 6, 1996 (the "Original
Agreement") with respect to the purchase and sale of all of the issued and
outstanding shares of capital stock of GREENBAY DRILLING COMPANY LTD., a
corporation organized under the laws of the British Virgin Islands ("BVI"),
(capitalized terms used herein without definition having the meanings ascribed
to such terms in the Original Agreement); and
WHEREAS, the parties acknowledge that the official consent of
Petrobras to the transfer from Parent to BVI or its designee of Drilling
Contract(s) between Parent and Petrobras (the "Petrobras Contracts") or the
consent of Hercules Offshore Corporation ("Hercules") to the transfer from
Parent to BVI or its designee of the Lease Agreement (collectively referred to
herein as the "Consents") have not yet been obtained; and
WHEREAS, the parties desire to amend the Original Agreement as
set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual terms,
covenants and conditions herein contained, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
1. The parties acknowledge and agree that the Assets owned by BVI
as of the Closing Date shall not include the Petrobras Contracts or the related
Lease Agreement associated with the Leased Drilling Rig, inasmuch as the
assignments from Parent into BVI or its designee of such Petrobras Contracts
and the Lease Agreement become effective only upon receipt of the Consents of
Petrobras and Hercules, respectively.
2. Notwithstanding the terms and provisions of Section 8.2(b) and
(c) of the Original Agreement, it is agreed that:
(a) From and after the Closing date up to and including
receipt of the Consents of Petrobras and Hercules to the assignment of
the Petrobras Contracts and the Lease Agreement, respectively, by
Parent to BVI or its designee,
(i) Parent shall operate the Leased Drilling Rig
and perform the Petrobras Contracts and Lease Agreement, for
its benefit and at its sole cost, risk and expense; and
(ii) Parent shall (A) maintain insurance covering
the top drive and related equipment associated with the Leased
Drilling
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<PAGE> 2
Rig, (B) name Buyer and BVI as additional insureds with
respect to the top drive and related equipment, and (C) waive
all rights of subrogation against Buyer and BVI with respect
to claims and losses associated with the top drive and related
equipment.
(b) Upon receipt of the Consents of Petrobras and
Hercules to the assignment of the Petrobras Contracts and the Lease
Agreement by Parent to BVI or its designee, such assignments shall
become effective, and thereafter Buyer shall be responsible for
operation of the Leased Drilling Rig and performance of the Petrobras
Contracts and the Lease Agreement.
(c) In the event that Seller and Parent are unable to
obtain Consents of Petrobras and Hercules on or before April 24, 1997,
(i) the term "Assets" shall be deemed not to include the Petrobras
Contracts, the related Lease Agreement, or the top drive and related
equipment associated with the Leased Drilling Rig; (ii) Buyer shall
reassign or cause BVI to reassign to Seller or Parent all right, title
and interest of Buyer and BVI in and to the top drive and related
equipment associated with the Leased Drilling Rig; and (iii) if the
inability to obtain Consent of Petrobras is not due to the breach by
Buyer of its obligations set forth in Section 5 of this Amendment,
Seller and/or Parent shall pay to Buyer liquidated damages in the
amount of $1,500,000.
3. Notwithstanding the terms and provisions of Section 8.5 of the
Original Agreement, it is agreed that:
(a) In the event that the Leased Drilling Rig shall
become an actual, constructive, arranged or compromised total loss
prior to receipt of the Consents of Petrobras and Hercules, (i) the
term "Assets" shall be deemed not to include the Petrobras Contracts,
the related Lease Agreement, or the top drive and related equipment
associated with the Leased Drilling Rig; and (ii) Seller and/or Parent
shall pay to Buyer liquidated damages in the amount of $1,500,000.
(b) In the event that the Leased Drilling Rig sustains
damage not amounting to an actual, constructive, arranged or
compromised total loss prior to receipt of the Consents of Petrobras
and Hercules, the terms of Section 8.5(c) of the Original Agreement
shall apply, except that references to Closing and Closing Date
therein shall refer instead to the effective date of the assignment by
Parent to BVI or its designee of the Petrobras Contracts and the Lease
Agreement.
4. From the date hereof until the earlier to occur of (i) receipt
of the Consents of Petrobras and Hercules, or (ii) April 24, 1997, the terms
and provisions of the Original Agreement shall be interpreted, with respect
only to the Leased Drilling Rig, the Petrobras Contracts and the Lease
Agreement, as if the Closing and the Closing Date had not yet occurred.
5. Seller and Parent will each use its Best Efforts to obtain the
Consents of Petrobras and Hercules as soon as practicable. Buyer will use its
Best Efforts (i) to assist Seller and Parent in obtaining the Consents of
Petrobras and Hercules as soon as practicable and (ii) deliver to Petrobras all
documents necessary for such acceptance by February 7, 1997, or within seven
days following request from Petrobras. Buyer will take all necessary action
within its control to cause its Brazilian affiliate to be accepted by
Petrobras, and Buyer will refrain from taking any action inconsistent with
obtaining the Consent of Petrobras and performing the Petrobras Contracts.
6. This instrument is executed and shall constitute an instrument
supplemental to and in amendment of the Original Agreement and shall be
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<PAGE> 3
construed with and as a part of the Original Agreement.
7. Except as modified and expressly amended by this Amendment and
any other supplement or amendment, the Original Agreement is in all respects
ratified and confirmed, and all of the terms provisions and conditions thereof
shall be and remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective officers hereunto duly authorized as of the date
first above written.
DELAVNEY-GESTAO E CONSULTADORIA LDA.
By:/s/ TRAJANO A. SOUZA CARMO
------------------------------------
Trajano A. Souza Carmo
Manager
CONSTRUTORA ANDRADE GUTIERREZ S.A.
By:/s/ TRAJANO A. SOUZA CARMO
------------------------------------
Trajano A. Souza Carmo
Attorney-in-fact
ANDRADE GUTIERREZ PERFURACAO LTDA.
By:/s/ TRAJANO A. SOUZA CARMO
------------------------------------
Trajano A. Souza Carmo
Attorney-in-fact
DRILTECH INC.
By:/s/ TRAJANO A. SOUZA CARMO
------------------------------------
Trajano A. Souza Carmo
Attorney-in-fact
CLIFFS DRILLING COMPANY
By:/s/ EDWARD A. GUTHRIE
------------------------------------
Edward A. Guthrie,
Vice President Finance
-3-
<PAGE> 1
EXHIBIT 4.6.2
________________________________________________________________________________
CLIFFS DRILLING COMPANY,
SUBSIDIARY GUARANTORS
NAMED HEREIN
and
FLEET NATIONAL BANK
Trustee
______________
SECOND SUPPLEMENTAL INDENTURE
Dated as of January 24, 1997
___________
Supplementing and Amending the Indenture
dated as of May 15, 1996
as amended by the First Supplemental Indenture
dated as of July 11, 1996
________________________________________________________________________________
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE
THIS SECOND SUPPLEMENTAL INDENTURE dated as of January 24, 1997, is
between CLIFFS DRILLING COMPANY, a Delaware corporation (the "Company"), the
SUBSIDIARY GUARANTORS (as defined herein) and FLEET NATIONAL BANK, a national
banking association (the "Trustee").
RECITALS OF THE COMPANY
A. The Company has duly authorized the creation of an issue of
10.25% Senior Notes due 2003, Series A (the "Series A Securities") and an issue
of 10.25% Senior Notes due 2003, Series B (the "Series B Securities" and the
Series A Securities and the Series B Securities, as amended or supplemented
from time to time in accordance with the terms of the Indenture (as defined
herein), being herein collectively called the "Securities"), of substantially
the tenor and in the aggregate principal amount set forth in the Indenture.
B. The Company and the Subsidiary Guarantors have heretofore
made, executed and delivered to the Trustee an Indenture dated as of May 15,
1996 (referred to herein as the "Original Indenture") pursuant to which the
Securities are issuable, and a First Supplemental Indenture dated as of July
11, 1996 (the Original Indenture as supplemented by the First Supplemental
Indenture being referred to herein as the "Original Supplemented Indenture")
C. The Securities are guaranteed by the Subsidiary Guarantors (as
defined in the Indenture) on the terms provided in the Indenture.
D. It is deemed desirable to supplement and amend the Original
Supplemented Indenture to add a Restricted Subsidiary of the Company as a
Subsidiary Guarantor (the Original Supplemented Indenture, as so supplemented
and amended by this Second Supplemental Indenture, being sometimes referred to
herein as the "Indenture").
E. Article IX, Section 9.1 of the Original Indenture provides
that under certain conditions the Company, the Subsidiary Guarantors and
Trustee, may, without the consent of any Holders, from time to time and at any
time, enter into an indenture or indentures supplemental thereto, for the
purpose, inter alia, of adding any Restricted Subsidiary as an additional
Subsidiary Guarantor (subsection (g)).
F. In addition, Article X, Section 10.13 of the Original
Indenture provides that certain Restricted Subsidiaries of the Company shall
become Subsidiary Guarantors by executing and delivering a supplemental
indenture agreeing to be bound by the terms of the Original Indenture.
G. The Series A Securities were issued on May 23, 1996 under the
Original Indenture, and the Series B Securities were issued in exchange for the
Series A Securities on August 30, 1996.
H. All things necessary to authorize the execution and delivery
of this Second Supplemental Indenture, to effect the modifications of the
Original Supplemented Indenture provided for in this Second Supplemental
Indenture, and to make the Original Supplemented
-1-
<PAGE> 3
Indenture, as further supplemented and amended by this Second Supplemental
Indenture, a valid agreement of the Company, in accordance with its terms, have
been done.
NOW, THEREFORE, in consideration of the premises and the purchase of
the Securities by the Holders, the Company, the Subsidiary Guarantors and the
Trustee mutually covenant and agree for the equal and proportionate benefit of
the respective Holders from time to time of the Securities as follows:
ARTICLE I
MODIFICATION OF THE ORIGINAL INDENTURE
SECTION 1.1 AMENDMENT OF ARTICLE I OF THE ORIGINAL INDENTURE.
Section 1.1 of the Original Supplemented Indenture is amended by changing the
definition of "Subsidiary Guarantor" to read as follows:
"'Subsidiary Guarantor' means (i) Southwestern Offshore
Corporation (f/k/a Cliffs Drilling Asset Acquisition Company), a
Delaware corporation, (ii) Cliffs Drilling Merger Company, a Delaware
corporation, (iii) Cliffs Drilling International, Inc., a Delaware
corporation, (iv) Cliffs Oil and Gas Company, a Delaware corporation,
(v) DRL, Inc., a Delaware corporation, (vi) Greenbay Drilling Company
Ltd., a corporation organized under the laws of the British Virgin
Islands, and (vii) each of the Company's other Restricted
Subsidiaries, if any, executing a supplemental indenture in compliance
with the provisions of Section 10.13(a) hereof and (viii) any Person
that becomes a successor guarantor of the Securities in compliance
with the provisions of Section 13.2 hereof."
ARTICLE II
ADDITIONAL SUBSIDIARY GUARANTOR
SECTION 2.1 ADDITION OF A SUBSIDIARY GUARANTOR. Greenbay
Drilling Company Ltd., a corporation organized under the laws of the British
Virgin Islands and a wholly-owned subsidiary of the Company, by execution of
this Second Supplemental Indenture hereby agrees to be bound by the terms of
the Indenture as a Subsidiary Guarantor.
SECTION 2.2 SUBSIDIARY GUARANTEE OF THE SECURITIES. Exhibit A,
attached hereto and incorporated herein by reference, sets forth the form of
Subsidiary Guarantee from the Original Indenture to which Greenbay Drilling
Company Ltd. agrees to be bound by execution and delivery of this Second
Supplemental Indenture.
ARTICLE III
PARTICULAR REPRESENTATIONS
AND COVENANTS OF THE COMPANY
SECTION 3.1 AUTHORITY OF THE COMPANY. The Company is duly
authorized by a
-2-
<PAGE> 4
resolution of the Board of Directors to execute and deliver this Second
Supplemental Indenture, and all corporate action on its part required for the
execution and delivery of this Second Supplemental Indenture has been duly and
effectively taken.
SECTION 3.2 AUTHORITY OF THE SUBSIDIARY GUARANTORS. Each of the
Subsidiary Guarantors is duly authorized by a resolution of its respective
Board of Directors to execute and deliver this Second Supplemental Indenture,
and all corporate action on the part of each required for the execution and
delivery of this Second Supplemental Indenture has been duly and effectively
taken.
SECTION 3.3 TRUTH OF RECITALS AND STATEMENTS. The Company
warrants that the recitals of fact and statements contained in this Second
Supplemental Indenture are true and correct, and that the recitals of fact and
statements contained in all certificates and other documents furnished
hereunder will be true and correct.
ARTICLE IV
CONCERNING THE TRUSTEE
SECTION 4.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trusts
hereunder and agrees to perform the same, but only upon the terms and
conditions set forth in the Original Supplemented Indenture and in this Second
Supplemental Indenture, to all of which the Company, Subsidiary Guarantors and
the respective Holders of Securities at any time hereafter outstanding agree by
their acceptance thereof.
SECTION 4.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The
recitals and statements contained in this Second Supplemental Indenture shall
be taken as the recitals and statements of the Company, and the Trustee assumes
no responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Second Supplemental
Indenture, except that the Trustee is duly authorized to execute and deliver
this Second Supplemental Indenture.
ARTICLE V
MISCELLANEOUS PROVISIONS
SECTION 5.1 RELATION TO THE INDENTURE. The provisions of this
Second Supplemental Indenture shall become effective immediately upon the
execution and delivery hereof. This Second Supplemental Indenture and all the
terms and provisions herein contained shall form a part of the Indenture as
fully and with the same effect as if all such terms and provisions had been set
forth in the Original Indenture. The Original Indenture is hereby ratified and
confirmed and shall remain and continue in full force and effect in accordance
with the terms and provisions thereof, as supplemented and amended by the First
Supplemental Indenture and this Second Supplemental Indenture; and the Original
Indenture, the First Supplemental Indenture and this Second Supplemental
Indenture shall be read, taken and construed together as one instrument.
SECTION 5.2 MEANING OF TERMS. Any capitalized term used in this
Second Supplemental Indenture and not defined herein that is defined in the
Original Indenture shall have
-3-
<PAGE> 5
the meaning specified in the Original Indenture, unless the context shall
otherwise require.
SECTION 5.3 COUNTERPARTS OF SECOND SUPPLEMENTAL INDENTURE. This
Second Supplemental Indenture may be executed in several counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
SECTION 5.4 GOVERNING LAW. This Second Supplemental Indenture
shall be governed by and construed in accordance with the laws of the State of
New York.
IN WITNESS WHEREOF, the parties hereto have cause this Second
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
Company: CLIFFS DRILLING COMPANY
By: /S/ EDWARD A. GUTHRIE
------------------------------------
Edward A. Guthrie
Vice President - Finance
Subsidiary Guarantors: CLIFFS DRILLING MERGER COMPANY
CLIFFS DRILLING INTERNATIONAL, INC.
CLIFFS OIL AND GAS COMPANY
By: /S/ EDWARD A. GUTHRIE
------------------------------------
Edward A. Guthrie
Vice President - Finance
SOUTHWESTERN OFFSHORE CORPORATION
(f/k/a Cliffs Drilling Asset Acquisition
Company)
DRL, INC.
GREENBAY DRILLING COMPANY LTD.
By: /S/ EDWARD A. GUTHRIE
------------------------------------
Edward A. Guthrie
Vice President
-4-
<PAGE> 6
Trustee: FLEET NATIONAL BANK
By: /S/ SUSAN C. MERKER
------------------------------------
Susan C. Merker
Assistant Vice President
-5-
<PAGE> 7
EXHIBIT A
FORM OF SUBSIDIARY GUARANTEE
Subject to the limitations set forth in the Indenture, the initial
Subsidiary Guarantors and, if any, all additional Subsidiary Guarantors (as
defined in the Indenture referred to in the Series ____ Security upon which
this notation is endorsed and each being hereinafter referred to as a
"Subsidiary Guarantor," which term includes any additional or successor
Subsidiary Guarantor under the Indenture) have, jointly and severally,
unconditionally guaranteed (a) the due and punctual payment of the principal
(and premium, if any) of and interest on the Securities, whether at maturity,
acceleration, redemption or otherwise, (b) the due and punctual payment of
interest on the overdue principal of and interest on the Securities, if any, to
the extent lawful, (c) the due and punctual performance of all other
obligations of the Company to the Holders or the Trustee, all in accordance
with the terms set forth in the Indenture, and (d) in case of any extension of
time of payment or renewal of any Securities or any of such other obligations,
the same will be promptly paid in full when due or performed in accordance with
the terms of the extension or renewal, whether at Stated Maturity, by
acceleration or otherwise.
The obligations of each Subsidiary Guarantor are 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 the 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.
No stockholder, officer, director, employee, incorporator or Affiliate
as such, past, present or future, of any Subsidiary Guarantor shall have any
personal liability under its Subsidiary Guarantee by reason of his or its
status as such stockholder, officer, director, employee, incorporator or
Affiliate, or any liability for any obligations of any Subsidiary Guarantor
under the Securities or the Indenture or for any claim based on, in respect of,
or by reason of such obligations or their creation.
Any Subsidiary Guarantor may be released from its Subsidiary Guarantee
upon the terms and subject to the conditions provided in the Indenture.
All terms used in this notation of Subsidiary Guarantee which are
defined in the Indenture referred to in this Series ____ Security upon which
this notation of Subsidiary Guarantees is endorsed shall have the meanings
assigned to them in such Indenture.
The Subsidiary Guarantees shall be binding upon the Subsidiary
Guarantors and shall inure to the benefit of the Trustee and the Holders and,
in the event of any transfer or assignment
<PAGE> 8
of rights by any Holder or the Trustee respecting the Series _____ Security
upon which the foregoing Subsidiary Guarantees are noted, the rights and
privileges herein conferred upon that party shall automatically extend to and
be vested in such transferee or assignee, all subject to the terms and
conditions hereof and in the Indenture.
The Subsidiary Guarantees shall not be valid or obligatory for any
purpose until the certificate of authentication on the Series ____ Security
upon which the foregoing Subsidiary Guarantees are noted shall have been
executed by the Trustee under the Indenture by the manual signature of one of
its authorized signatories.
<PAGE> 1
EXHIBIT 10.7.3
AMENDMENT NO. 3
TO THE
CLIFFS DRILLING COMPANY
1988 INCENTIVE EQUITY PLAN
Pursuant to the terms and provisions of Section 10 of the Cliffs
Drilling Company 1988 Incentive Equity Plan (the "Plan"), Cliffs Drilling
Company, a Delaware corporation (the "Company"), hereby adopts the following
Amendment No. 3 to the Plan (the "Amendment No. 3").
1.
The first sentence of Section 5 of the Plan is hereby amended in its
entirety by substituting the following therefor:
"The total number of shares of Stock reserved and
available for distribution pursuant to Stock Options or other
awards hereunder shall be 650,000 shares. Such shares may
consist, in whole or in part, of authorized and unissued
shares or treasury shares."
2.
Each amendment made by this Amendment No. 3 to the Plan has been
effected in conformity with the provisions of the Plan. This Amendment No. 3
was adopted by the Compensation Committee of the Board of Directors of the
Company on April 24, 1996 and approved by the shareholders of the Company on
May 22, 1996.
3.
At the time of the adoption of this Amendment No. 3 to the Plan,
6,189,930 shares of the Company's common stock, $0.01 par value per share, were
outstanding and entitled to vote, 5,209,869 were represented in person or by
proxy, of which 3,781,508 shares were voted for this Amendment No. 3, 1,026,179
shares were voted against this Amendment No. 3 and 402,182 shares abstained
from voting.
Dated: May 22, 1996.
CLIFFS DRILLING COMPANY
By:/S/ JAMES E. MITCHELL JR.
-------------------------
James E. Mitchell, Jr.
Secretary
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Cliffs Drilling International, Inc., a Delaware corporation wholly owned
by Cliffs Drilling Company.
2. CLIFFS OIL AND GAS COMPANY, a Delaware corporation wholly owned by Cliffs
Drilling Company (f/k/a Cliffs Exploration Company, f/k/a Cliffs
Offshore, Inc.)
3. Southwestern Offshore Corporation, a Delaware corporation wholly owned by
Cliffs Drilling Company (f/k/a Cliffs Drilling Asset Acquisition
Company).
4. Cliffs Drilling Merger Company, a Delaware corporation wholly owned by
Cliffs Drilling Company (f/k/a Cliffs Drilling Acquisition Company).
5. DRL, INC., a Delaware corporation wholly owned by Cliffs Drilling
Company.
6. CLIFFS DRILLING VENEZUELA, INC., a Delaware corporation wholly owned by
Cliffs Drilling Company.
7. CLIFFS DRILLING TRINIDAD LIMITED, a corporation organized under the laws
of the Republic of Trinidad and Tobago and wholly owned by Southwestern
Offshore Corporation (f/k/a Viking Trinidad Limited).
8. CLIFFS DRILLING DE VENEZUELA, S.A., a Venezuelan corporation wholly owned
by Cliffs Drilling Company.
9. CLIFFS DRILLING DE MEXICO, S.A. DE C.V., a Mexican corporation wholly
owned by Cliffs Drilling International, Inc.
10. Cliffs Drilling do Servicos de Petroleo Ltda., a Brazilian corporation
wholly owned by Cliffs Drilling Company (90%) and Cliffs Drilling
International, Inc. (10%).
11. Greenbay Drilling Company Ltd., a British Virgin Islands corporation
wholly owned by Cliffs Drilling Company.
12. OILFIELD MANAGEMENT & DEVELOPMENT CORP., a Barbados corporation wholly
owned by Cliffs Drilling Company.
13. West Indies Drilling Joint Venture, a joint venture between Cliffs
Drilling Trinidad Limited and Well Services (Marine) Limited, in which
Cliffs Drilling Trinidad Limited owns a fifty percent (50%) interest.
14. Cliffs Central Drilling INTERNATIONAL, a joint venture between Cliffs
Drilling International, Inc. and Perforadora Central, S.A. de C.V., in
which Cliffs Drilling International, Inc. owns a fifty percent (50%)
interest.
<PAGE> 2
SUBSIDIARIES OF THE REGISTRANT (CONTINUED)
15. A joint venture among Cliffs Drilling Company, Inelectra S.A. and
Cementaciones Petroleras Venezolanas C.A., in which Cliffs Drilling
Company owns a one-third interest (33 1/3%) interest.
16. A joint venture among Cliffs Drilling Company, Inelectra S.A. and
Cementaciones Petroleras Venezolanas C.A., in which Cliffs Drilling
Company owns a fifty percent (50%) interest.
17. CLIFFS NEDDRILL CENTRAL TURNKEY INTERNATIONAL, a joint venture among
Cliffs Drilling International, Inc., Neddrill Turnkey Drilling B.V. and
Perforadora Central, S.A. de C.V., in which Cliffs Drilling
International, Inc. owns a one-third (33 1/3%) interest.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-29915, 33-37162, and 33-71778) pertaining to the
1988 Incentive Equity Plan of Cliffs Drilling Company of our report dated
February 21, 1997, with respect to the consolidated financial statements and
schedule of Cliffs Drilling Company included in the Annual Report (Form 10-K)
for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Houston, Texas
March 6, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF HUDDLESTON & CO., INC.
We hereby consent to the incorporation by reference in Cliffs Drilling
Company's Registration Statements on Form S-8 (Nos. 33-29915, 33-37162, and
33-71778) and in the related prospectuses of our report dated January 1, 1997,
with respect to the excerpts and estimates of Cliffs Oil and Gas Company in the
Annual Report on Form 10-K for the year ended December 31, 1996, and to the use
of our name, and the statements with respect to us.
HUDDLESTON & CO., INC.
/s/ B.P. HUDDLESTON
B.P. Huddleston
Chairman
Houston, Texas
March 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Operations and the Consolidated Balance Sheets and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 39,181
<SECURITIES> 0
<RECEIVABLES> 34,585
<ALLOWANCES> 797
<INVENTORY> 5,807
<CURRENT-ASSETS> 110,202
<PP&E> 310,039
<DEPRECIATION> 93,565
<TOTAL-ASSETS> 339,546
<CURRENT-LIABILITIES> 41,981
<BONDS> 150,000
0
0
<COMMON> 80
<OTHER-SE> 142,088
<TOTAL-LIABILITY-AND-EQUITY> 339,546
<SALES> 133,109
<TOTAL-REVENUES> 133,109
<CGS> 91,984
<TOTAL-COSTS> 108,672
<OTHER-EXPENSES> (6,246)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,265
<INCOME-PRETAX> 21,418
<INCOME-TAX> 6,996
<INCOME-CONTINUING> 14,422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,422
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 2.08
</TABLE>
