<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-19987
***************************************************************************
* *
* THIS PROSPECTUS SUPPLEMENT RELATES TO AN EFFECTIVE REGISTRATION *
* STATEMENT UNDER THE SECURITIES ACT OF 1933, AND IS SUBJECT TO *
* COMPLETION OR AMENDMENT. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED JANUARY 24, 1997
PRELIMINARY PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JANUARY 22, 1997
$300,000,000
[Diamond Offshore Logo]
% Convertible Subordinated Notes Due 2007
Interest payable February 15 and August 15 Due February 15, 2007
------------------
The Notes are convertible into Common Stock of Diamond Offshore Drilling, Inc.
(the "Company" or "Diamond Offshore") at any time following the date of original
issuance thereof, unless previously redeemed, at a conversion price of
$ per share, subject to adjustment in certain events. On January 23,
1997, the reported last sale price of the Common Stock on the New York Stock
Exchange was $68 3/4 per share.
The Notes are redeemable, in whole or in part, at the option of the Company at
any time on or after February 22, 2001 at the redemption prices set forth herein
plus accrued interest. See "Description of Notes -- Optional Redemption." The
Notes are unsecured general obligations of the Company, are subordinated in
right of payment to all existing and future Senior Indebtedness (as defined) of
the Company and are structurally subordinated to all liabilities of the
Company's subsidiaries. The Indenture does not restrict the incurrence of Senior
Indebtedness or other indebtedness by the Company or its subsidiaries. At
January 23, 1997, the Company had approximately $74.6 million of outstanding
Senior Indebtedness.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions Company(1)(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Note..................................... % % %
Total (3).................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1997.
(2) Before deduction of expenses payable by the Company, estimated at $750,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus Supplement, to purchase up to an
additional $45,000,000 principal amount of Notes solely to cover
over-allotments. If the option is exercised in full, the total price to the
public will be $ , underwriting discounts will be $ and
proceeds to the Company will be $ .
------------------
The Notes are offered by the several Underwriters when, as and if issued by the
Company, delivered to and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that delivery of the
Notes, in book-entry form, will be made through the facilities of The Depository
Trust Company on or about , 1997, against payment therefor in
immediately available funds.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
Prospectus Supplement dated January , 1997.
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NOTES AND THE
COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE NOTES PURSUANT TO EXEMPTIONS FROM RULES 10B-6 AND
10B-7 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
MERRILL LYNCH SPECIALISTS INC. ("MLSI"), AN AFFILIATE OF MERRILL LYNCH,
PIERCE, FENNER & SMITH INCORPORATED, ONE OF THE UNDERWRITERS, ACTS AS A
SPECIALIST IN THE COMMON STOCK OF THE COMPANY PURSUANT TO THE RULES OF THE
NEW YORK STOCK EXCHANGE, INC. UNDER AN EXEMPTION GRANTED BY THE SECURITIES AND
EXCHANGE COMMISSION ON JULY 31, 1995, MLSI WILL BE PERMITTED TO CARRY ON ITS
ACTIVITIES AS A SPECIALIST IN THE COMMON STOCK FOR THE ENTIRE PERIOD OF THE
DISTRIBUTION OF THE NOTES. THE EXEMPTION IS SUBJECT TO THE SATISFACTION BY MLSI
OF THE CONDITIONS SPECIFIED IN THE EXEMPTION.
FORWARD-LOOKING STATEMENTS
WHEN INCLUDED IN THIS PROSPECTUS SUPPLEMENT, THE PROSPECTUS OR IN DOCUMENTS
INCORPORATED HEREIN BY REFERENCE, THE WORDS "EXPECTS," "INTENDS," "ANTICIPATES,"
"ESTIMATES" AND ANALOGOUS EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS INHERENTLY ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC
AND BUSINESS CONDITIONS, INDUSTRY FLEET CAPACITY, CHANGES IN FOREIGN AND
DOMESTIC OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITY, COMPETITION, CHANGES
IN FOREIGN POLITICAL, SOCIAL AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND
COMPLIANCE WITH GOVERNMENTAL REGULATIONS, CUSTOMER PREFERENCES AND VARIOUS OTHER
MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. THESE FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS SUPPLEMENT. THE COMPANY
EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY STATEMENT IS BASED.
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements of the Company (the "Consolidated Financial Statements") and notes
thereto included and incorporated by reference in this Prospectus Supplement.
All capitalized terms used and not otherwise defined in this Summary have the
respective meanings assigned to them elsewhere in this Prospectus Supplement.
Unless the context otherwise requires, references herein and in the Prospectus
to the "Company" or "Diamond Offshore" shall mean Diamond Offshore Drilling,
Inc. and its subsidiaries. Unless otherwise indicated, the information in this
Prospectus Supplement assumes that the Underwriters' over-allotment option is
not exercised.
THE COMPANY
The Company, through wholly owned subsidiaries, engages worldwide in the
contract drilling of offshore oil and gas wells and is a leader in deep water
drilling. The Company's fleet of 46 mobile offshore drilling rigs is one of the
largest in the world and includes the largest fleet of semisubmersible rigs. The
fleet is comprised of 30 semisubmersibles, 15 jack-ups and one drillship. In
addition, the Company operates a jack-up rig under bareboat charter, which will
terminate in 1997. The Company operates the largest fleet of semisubmersibles
currently working in the U.S. Gulf of Mexico.
Diamond Offshore Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "DO." For the period from October 1, 1996 through
January 23, 1997, the high and low closing prices of the Common Stock as
reported by the NYSE were $73 and $54 1/4 per share, respectively. For the high
and low closing prices for earlier periods, see "Price Range of Common Stock."
The Company is a Delaware corporation with its principal executive offices
located at 15415 Katy Freeway, Houston, Texas 77094, where its telephone number
is (281) 492-5300.
RECENT DEVELOPMENTS
Financial Results. On January 23, 1997, the Company announced its earnings
for the year and the fourth quarter ended December 31, 1996. The following
financial information should be read in conjunction with the financial
information contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 and the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues....................................... $424,473 $238,582 $611,430 $336,584
Operating income..................................... 129,830 2,898 213,491 11,650
Net income (loss).................................... 90,234 (12,920) 146,388 (7,026)
Net income per share................................. 1.50 -- 2.35 --
Pro forma net income per share....................... -- -- -- 0.20
</TABLE>
Rig Upgrade Program. During 1996, the Company moved aggressively to
implement one of the key elements of its business strategy by commencing
substantial upgrades of three of its Victory-class semisubmersible rigs (the
Ocean Quest, the Ocean Star and the Ocean Victory), and a major upgrade of its
drillship, the Ocean Clipper I, to provide it with ultra-deep water and dynamic
positioning capability. The Victory-class projects generally include
enhancements to provide additional hull buoyancy, thus allowing greatly
increased variable deck load capacity, the addition of new self-contained
chain/wire mooring systems and drilling system upgrades, including the
installation of top-drive drilling systems, new blowout prevention systems,
third mud pumps and increased liquid mud capacity. The Company believes that the
upgraded Victory-class rigs will be competitive with fourth-generation
semisubmersibles in the U.S. Gulf of Mexico deep water drilling market. The
Company sought to mitigate financial risk associated with these upgrades by
deferring commencement until term
S-3
<PAGE> 4
commitments were secured with major integrated or large independent oil
companies with projected contract revenues substantially covering the upgrade
costs. One of the Victory-class upgrade projects, the Ocean Quest, is completed
and the rig is currently working in the Gulf of Mexico in 2,559 feet of water.
Deliveries of the two remaining Victory-class rigs are expected in the first and
fourth quarters of 1997, while delivery of the drillship is anticipated in the
second quarter of 1997.
Contract Extension. In November 1996 the Company signed a one-year contract
extension with a major integrated oil company for its fourth-generation
semisubmersible, the Ocean Valiant, which is expected to operate during the
contract term in the U.S. Gulf of Mexico. The contract extension commenced on
January 1, 1997 and is expected to generate revenues of approximately $45.3
million.
THE OFFERING
Securities Offered............ $300,000,000 aggregate principal amount
($345,000,000 aggregate principal amount if the
Underwriters' over-allotment option is
exercised in full) of % Convertible
Subordinated Notes Due 2007 (the "Notes").
Maturity Date................. February 15, 2007.
Interest Payment Dates........ Interest on the Notes will be payable in cash
semi-annually on each February 15 and August
15, commencing on August 15, 1997.
Conversion Rights............. The Notes are convertible, in whole or in part,
at the option of the holder at any time
following the date of original issuance thereof
and prior to the close of business on the
business day immediately preceding the maturity
date, unless previously redeemed, into shares
of Common Stock of the Company, par value $0.01
per share ("Common Stock"), at a conversion
price of $ per share (equivalent to a
conversion rate of shares per $1,000
principal amount of Notes), subject to
adjustment in certain circumstances. Upon
conversion, any accrued interest will be deemed
paid by the appropriate portion of the Common
Stock received by the holder upon such
conversion.
Sinking Fund.................. None.
Optional Redemption........... The Notes are redeemable, in whole or from time
to time in part, at the option of the Company,
at any time on or after February 22, 2001 at
the redemption prices set forth herein, plus
accrued and unpaid interest to the date of
redemption. See "Description of Notes --
Optional Redemption."
Repurchase Right of Holders... Upon the occurrence of a Change in Control (as
defined in the Indenture), holders of the Notes
may elect to require the Company to repurchase
their Notes, in whole or in part, at a purchase
price equal to 100% of the principal amount
thereof plus accrued interest through the date
of repurchase. See "Description of
Notes -- Certain Rights to Require Repurchase
of Notes."
Ranking....................... The Notes are general unsecured obligations of
the Company, subordinated in right of payment
to the prior payment in full of all Senior
Indebtedness (as defined in the Indenture) and
effectively subordinated in right of payment to
the prior payment in full of all indebtedness
of the Company's subsidiaries. The Indenture
does not restrict the Company's ability to
incur Senior Indebtedness or additional
indebtedness of the Company's subsidiaries. At
Janu-
S-4
<PAGE> 5
ary 23, 1997, Senior Indebtedness of the
Company was approximately $74.6 million in
principal amount and the Company's subsidiaries
had no indebtedness for borrowed money. See
"Description of Notes -- Subordination of
Notes."
Denomination and Registration
of
Notes...................... The Notes are represented by a global Note (the
"Global Note") in full registered form, without
coupons, which will be deposited with a
custodian for, and registered in the name of,
The Depository Trust Company (the "DTC") in The
City of New York. Beneficial interests in the
Global Note will be shown on, and transfers
thereof will be effected only through, records
maintained by DTC and its participants. Unless
certain conditions specified in the Indenture
are met, certificated Notes will not be issued
in exchange for beneficial interests in the
Global Note. See "Description of Notes -- Form,
Denomination and Registration."
Use of Proceeds............... The estimated net proceeds to be received by
the Company from the sale of the Notes offered
hereby, after deducting the discount to the
Underwriters and other estimated expenses
payable by the Company, are approximately
$295.5 million ($339.9 million if the
Underwriters' over-allotment option is
exercised in full). The Company intends to use
such net proceeds to repay a portion of the
outstanding indebtedness under the Company's
revolving credit facility with a group of banks
(the "Credit Facility"), to finance the
Company's current and future rig upgrade and
capital expenditure programs, including
possible acquisitions, and for general
corporate purposes. Pending all such uses, the
Company intends to invest such net proceeds in
short-term money market and other market rate,
investment-grade instruments.
Common Stock Traded........... The Common Stock is traded on the NYSE under
the symbol "DO."
S-5
<PAGE> 6
THE COMPANY
The Company, through wholly owned subsidiaries, engages worldwide in the
contract drilling of offshore oil and gas wells and is a leader in deep water
drilling. The Company's fleet of 46 mobile offshore drilling rigs is one of the
largest in the world and includes the largest fleet of semisubmersible rigs. The
fleet is comprised of 30 semisubmersibles, 15 jack-ups and one drillship. In
addition, the Company operates a jack-up rig under bareboat charter, which will
terminate in 1997. The Company operates the largest fleet of semisubmersibles
currently working in the U.S. Gulf of Mexico.
Diamond Offshore seeks to maximize dayrates and rig utilization by
continuously adapting to changes in its markets, improving the capabilities of
its drilling rigs and increasing the quality of its service. The key elements of
its strategy are to:
- Market worldwide its large, diverse fleet, focused on its semisubmersible
rigs, which is capable of satisfying customer requirements in a variety
of applications;
- Continue to enhance its fleet to meet customer demand for diverse
drilling capabilities, including those required for deep water and harsh
environment operations;
- Continue to exploit the potential of Diamond Offshore's nine
Victory-class semisubmersible rigs by pursuing projects that take
advantage of this rig type's unique design to yield significantly
enhanced rigs; and
- Maintain a program of continuous improvement of quality and safety
through Diamond Offshore's Global Excellence Management System and
further capitalize on customer recognition of Diamond Offshore's quality
and safety achievements.
On April 29, 1996, Diamond Offshore consummated the acquisition of Arethusa
(Off-Shore) Limited ("Arethusa"), thereby adding to its fleet Arethusa's 13
owned and/or operated mobile offshore drilling rigs. Arethusa provided drilling
services worldwide to international and government-controlled oil and gas
companies. The Arethusa transaction solidified the Company's position as the
operator of the largest fleet of semisubmersibles in the U.S. Gulf of Mexico and
provided the Company with a presence in the international jack-up market.
During 1996, the Company's bareboat charter of a jack-up drilling rig
acquired in the Arethusa transaction terminated and the Company no longer
operates this rig. In addition, in 1996 the Company sold two shallow water
jack-ups and one semisubmersible, each of which was inactive. On December 31,
1996, the Company exited the land drilling business with the sale of its land
rigs and associated equipment for approximately $26.0 million.
The transactions described above sharpened the Company's focus on the
semisubmersible segment of the market in 1996.
The Company is continually considering potential transactions including,
but not limited to, enhancement of existing rigs, the purchase of existing rigs,
construction of new rigs and the acquisition of other companies engaged in
contract drilling. Certain of the potential transactions reviewed by the Company
would if completed result in its entering new lines of business, although in
general these opportunities have been related in some manner to the Company's
existing operations. For example, the Company has explored the possibility of
acquiring certain floating production systems, crew accommodation units and oil
service companies providing subsea products, technology and services, and
shipping assets such as oil tankers, through the acquisition of existing
businesses or assets or new construction. As of the date hereof, the Company has
no pending commitment with respect to any material business opportunity. There
can be no assurance that the Company will make additional material acquisitions
or investments and that, if made, such acquisitions will be successful.
S-6
<PAGE> 7
USE OF PROCEEDS
The proceeds to the Company from the sale of the Notes in this Offering,
after deducting underwriting discounts and commissions and estimated offering
expenses, are estimated to be approximately $295.5 million ($339.9 million if
the Underwriters' over-allotment option is exercised in full).
The net proceeds of this Offering are expected to be used to repay a
portion of the outstanding indebtedness under the Credit Facility, to finance
the Company's current and future rig upgrade and capital expenditure programs,
including possible acquisitions, and for general corporate purposes. At January
23, 1997, the aggregate outstanding principal balance under the Credit Facility
was $40.0 million. Borrowings under the Credit Facility bear interest, at the
Company's option, at a per annum rate equal to a base rate (equal to the greater
of (i) the prime rate announced by the agent bank, (ii) the Federal Funds
Effective Rate plus .50% or (iii) the Adjusted Certificate of Deposit Rate plus
.50%) or the Eurodollar Rate plus .500% until June 30, 1997, and thereafter plus
.375%, .500% or .625% based upon the Leverage Ratio for the previous fiscal
quarter or, if an investment grade rating is in effect, plus .375%. Amounts
currently outstanding under the Credit Facility were incurred primarily to fund
the Company's rig upgrade program and for other capital expenditures, and to
refinance Arethusa indebtedness. Amounts repaid on the Credit Facility may be
reborrowed from time to time for pending and possible future rig upgrade
projects, other capital expenditures, acquisitions and other general corporate
purposes.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is listed on the NYSE under the symbol
"DO." The table below sets forth the high and low sales prices of the Common
Stock on the NYSE Composite Tape during the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE
---------------
LOW HIGH
---- -----
<S> <C> <C>
1995
Fourth Quarter (from October 10)................................. $24 $ 34
1996
First Quarter.................................................... 33 3/8 43 3/8
Second Quarter................................................... 43 1/2 57
Third Quarter.................................................... 47 58 1/8
Fourth Quarter................................................... 54 1/4 64 3/8
1997
First Quarter (through January 23, 1997)......................... 56 1/2 73
</TABLE>
On January 23, 1997, the reported last sale price of the Common Stock as
reported on the NYSE Composite Tape was $68 3/4.
The Company does not anticipate that it will declare or pay any dividends
on the Common Stock in the foreseeable future. The Company expects that it will
retain all earnings for the development and growth of its business. Any future
determination as to payment of dividends will be made at the discretion of the
Board of Directors of the Company and will depend upon the Company's operating
results, financial condition, capital requirements, general business conditions
and such other factors that the Board of Directors deems relevant. In addition,
the Credit Facility contains covenants that limit the payment of dividends. At
December 31, 1996, the Company could have declared and paid dividends of $25.0
million in the aggregate within the limitations of the Credit Facility.
S-7
<PAGE> 8
CAPITALIZATION
The following table sets forth the capitalization of Diamond Offshore as of
September 30, 1996 and as adjusted as of such date after giving effect to the
sale of the Notes pursuant to this Offering and the application of a portion of
the net proceeds therefrom to repay borrowings under the Credit Facility. See
"Use of Proceeds." This table should be read in conjunction with the
Consolidated Financial Statements (including the Notes thereto) and the
Unaudited Pro Forma Consolidated Condensed Financial Statements incorporated
herein by reference.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt............................................. $ 55,000 --
Convertible subordinated notes............................. -- $ 300,000
Stockholders' equity:
Common stock, $0.01 par value............................ 683 683
Additional paid-in capital............................... 1,219,416 1,219,416
Accumulated deficit...................................... (81,210) (81,210)
Cumulative translation adjustment........................ (1,555) (1,555)
---------- -----------
Total stockholders' equity............................ 1,137,334 1,137,334
---------- -----------
Total capitalization............................. $1,192,334 $ 1,437,334
========== ===========
</TABLE>
S-8
<PAGE> 9
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated historical and pro
forma financial data for the Company. The selected consolidated financial data
were derived from the Consolidated Financial Statements (including the Notes
thereto) of the Company and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein and the Consolidated Financial Statements (including
the Notes thereto) of the Company incorporated by reference herein. The pro
forma financial data reflect certain adjustments that give effect to the
offering of the Notes and the Arethusa Acquisition (as defined in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General"), accounted for under the purchase method of accounting,
as if each of these transactions had occurred at January 1, 1996. Such tables
should be read in conjunction with the "Unaudited Pro Forma Consolidated
Condensed Financial Statements" incorporated by reference herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
1996 SEPTEMBER 30, SEPTEMBER 30, ------------------------------
PRO FORMA 1996 1995 1995 1994 1993
------------- ------------- ------------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues................. $ 480,586 $ 424,473 $ 238,582 $336,584 $307,918 $288,069
Operating expenses:
Contract drilling........... 270,376 242,109 185,260 259,560 256,919 228,211
General and
administrative............ 14,058 10,661 9,453 13,857 11,993 11,785
Depreciation(1)............. 62,902 52,062 41,425 52,865 55,366 46,819
Gain on sale of assets...... (10,189) (10,189) (454) (1,349) (1,736) (3,201)
Operating income (loss)........ 143,439 129,830 2,898 11,651 (14,624) 4,455
Interest expense............... (10,463) (104) (26,139) (27,052) (31,346) (25,906)
Other income (expense), net.... 1,326 1,117 1,084 1,598 (455) (219)
Income tax (expense)
benefit(2).................. (41,820) (40,609) 9,237 6,777 11,621 5,041
Net income (loss).............. 92,482 90,234 (12,920) (7,026) (34,804) (16,629)
Net income per share........... -- 1.50 -- -- -- --
Pro forma net income per
share....................... 1.36 -- -- 0.20(3) -- --
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- DECEMBER 31,
1996 ------------------------------
PRO FORMA 1996 1995 1994 1993
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............................. $ 354,283(4) $ 113,783 $ 63,523 $ 57,521 $ 52,904
Drilling and other property and equipment,
net....................................... 1,128,653 1,128,653 502,278 488,664 498,740
Goodwill.................................... 86,258 86,258 -- -- --
Total assets................................ 1,659,019 1,414,019 618,052 588,158 592,162
Long-term debt(5)........................... 300,000 55,000 -- 394,777 353,483
Stockholders' equity(6)..................... 1,137,334 1,137,334 492,894 124,066 158,361
</TABLE>
- ---------------
(1) Effective January 1, 1996 and January 1, 1993, the Company revised the
estimated useful lives for certain classes of its offshore drilling rigs. As
compared to the original estimate of useful lives, this change resulted in a
reduction of approximately $6.4 million and $6.3 million in depreciation
expense during the nine months ended September 30, 1996 and the year ended
December 31, 1993, respectively, and a corresponding increase in operating
income. The estimated useful lives of the Company's offshore drilling rigs,
after the change in estimate, range from 10 to 25 years.
(2) Prior to the Company's initial public offering, the Company was included in
the consolidated U.S. federal income tax return of Loews Corporation
("Loews"). For taxable periods subsequent to the Company's initial public
offering, the Company has filed a consolidated U.S. federal income tax
return on a stand-alone basis.
(3) Pro forma net income per share gives effect to the Company's initial public
offering and the after-tax effects of a reduction in interest expense.
Assuming the Company's initial public offering had occurred at January 1,
1995, the Company would have recognized net income of $10.0 million, or
$0.20 per share of Common Stock, after adjusting for the after-tax effects
of a reduction in interest expense. See Note 1 to the Company's Consolidated
Financial Statements incorporated by reference herein.
(4) Pro forma working capital includes the net proceeds of the Notes.
(5) Long-term debt consisted solely of notes payable to Loews for 1994 and 1993.
(6) In connection with the Company's initial public offering, the Company paid a
special dividend of $2.1 million to Loews with a portion of the proceeds. No
other cash dividends were paid during the historical periods presented.
S-9
<PAGE> 10
UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed balance sheet has
been prepared based on the historical financial statements of Diamond Offshore
as of September 30, 1996. The following unaudited pro forma consolidated
condensed income statements have been prepared based on the historical financial
statements of Diamond Offshore and Arethusa for the period ended September 30,
1996 and based on pro forma income statement data for Arethusa that reflect
adjustments to Arethusa's historical consolidated income statement for the year
ended September 30, 1995 in connection with (i) the acquisition of the Arethusa
Yatzy, (ii) the sale of the Treasure Stawinner and (iii) the dividend and
capital distribution of $61.0 million ($3.00 per share of Arethusa common stock)
as if each had occurred at the beginning of fiscal year 1995. The pro forma
financial statements give effect to (i) the issuance of the Notes, including
interest expense on the Notes which replaces interest expense historically
recognized, (ii) the acquisition of Arethusa and (iii) the Diamond Offshore
initial public offering and, in connection therewith, the use of proceeds to
repay all of Diamond Offshore's then outstanding indebtedness to Loews and to
fund the payment of a special dividend to Loews.
The pro forma consolidated condensed balance sheet was prepared assuming
issuance of the Notes on September 30, 1996 and gives effect to events directly
attributable to the transaction. The pro forma consolidated condensed income
statements were prepared assuming the transactions were consummated as of the
beginning of the period presented and give effect to events directly
attributable to the transactions which are expected to have a continuing impact
on Diamond Offshore. The pro forma consolidated condensed financial statements
should be read in conjunction with the other financial information of Diamond
Offshore and Arethusa included or incorporated by reference herein. The pro
forma consolidated condensed financial statements are presented for illustrative
purposes only and are not necessarily indicative of actual results that would
have been achieved had the transactions been consummated on such dates, and are
not necessarily indicative of future results. The allocation of the purchase
price for the acquisition of Arethusa is preliminary, however, it is not
expected that the final allocation of the purchase price will produce materially
different results from those presented herein.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
DIAMOND ISSUANCE OF THE PRO
OFFSHORE NOTES FORMA
---------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and short-term investments............ $ 18,184 $ 240,500(a) $ 258,684
Accounts receivable and other current
assets................................... 177,146 -- 177,146
Drilling and other property and equipment,
net...................................... 1,128,653 -- 1,128,653
Goodwill and other assets.................. 90,036 4,500(a) 94,536
---------- --------- ----------
Total assets.......................... $1,414,019 $ 245,000 $1,659,019
========== ========= ==========
Current liabilities........................ $ 81,547 $ -- $ 81,547
Long-term debt............................. 55,000 (55,000)(a) --
Convertible subordinated notes............. -- 300,000(a) 300,000
Deferred credits and other liabilities..... 140,138 -- 140,138
Common stock and additional paid-in
capital.................................. 1,220,099 -- 1,220,099
Accumulated deficit........................ (81,210) -- (81,210)
Cumulative translation adjustment.......... (1,555) -- (1,555)
---------- --------- ----------
Total liabilities and stockholders'
equity.............................. $1,414,019 $ 245,000 $1,659,019
========== ========= ==========
</TABLE>
- ---------------
(a) Adjustment for net proceeds from the issuance of the Notes and repayment of
amounts outstanding under the Credit Facility.
S-10
<PAGE> 11
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL ARETHUSA ISSUANCE OF
DIAMOND HISTORICAL ACQUISITION THE PRO
OFFSHORE ARETHUSA(A) ADJUSTMENTS NOTES FORMA
---------- ----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 424,473 $ 56,113 $ -- $ -- $480,586
Operating expenses:
Contract drilling................... 242,109 28,267 -- -- 270,376
General and administrative.......... 10,661 3,397 -- -- 14,058
Depreciation and amortization....... 52,062 11,067 (227)(b) -- 62,902
Gain on sale of assets.............. (10,189) -- -- -- (10,189)
-------- -------- ------- -------
Total operating expenses.... 294,643 42,731 (227) -- 337,147
-------- -------- ------- -------
Operating income...................... 129,830 13,382 227 -- 143,439
Other income (expense):
Interest expense.................... (104) (2,285) -- (8,074)(e) (10,463)
Other, net.......................... 1,117 (12,221) 12,430(c) -- 1,326
-------- -------- ------- -------
Income (loss) before income tax
benefit expense..................... 130,843 (1,124) 12,657 (8,074) 134,302
Income tax (expense) benefit.......... (40,609) (451) (3,586)(d) 2,826(d) (41,820)
-------- -------- ------- ------- --------
Net income (loss)..................... $ 90,234 $ (1,575) $ 9,071 $(5,248) $ 92,482
======== ======== ======= ======= ========
Net income (loss) per common share.... $ 1.50 $ (0.08) $ 1.36
======== ======== ========
Weighted average common shares
outstanding......................... 60,179 20,333 67,893(f)
======== ======== ========
</TABLE>
- ---------------
(a) Because Arethusa's fiscal year end was September 30, the historical results
above reflect operating results for the fiscal year ended September 30, 1996
(which ended April 30, 1996 due to the acquisition) less operating results
for the quarter ended December 31, 1995. The operating results for the
quarter ended December 31, 1995 reflected revenues of $40.4 million and net
income of $8.8 million.
(b) To adjust depreciation expense and amortization of goodwill resulting from
the allocation of the purchase price. The pro forma adjustment assumes an
18-year average estimated useful life for depreciation and a 20-year
amortization period for goodwill.
(c) To reverse the effect of certain events directly attributable to the
transaction paid and expensed by Arethusa prior to the acquisition, which
will not be part of continuing operations of the Company. Such items include
severance to employees, financial advisory services in connection with the
acquisition, and nonrecurring legal and accounting charges incurred in
connection with the acquisition.
(d) To record income tax expense on the effect of pro forma adjustments and to
increase the tax rate on Arethusa results to approximate the federal
statutory tax rate.
(e) To record interest expense and amortization of debt issuance costs on the
Notes and to eliminate historical interest expense on other indebtedness.
(f) Weighted average shares outstanding as if the 17.9 million shares issued by
Diamond Offshore in consideration of the Arethusa common stock had taken
place on January 1, 1996.
S-11
<PAGE> 12
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL ISSUANCE OF
DIAMOND PRO FORMA OTHER THE PRO
OFFSHORE ARETHUSA(A) ADJUSTMENTS(B) NOTES FORMA
---------- ----------- -------------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 336,584 $ 120,166 $ -- $ -- $456,750
Operating expenses:
Contract drilling............... 259,560 86,532 -- -- 346,092
General and administrative...... 13,857 9,033 -- -- 22,890
Depreciation and amortization... 52,865 29,008 3,897(c) -- 85,770
Gain on sale of assets.......... (1,349) -- -- -- (1,349)
-------- -------- ------- ------- -------
Total operating
expenses.............. 324,933 124,573 3,897 -- 453,403
-------- -------- ------- ------- -------
Operating income (loss)........... 11,651 (4,407) (3,897) -- 3,347
Other income (expense):
Interest expense................ (27,052) (6,697) 26,296(d) (6,497)(f) (13,950)
Other, net...................... 1,598 4,048 -- -- 5,646
-------- -------- ------- ------- -------
Income (loss) before income tax
benefit expense................. (13,803) (7,056) 22,399 (6,497) (4,957)
Income tax benefit (expense)...... 6,777 (1,440) (7,840)(e) $ 2,274(e) (229)
-------- -------- ------- ------- -------
Net income (loss)................. $ (7,026) $ (8,496) $ 14,559 $(4,223) $ (5,186)
======== ======== ======= ======= =======
Pro forma net income (loss) per
common share.................... $ 0.20(g) $ (0.42) -- -- $ (0.08)
======== ======== =======
Weighted average common shares
outstanding..................... 50,000(g) 20,333 -- -- 67,893(h)
======== ======== =======
</TABLE>
- ---------------
(a) Pro forma income statement data for Arethusa reflect (i) the acquisition of
the Arethusa Yatzy, which occurred on May 3, 1995, (ii) the sale of the
Treasure Stawinner, which occurred June 30, 1995, and (iii) the dividend and
capital distribution of $61.0 million ($3.00 per share of Arethusa Common
Stock) as if each had occurred at the beginning of fiscal year 1995. The
historical amounts, and the adjustments thereto, upon which the pro forma
Arethusa amounts are based are set forth in the "Unaudited Pro Forma
Consolidated Condensed Financial Statements" included in the Company's
Current Report on Form 8-K dated May 13, 1996 which is incorporated herein
by reference.
(b) To reflect the Arethusa Acquisition and the Diamond Offshore initial public
offering as if both transactions had occurred at January 1, 1995.
(c) To record additional depreciation expense and amortization of goodwill
resulting from the allocation of the purchase price. The pro forma
adjustment assumes an 18-year average estimated useful life for
depreciation and a 20-year amortization period for goodwill.
(d) To adjust interest expense, assuming that the Diamond Offshore initial
public offering and repayment of indebtedness occurred on January 1, 1995.
(e) To record income tax expense on the effect of the pro forma adjustments.
(f) To record interest expense and amortization of debt issuance costs on the
Notes and to eliminate historical interest expense.
(g) After the Diamond Offshore initial public offering, Diamond Offshore had
50.0 million shares of Diamond Offshore common stock outstanding. Assuming
the Diamond Offshore initial public offering had occurred at January 1,
1995, Diamond Offshore would have recognized net income of $10.0 million,
or $0.20 per share of Diamond Offshore common stock, after adjusting for
the after-tax effects of a reduction in interest expense.
(h) Weighted average shares outstanding as if both the October 1995 issuance of
15.0 million shares by Diamond Offshore through the Diamond Offshore
initial public offering and the 17.9 million shares issued by Diamond
Offshore in consideration of the Arethusa common stock had taken place on
January 1, 1995.
S-12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) incorporated
herein by reference.
GENERAL
Effective April 29, 1996, the Company completed its acquisition of Arethusa
(the "Arethusa Acquisition"). Arethusa owned a fleet of 11 mobile offshore
drilling rigs, operated two additional mobile offshore drilling rigs pursuant to
bareboat charters, and provided drilling services worldwide to international and
government-controlled oil and gas companies. Because the Arethusa Acquisition
was accounted for as a purchase for financial reporting purposes, results of
operations include those of Arethusa from the effective date of the Arethusa
Acquisition. See Note 2 to the Company's Consolidated Financial Statements
incorporated herein by reference.
The Company's business and operations depend principally upon the condition
of the oil and gas industry and, specifically, the exploration and production
expenditures of oil and gas companies. Historically, the offshore contract
drilling industry has been highly competitive and cyclical, with periods of high
demand, short rig supply and high dayrates followed by periods of low demand,
excess rig supply and low dayrates. The offshore contract drilling business is
influenced by a number of factors, including the current and anticipated prices
of oil and natural gas, the expenditures by oil and gas companies for
exploration and production and the availability of drilling rigs. For a number
of years, depressed oil and natural gas prices and an oversupply of rigs have
adversely affected the offshore drilling market, particularly in the Gulf of
Mexico, where the prolonged weakness and uncertainty in the demand for and price
of natural gas resulted in a significant decline in exploration and production
activities. Demand for drilling services outside the U.S., excluding the North
Sea, has been less volatile in recent years, but remains dependent on a variety
of political and economic factors beyond the Company's control, including
worldwide demand for oil and natural gas, the ability of the Organization of
Petroleum Exporting Countries ("OPEC") to set and maintain production levels and
pricing, the level of production of non-OPEC countries and the policies of the
various governments regarding exploration and development of their oil and
natural gas reserves.
Diamond Offshore's operations are subject to numerous governmental laws and
regulations. In addition, demand for services in the drilling industry is
dependent on the oil and gas exploration industry and accordingly is affected by
changes in tax and other laws relating to the energy business generally. Diamond
Offshore's operations are subject to numerous federal, state and local
environmental laws and regulations that relate directly or indirectly to its
operations, including certain regulations controlling the discharge of materials
into the environment, requiring removal and clean-up under certain
circumstances, or otherwise relating to the protection of the environment.
Diamond Offshore's operations are also subject to hazards inherent in the
drilling of oil and gas wells such as blowouts, reservoir damage, loss of
production, loss of well control, cratering or fires, the occurrence of which
could result in the suspension of drilling operations, injury to or death of rig
and other personnel and damage to or destruction of Diamond Offshore's, Diamond
Offshore's customer's or a third party's property or equipment. Damage to the
environment could also result from Diamond Offshore's operations, particularly
through oil spillage or uncontrolled fires. In addition, offshore drilling
operations are subject to perils peculiar to marine operations, including
capsizing, grounding, collision and loss or damage from severe weather. Diamond
Offshore has insurance coverage and contractual indemnification for certain
risks but there can be no assurance that such coverage or indemnification will
adequately cover Diamond Offshore's loss or liability in many circumstances or
that Diamond Offshore will continue to carry such insurance or receive such
indemnification.
Significant capital expenditures may be required to comply with
governmental laws and regulations applicable to Diamond Offshore, including
environmental laws and regulations, and such compliance could materially
adversely affect the results of operations or competitive position of Diamond
Offshore. It is possible that such regulations may in the future add
significantly to the cost of operating offshore drilling equipment or may
significantly limit drilling activity.
S-13
<PAGE> 14
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past two years, due
in part to the increasing impact of technological advances that have broadened
opportunities for offshore exploration and development. Both the Gulf of Mexico
and the North Sea semisubmersible markets experienced increased utilization and
significantly higher dayrates in 1995. All of the Company's markets have
experienced increased utilization and significantly higher dayrates in 1996, and
customers increasingly are seeking to contract for rigs serving these markets
for a stated term (as opposed to contracts for the drilling of a single well or
a group of wells). The market for jack-up rigs in the Gulf of Mexico, which
weakened during 1994, appears to have stabilized during 1995 and strengthened
significantly in 1996. However, the Company cannot predict whether and, if so,
to what extent these recently improved conditions will continue. See
"-- Outlook."
The contract drilling industry is highly competitive. Customers often award
contracts on a competitive bid basis, and although a customer selecting a rig
may consider, among other things, a contractor's safety record, crew quality and
quality of service and equipment, the historical oversupply of rigs has created
an intensely competitive market in which price is the primary factor in
determining the selection of a drilling contractor. Diamond Offshore believes
that competition for drilling contracts will continue to be intense for the
foreseeable future. Contractors are also able to adjust to localized supply and
demand imbalances by moving rigs from areas of low utilization and dayrates to
areas of greater activity and relatively higher dayrates. In addition, there are
inactive non-marketed rigs or rigs being operated in non-drilling activities
that could be reactivated to meet an increase in demand for drilling rigs in any
given market. Such movements or reactivations or a decrease in drilling activity
in any major market could depress dayrates and could adversely affect
utilization of Diamond Offshore's rigs.
In addition, the recent improvements in the current results of operations
and prospects for the offshore contract drilling industry as a whole has led to
increased rig construction and enhancement programs by the Company's competitors
and, if present trends continue for an extended period, may lead to new entrants
into the market. A significant increase in the supply of technologically
advanced rigs capable of drilling in deep water may have an adverse effect on
the average operating dayrates for the Company's rigs, particularly its more
advanced semisubmersible units, and on the overall utilization level of the
Company's fleet. In such case, the Company's results of operations would be
adversely affected.
The average age of the Diamond Offshore fleet of offshore drilling rigs
(calculated as of December 31, 1996 and measured from year built) is 18.9 years.
Many of Diamond Offshore's rigs have been upgraded during the last five years
with enhancements such as top-drive drilling systems, increases to water depth
capability, mud pump additions or increases in deck load capacity, and Diamond
Offshore believes that it will be feasible to continue to upgrade its fleet,
particularly its Victory-class semisubmersible rigs, notwithstanding the average
age of its fleet. However, there can be no assurance as to if, when or to what
extent upgrades will continue to be made to rigs in Diamond Offshore's fleet. In
addition, to the extent Diamond Offshore is not able to enhance its fleet with
upgrade projects, Diamond Offshore will have fewer rigs available to meet
customer demand for harsh environment and deep water operations than if such
projects had been successfully implemented.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset dayrate revenues earned
when the Company's rigs are utilized in its turnkey operations and intercompany
expenses charged to rig operations). Certain amounts applicable to the prior
periods have been reclassified to conform to the classifications currently
followed. Such reclassifications do not affect earnings.
S-14
<PAGE> 15
During September 1996, the Company completed its major upgrade of the Ocean
Quest, expanding the rig to have fourth-generation capabilities. Upon
completion, the Ocean Quest is included in Fourth-Generation Semisubmersibles
for discussion purposes (prior period information will continue to include the
rig in Other Semisubmersibles). The Company's drillship, the Ocean Clipper I, is
included in Other Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------- INCREASE/
1996 1995 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles................ $ 28,779 $ 19,358 $ 9,421
Other Semisubmersibles............................ 99,263 45,481 53,782
Jack-ups.......................................... 35,001 17,568 17,433
Turnkey........................................... 8,702 8,319 383
Land.............................................. 5,838 5,081 757
Other............................................. -- (67) 67
Eliminations...................................... (6,961) (4,024) (2,937)
-------- -------- -------
Total Revenues............................ $170,622 $ 91,716 $ 78,906
======== ======== =======
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles................ $ 9,000 $ 8,303 $ 697
Other Semisubmersibles............................ 56,456 32,524 23,932
Jack-ups.......................................... 25,573 15,156 10,417
Turnkey........................................... 7,476 7,415 61
Land.............................................. 4,582 4,312 270
Other............................................. (963) 627 (1,590)
Eliminations...................................... (7,769) (4,509) (3,260)
-------- -------- -------
Total Contract Drilling Expense........... $ 94,355 $ 63,828 $ 30,527
======== ======== =======
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles................ $ 19,779 $ 11,055 $ 8,724
Other Semisubmersibles............................ 42,807 12,957 29,850
Jack-ups.......................................... 9,428 2,412 7,016
Turnkey........................................... 1,226 904 322
Land.............................................. 1,256 769 487
Other............................................. 963 (694) 1,657
Eliminations...................................... 808 485 323
General and Administrative Expense................ (4,109) (2,979) (1,130)
Depreciation and Amortization Expense............. (21,597) (13,361) (8,236)
Gain on Sale of Assets............................ 6,959 24 6,935
-------- -------- -------
Total Operating Income.................... $ 57,520 $ 11,572 $ 45,948
======== ======== =======
</TABLE>
Revenues. The $9.4 million increase in revenues from fourth-generation
semisubmersibles resulted primarily from improvements in dayrates ($8.5 million)
and increases in utilization ($0.9 million). The $53.8 million increase in
revenues from other semisubmersibles was primarily the result of (i) $32.9
million of revenue generated by the eight semisubmersibles acquired in the
Arethusa Acquisition, (ii) revenue from three rigs which were out of service
while modifications were being performed during the quarter ended September 30,
1995 and (iii) revenue from one rig that was cold stacked during the same period
of the prior year. In addition, improvements in dayrates, primarily in the Gulf
of Mexico and the North Sea, contributed an increase in revenue of $11.6
million. The $17.4 million increase in revenues from jack-ups reflects $10.3
million generated by the five jack-ups acquired in the Arethusa Acquisition and
from improved dayrates.
S-15
<PAGE> 16
Contract Drilling Expense. Contract drilling expense for fourth-generation
semisubmersibles was relatively unchanged from the third quarter of the prior
year. The $23.9 million increase in expenses for other semisubmersibles resulted
from $14.5 million associated with rigs acquired in the Arethusa Acquisition,
increased expenses for shipyard repairs on one rig, and additional operating
expenses incurred on a semisubmersible in the Gulf of Mexico that was cold
stacked in the comparable period of the prior year. The $10.4 million increase
in expenses for jack-ups resulted primarily from the additional rigs acquired in
the Arethusa Acquisition. Other expenses decreased $1.6 million due to
collections from a settlement in connection with a lawsuit and collections on
accounts written off in the prior year used to reduce contract drilling expense.
A reduction in maintenance and repairs on spare equipment also decreased
contract drilling expense as compared to the prior year.
General and Administrative Expense. General and administrative expense of
$4.1 million for the quarter ended September 30, 1996 increased due to the
Arethusa Acquisition; however, these increases were partially offset by cost
savings in rent due to the February 1996 purchase of the building in which the
Company has its corporate headquarters. In addition, approximately $0.7 million
of general and administrative expense associated with construction on the Ocean
Quest, the Ocean Star and the Ocean Clipper I was capitalized to these projects
during the third quarter of 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense of $21.6 million for the quarter ended September 30, 1996 increased
primarily due to additional expense for (i) the eight semisubmersibles and three
jack-ups acquired in the Arethusa Acquisition, (ii) goodwill amortization
expense associated with the Arethusa Acquisition, (iii) three rig upgrades
completed in the third and fourth quarters of 1995 and (iv) capital expenditures
associated with the Company's continuing rig enhancement program. Partially
offsetting these increases was a change in accounting estimate to increase the
estimated useful lives for certain classes of rigs. This change reduced
depreciation expense by approximately $2.1 million, as compared to the quarter
ended September 30, 1995.
Gain on Sale of Assets. Gain on sale of assets for the quarter ended
September 30, 1996 consists primarily of a gain on the sale of the Ocean
Conquest, a shallow water jack-up drilling rig located in the Gulf of Mexico.
Interest Expense. Interest expense of $1.2 million incurred during the
quarter ended September 30, 1996 was capitalized to qualified construction
projects on the Ocean Quest, the Ocean Star and the Ocean Clipper I. See Note 5
to the Company's Consolidated Financial Statements incorporated herein by
reference. The decrease from $8.9 million for the same period of the prior year
was attributable to a reduction in outstanding indebtedness resulting from the
repayment of the Company's loan from Loews in connection with the initial public
offering in October 1995.
Income Tax (Expense) Benefit. The income tax expense for the quarter ended
September 30, 1996 was $19.4 million as compared to $1.6 million for the
comparable period of the prior year. This change resulted primarily from the
increase of $54.9 million in the Company's income before income tax expense. In
addition, during the quarter ended September 30, 1995, the Company's tax expense
reflects the effects of losses in foreign jurisdictions for which no income tax
benefit was recognized.
Net Income (Loss). Net income for the quarter ended September 30, 1996
increased $37.1 million to $38.5 million, as compared to $1.4 million for the
comparable period of the prior year. The increase resulted primarily from an
increase in operating income of $45.9 million and a decrease in interest expense
of $8.9 million, partially offset by an increase in income tax expense of $17.9
million.
S-16
<PAGE> 17
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset dayrate revenues earned
when the Company's rigs are utilized in its turnkey operations and intercompany
expenses charged to rig operations). Certain amounts applicable to the prior
periods have been reclassified to conform to the classifications currently
followed. Such reclassifications do not affect earnings.
During September 1996, the Company completed its major upgrade of the Ocean
Quest, expanding the rig to have fourth-generation capabilities. Upon
completion, the Ocean Quest is included in Fourth-Generation Semisubmersibles
for discussion purposes (prior period information will continue to include the
rig in Other Semisubmersibles). The Company's drillship, the Ocean Clipper I, is
included in Other Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------- INCREASE/
1996 1995 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles............... $ 76,622 $ 46,656 $ 29,966
Other Semisubmersibles........................... 237,206 121,615 115,591
Jack-ups......................................... 83,235 49,939 33,296
Turnkey.......................................... 27,219 11,866 15,353
Land............................................. 16,380 14,746 1,634
Other............................................ -- -- --
Eliminations..................................... (16,189) (6,240) (9,949)
--------- --------- ---------
Total Revenues........................... $424,473 $238,582 $ 185,891
========= ========= =========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles............... $ 25,860 $ 25,790 $ 70
Other Semisubmersibles........................... 137,311 94,759 42,552
Jack-ups......................................... 59,040 46,061 12,979
Turnkey.......................................... 25,533 12,334 13,199
Land............................................. 13,748 12,877 871
Other............................................ (1,174) 1,116 (2,290)
Eliminations..................................... (18,209) (7,677) (10,532)
--------- --------- ---------
Total Contract Drilling Expense.......... $242,109 $185,260 $ 56,849
========= ========= =========
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles............... $ 50,762 $ 20,866 $ 29,896
Other Semisubmersibles........................... 99,895 26,856 73,039
Jack-ups......................................... 24,195 3,878 20,317
Turnkey.......................................... 1,686 (468) 2,154
Land............................................. 2,632 1,869 763
Other............................................ 1,174 (1,116) 2,290
Eliminations..................................... 2,020 1,437 583
General and Administrative Expense............... (10,661) (9,453) (1,208)
Depreciation and Amortization Expense............ (52,062) (41,425) (10,637)
Gain on Sale of Assets........................... 10,189 454 9,735
--------- --------- ---------
Total Operating Income................... $129,830 $ 2,898 $ 126,932
========= ========= =========
</TABLE>
Revenues. The $30.0 million increase in revenues from fourth-generation
semisubmersibles resulted from improvements in dayrates ($22.1 million) and
increases in utilization ($7.8 million). The improvement in utilization for 1996
was partially attributable to the relocation of two fourth-generation rigs
during the comparable period of the prior year, reducing the days worked for
these rigs during that period. The $115.6 million increase in revenues from
other semisubmersibles was primarily attributable to $57.1 million of
S-17
<PAGE> 18
revenues from the eight semisubmersibles acquired in the Arethusa Acquisition
and increases in dayrates in both the North Sea and the Gulf of Mexico. The
$33.3 million increase in revenues from jack-ups resulted primarily from
revenues associated with rigs acquired in the Arethusa Acquisition and
improvements in dayrates in the Gulf of Mexico. The $15.4 million increase in
turnkey revenues resulted from turnkey projects of greater magnitude and overall
project management services completed during 1996 as compared to those completed
during the same period of the prior year.
Contract Drilling Expense. Contract drilling expense for fourth-generation
semisubmersibles was relatively unchanged from the first nine months of the
prior year. The $42.6 million increase for other semisubmersibles resulted from
the additional rigs acquired in the Arethusa Acquisition, increased expenses for
shipyard repairs on three rigs, and increased expenses associated with a rig
working during the current year but cold stacked during the comparable period of
the prior year. The $13.0 million increase in jack-up expense resulted primarily
from the rigs acquired in the Arethusa Acquisition, partially offset by
decreased operating expenses for two rigs that were cold stacked during 1996.
The $13.2 million increase in turnkey expense resulted from more extensive
turnkey wells drilled, project management services provided and cost overruns on
one turnkey well during the current year. Other expenses decreased $2.3 million
due to collections from a settlement in connection with a lawsuit and
collections on accounts written off in the prior year used to reduce contract
drilling expense. A reduction in maintenance and repairs on spare equipment also
decreased contract drilling expense as compared to the prior year.
General and Administrative Expense. General and administrative expense of
$10.7 million for the nine months ended September 30, 1996 increased due to the
Arethusa Acquisition; however, these increases were partially offset by cost
savings in rent due to the February 1996 purchase of the building in which the
Company has its corporate headquarters. In addition, approximately $1.1 million
of general and administrative expense associated with construction on the Ocean
Quest, the Ocean Star and the Ocean Clipper I was capitalized to these projects
during the third quarter of 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense of $52.1 million for the nine months ended September 30, 1996 increased
primarily due to additional expense for (i) the eight semisubmersibles and three
jack-ups acquired in the Arethusa Acquisition, (ii) goodwill amortization
expense associated with the Arethusa Acquisition, (iii) three rig upgrades
completed in the third and fourth quarters of 1995 and (iv) capital expenditures
associated with the Company's continuing rig enhancement program. Partially
offsetting these increases was a change in accounting estimate to increase the
estimated useful lives for certain classes of rigs. This change reduced
depreciation expense by approximately $6.4 million, as compared to the nine
months ended September 30, 1995.
Gain on Sale of Assets. Gain on sale of assets for the nine months ended
September 30, 1996 consists primarily of gains on the sale of two of the
Company's shallow water jack-up drilling rigs, the Ocean Magallanes and the
Ocean Conquest.
Interest Expense. Interest expense of $0.1 million for the nine months
ended September 30, 1996 consists of interest costs incurred of $2.6 million,
net of capitalized interest of $2.5 million. See Note 5 to the Company's
Consolidated Financial Statements incorporated herein by reference. The decrease
from $26.1 million for the same period of the prior year was attributable to a
reduction in outstanding indebtedness resulting from the repayment of the
Company's loan from Loews in connection with the initial public offering in
October 1995.
Income Tax (Expense) Benefit. The income tax (expense) benefit for the nine
months ended September 30, 1996 was $(40.6) million as compared to $9.2 million
for the comparable period of the prior year. This change resulted primarily from
the increase of $153.0 million in the Company's income before income tax
expense. In addition, during the nine months ended September 30, 1995, the
Company's tax benefit reflects the effects of profits in foreign jurisdictions
where the Company's tax liability was minimal.
Net Income (Loss). Net income (loss) for the nine months ended September
30, 1996 increased $103.1 million to $90.2 million, as compared to $(12.9)
million for the comparable period of the prior year. The increase resulted
primarily from an increase in operating income of $126.9 million and a decrease
in interest expense of $26.0 million, partially offset by an increase in income
tax expense of $49.8 million.
S-18
<PAGE> 19
Diamond Offshore reported operating income of $129.8 million for the nine
months ended September 30, 1996, $11.7 million for the year ended December 31,
1995, operating loss of $14.6 million for the year ended December 31, 1994 and
operating income of $4.5 million for the year ended December 31, 1993.
Additionally, Diamond Offshore reported net income of $90.2 million for the nine
months ended September 30, 1996 and net loss of $7.0 million, $34.8 million and
$16.6 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Diamond Offshore's financial results in the future will depend
primarily on the utilization and dayrates of the rigs operated by Diamond
Offshore and the cost of such operations. Although demand for drilling services
has improved recently, an oversupply of rigs has existed since the early 1980's
and has led to intense price competition among drilling contractors. There can
be no assurance that Diamond Offshore's results of operations will continue its
recent positive trend in future periods.
OUTLOOK
The deep water and harsh environment markets for semisubmersible rigs
continue to experience improved demand and higher dayrates due in part to the
increasing impact of technological advances, including 3-D seismic, horizontal
drilling, and subsea completion procedures. Both the Gulf of Mexico and the
North Sea semisubmersible markets experienced increased utilization and
significantly higher dayrates in 1995. All of the Company's markets have
experienced increased utilization and significantly higher dayrates in 1996, and
customers are increasingly seeking to contract for rigs serving these markets
for a stated term (as opposed to contracts for the drilling of a single well or
a group of wells). For the nine months ended September 30, 1996, average
operating dayrates earned by the Company's semisubmersible fleet were
approximately 37% higher than those earned during the same period of 1995. In
addition, the Company's semisubmersible rigs marketed and available for contract
are essentially working at full utilization. Consequently, many customers are
contracting rigs serving these markets under term contracts (as opposed to
contracts let on a single well or well-to-well basis). Of the Company's 30
semisubmersibles, as of January 23, 1997, 25 were committed under term contracts
with staggered renewal opportunities throughout 1997 and beyond.
The Company continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and harsh
environment operations. During September 1996, the Company completed its major
upgrade of the Ocean Quest and the rig began a three-year commitment. The rig,
which had been cold stacked in the Gulf of Mexico, now has fourth-generation
capabilities, including variable deckload in excess of 5,000 long tons, a
mooring system to meet 3,500 foot water depth requirements, enhanced subsea
equipment, and upgraded mud pit capacity. The Ocean Victory, previously stacked
in the North Sea, arrived in the Gulf of Mexico in September 1996 and began
modifications in connection with its three-year deep water drilling program
anticipated to begin during the fourth quarter of 1997. In addition, upgrades
continue on the Ocean Star and the Ocean Clipper I which are anticipated to be
completed during the first and second quarters of 1997, respectively.
The market for jack-up rigs continues to strengthen. For the nine months
ended September 30, 1996, average operating dayrates earned by the Company's
jack-up fleet were approximately 29% higher than those earned during the same
period of 1995. The Company's marketed jack-ups in the Gulf of Mexico are
currently experiencing full utilization, although contracts generally remain on
a short-term or well-to-well basis. The Company's three international jack-ups,
and the jack-up which the Company operates under bareboat charter, are
contracted for terms expiring from May 1997 to February 1998.
Historically, the offshore contract drilling market has been highly
competitive and cyclical, and the Company cannot predict the extent to which
current conditions will continue.
LIQUIDITY
Net cash provided by operating activities for the nine months ended
September 30, 1996 increased by $124.3 million to $152.6 million, as compared to
$28.3 million for the comparable period of the prior year. This increase was
attributable to a $103.1 million increase in net income and a $44.5 million
increase in the deferred tax provision for 1996, partially offset by the
elimination of accrued interest on notes payable to Loews, which totaled $26.1
million for the nine months ended September 30, 1995. Cash used in investing
activities increased
S-19
<PAGE> 20
$107.7 million primarily due to capital expenditures for major upgrades during
1996 of $154.6 million, partially offset by cash acquired in the Arethusa
Acquisition and proceeds from the sale of assets. Cash used in financing
activities for the nine months ended September 30, 1996 increased $7.9 million
primarily due to repayment of debt assumed in the Arethusa Acquisition,
partially offset by net borrowings of $55.0 million on the Credit Facility as
compared to $2.0 million of net repayments on the Company's indebtedness to
Loews during the same period of the prior year.
The Company uses funds available under the Credit Facility, together with
cash flow from operations, to fund its capital expenditure and working capital
requirements. The Credit Facility is a revolving line of credit for a five-year
term providing a maximum credit commitment of $200.0 million until December
2001. Borrowings under the Credit Facility bear interest, at the Company's
option, at a per annum rate equal to a base rate (equal to the greater of (i)
the prime rate announced by the agent bank, (ii) the Federal Funds Effective
Rate plus .50% or (iii) the Adjusted Certificate of Deposit Rate plus .50%) or
the Eurodollar Rate plus .500% until June 30, 1997, and thereafter plus .375%,
.500% or .625% based upon the Leverage Ratio for the previous fiscal quarter or,
if an investment grade rating is in effect, plus .375%. The Company is required
to pay a commitment fee on the unused available portion of the maximum credit
commitment of .200% until June 30, 1997 and of .150%, .200% or .250% thereafter
based upon the Leverage Ratio for the previous fiscal quarter or, if an
investment grade rating is in effect, of .150%. Borrowings are unsecured by
mortgages or liens on, or pledges of, assets, but are guaranteed by all of the
Company's material domestic subsidiaries. The Credit Facility also contains
covenants that limit the amount of total consolidated debt, require the
maintenance of certain consolidated financial ratios and limit dividends and
similar payments. As of the date of this Prospectus Supplement the Company was
in compliance with each of these covenants.
It is anticipated that the Credit Facility will be used primarily to fund
rig upgrades and similar capital expenditure requirements. In management's
opinion, the Company's cash generated from operations and borrowings available
under its Credit Facility are sufficient to meet its anticipated short and
long-term liquidity needs, including its capital expenditure requirements. The
Company's cash flows and operating revenues primarily are determined by average
operating dayrates and overall fleet utilization, which in turn are dependent on
the worldwide level of offshore oil and gas exploration and production activity.
CAPITAL RESOURCES
Cash requirements for capital commitments result from rig upgrades to meet
specific customer requirements and from the Company's continuing rig enhancement
program, including top-drive drilling system installations and water depth and
drilling capability upgrades. It is management's opinion that significant
improvements in operating cash flow resulting from current conditions of
improved dayrates and the increasing number of term contracts for rigs in
certain markets, in conjunction with borrowings under the Credit Facility, will
be sufficient to meet these capital requirements. In addition, the Company may,
from time to time, issue debt or equity securities, or a combination thereof, to
finance capital expenditures or acquisitions of assets and businesses. The
Company's ability to effect any such issuance will be dependent on the Company's
results of operations, its current financial condition and other factors beyond
its control.
At September 30, 1996, the Company expected to spend approximately $243.5
million, including interest expense to be capitalized, during 1996 for rig
upgrades in connection with contract requirements. Expenditures budgeted for
upgrades of the Ocean Quest, the Ocean Star and the Ocean Clipper I totalled
$157.6 million at such date. Also included in the Company's major upgrade budget
at such date was $22.3 million to increase the water depth capability to 3,000
feet on the Ocean Winner (formerly the Arethusa Neptune) and $17.7 million for
1996 expenditures to upgrade the Ocean Victory for deep water drilling in the
Gulf of Mexico. During the nine months ended September 30, 1996, $154.6 million
was expended on these projects. The Company sought to mitigate financial risk
associated with these projects by deferring commencement until term commitments
were secured with major integrated or large independent oil companies with
projected contract revenues substantially covering the upgrade costs. The
Company expects to evaluate other upgrade projects as opportunities arise.
S-20
<PAGE> 21
Through September 30, 1996, the Company spent approximately $20.3 million
for capital expenditures on other rig enhancements. The Company has also
budgeted $52.6 million for 1997 capital expenditures associated with its
continuing rig enhancement program.
The Company is continually considering potential transactions including,
but not limited to, enhancement of existing rigs, the purchase of existing rigs,
construction of new rigs and the acquisition of other companies engaged in
contract drilling. Certain of the potential transactions reviewed by the Company
would if completed result in its entering new lines of business, although in
general these opportunities have been related in some manner to the Company's
existing operations. For example, the Company has explored the possibility of
acquiring certain floating production systems, crew accommodation units and oil
service companies providing subsea products, technology and services, and
shipping assets such as oil tankers, through the acquisition of existing
businesses or assets or new construction. Although the Company does not as of
the date hereof have any commitment with respect to a material acquisition, it
could enter into such agreement in the future and such acquisition could result
in a material expansion of its existing operations or result in its entering a
new line of business. Some of the potential acquisitions considered by the
Company could, if completed, result in the expenditure of a material amount of
funds or the issuance of a material amount of debt or equity securities.
OTHER
Disposition of Assets. In December 1996, the Company sold all of the
operational assets of Diamond M Onshore, Inc., a wholly-owned subsidiary of the
Company to DI Industries, Inc. for approximately $26.0 million in cash. The
assets sold consisted of ten land drilling rigs, all of which were operating, 18
trucks, a yard facility in Alice, Texas and various other associated equipment.
Operations Outside the United States. Operations outside the United States
accounted for approximately 37.7%, 36.4% and 34.0% of Diamond Offshore's total
consolidated revenues for the nine months ended September 30, 1996 and fiscal
years 1995 and 1994, respectively. Diamond Offshore's non-U.S. operations are
subject to certain political, economic and other uncertainties not encountered
in U.S. operations, including risks of war and civil disturbances (or other
risks that may limit or disrupt markets), expropriation and the general hazards
associated with the assertion of national sovereignty over certain areas in
which operations are conducted. Diamond Offshore's operations outside the United
States may face the additional risk of fluctuating currency values, hard
currency shortages, controls of currency exchange and repatriation of income or
capital. No prediction can be made as to what governmental regulations may be
enacted in the future that could adversely affect the international drilling
industry.
Certain of the Company's subsidiaries use the local currency in the country
where they conduct operations as their functional currency. Currency
environments in which the Company has material business operations include the
U.K., Australia and Brazil. The Company generally attempts to minimize its
currency exchange risk by seeking international contracts payable in local
currency in amounts equal to the Company's estimated operating costs payable in
local currency and in U.S. dollars for the balance of the contract. Because of
this strategy, the Company has minimized its unhedged net asset or liability
positions denominated in local currencies and has not experienced significant
gains or losses associated with changes in currency exchange rates. However,
contracts presently covering three of the Company's four rigs operating in the
U.K. sector of the North Sea are payable in U.S. dollars. The Company has not
hedged its exposure to changes in the exchange rate between U.S. dollars and
pounds sterling for operating costs payable in pounds sterling, although it may
seek to do so in the future.
Currency translation adjustments are accumulated in a separate section of
stockholders' equity. However, when the Company ceases its operations in a
currency environment, the accumulated adjustments are recognized currently in
results of operations. Translation gains and losses for the Company's operations
in Brazil have been recognized currently due to the hyperinflationary status of
this environment. The effect on results of operations has not been material and
is not expected to have a significant effect in the future due to the recent
stabilization of currency rates in Brazil.
Turnkey Operations. Diamond Offshore, through Diamond Offshore Turnkey
Services, Inc. ("DOTS"), a direct, wholly owned subsidiary of Diamond Offshore,
selectively engages in drilling services pursuant to turnkey
S-21
<PAGE> 22
drilling contracts under which DOTS agrees to drill a well to a specified depth
for a fixed price. Generally, DOTS is not entitled to payment unless the well is
drilled to the specified depth and profitability of the contract depends upon
its ability to keep expenses within the estimates used by DOTS in determining
the contract price. Drilling a well under a turnkey contract therefore typically
requires a cash commitment by Diamond Offshore in excess of those drilled under
conventional dayrate contracts and exposes DOTS to risks of potential financial
losses that generally are substantially greater than those that would ordinarily
exist when drilling under a conventional dayrate contract. The financial results
of a turnkey contract depend upon the performance of the drilling unit, drilling
conditions and other factors, some of which are beyond the control of DOTS. For
the nine months ended September 30, 1996, DOTS contributed $1.7 million of
operating income to the Company's consolidated results of operations.
DESCRIPTION OF NOTES
The following description of the particular terms of the Notes offered
hereby (which are a series of "Debt Securities" described in the accompanying
Prospectus) supplements, and to the extent inconsistent therewith replaces,
insofar as such description relates to the Notes, the description of the general
terms and provisions of the Debt Securities set forth in the accompanying
Prospectus, to which description reference is hereby made.
The Notes will be issued under an Indenture, dated as of ,
1997, as supplemented by a Supplemental Indenture dated as of , 1997
(collectively, the "Indenture"), between the Company and Chase Manhattan Bank,
as Trustee (the "Trustee").
Capitalized terms used and not otherwise defined below or elsewhere in this
Prospectus Supplement are used with the respective meanings given thereto in the
Indenture.
GENERAL
The Notes will be unsecured, subordinated general obligations of the
Company, will be limited to an aggregate principal amount of (a) $300.0 million
and (b) such aggregate principal amount (which may not exceed $45.0 million
principal amount) of Notes as may be purchased by the Underwriters on the Second
Closing Date (as defined in the Underwriting Agreement) pursuant to the
Underwriting Agreement, and will mature on February 15, 2007. The Notes will
bear interest at a rate of % per annum from , 1997, or from the
most recent Interest Payment Date on which interest has been paid or provided
for, payable semi-annually on February 15 and August 15 of each year, commencing
August 15, 1997, to each Person in whose name a Note (or any predecessor Note)
is registered (a "Holder") at the close of business on the preceding February 1
or August 1 (whether or not a Business Day), as the case may be. Interest on the
Notes will be computed on the basis of a 360-day year comprised of twelve,
30-day months.
Principal of, and premium, if any, and interest on the Notes will be
payable, Notes may be presented for conversion and transfers of the Notes will
be registrable at the office or agency of the Company in the Borough of
Manhattan, The City of New York, and transfers of the Notes will also be
registrable at such other office or agency of the Company as may be maintained
for such purpose. In addition, payment of interest may be made, at the option of
the Company, by check mailed to the address of the person entitled thereto as
shown on the Security Register. The Notes are to be in denominations of $1,000
or any integral multiple thereof. No service charge will be made for any
conversion or registration of transfer or exchange of Notes, except for any tax
or other governmental charge that may be imposed in connection therewith.
FORM, DENOMINATION AND REGISTRATION
The Notes will be represented by one or more global securities (a "Global
Security") registered in the name of DTC. Except as set forth below, a Global
Security may be transferred in whole and not in part, only to DTC or another
nominee of DTC or to a successor of DTC or its nominee.
Upon the issuance of a Global Security, DTC will credit, on its book-entry
registration and transfer system, the respective principal amounts of the Notes
represented by such Global Security to the accounts of institutions that have
accounts with DTC or its nominee ("Participants"). The accounts to be credited
will be designated by
S-22
<PAGE> 23
the Underwriters, dealers or agents. Ownership of beneficial interests in a
Global Security will be limited to Participants or persons that may hold
interests through Participants. Ownership of interests in such Global Security
will be shown on, and the transfer of those ownership interests will be effected
only through, records maintained by DTC (with respect to Participants'
interests) and such Participants (with respect to the owners of beneficial
interests in such Global Security). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in a Global Security.
So long as DTC, or its nominee, is the registered holder and owner of such
Global Security, DTC or such nominee, as the case may be, will be considered the
sole owner and holder of the related Notes for all purposes of such Notes and
for all purposes under the Indenture. Except as set forth below, owners of
beneficial interests in a Global Security will not be entitled to have the Notes
represented by such Global Security registered in their names, will not receive
or be entitled to receive physical delivery of Notes in definitive form and will
not be considered to be the owners or holders of any Notes under the Indenture
or such Global Security.
Accordingly, each person owning a beneficial interest in a Global Security
must rely on the procedures of DTC and, if such person is not a Participant, on
the procedures of the Participant through which such person owns its interest,
to exercise all rights of a holder of Notes or such Global Security. The Company
understands that under existing industry practice, in the event the Company
requests any action of holders of Notes or an owner of a beneficial interest in
a Global Security desires to take any action that DTC, as the holder of such
Global Security, is entitled to take, DTC would authorize the Participants to
take such action, and that the Participants would authorize beneficial owners
owning through such Participants to take such action or would otherwise act upon
the instructions of beneficial owners owning through them.
Payment of principal and interest on Notes represented by a Global Security
will be made to DTC or its nominee, as the case may be, as the registered owner
and holder of such Global Security.
The Company expects that DTC, upon receipt of any payment of principal or
interest, will immediately credit the accounts of the Participants with such
payment in amounts proportionate to their respective holdings in principal
amount of beneficial interest in the Global Security as shown in the records of
DTC. Payments by Participants to owners of beneficial interests in a Global
Security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the
responsibility of such Participants. The Company and the Trustee will not have
any responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in a Global Security
for any Notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for any other aspect of the
relationship between DTC and its Participants or the relationship between such
Participants and the owners of beneficial interests in such Global Security
owned through such Participants.
Unless and until it is exchanged in whole or in part for Notes in
definitive form, a Global Security may not be transferred except as a whole by
DTC to a nominee of DTC, by a nominee of DTC to DTC or another nominee of DTC,
or to a successor of DTC or its nominee.
Notes represented by a Global Security will be exchangeable for Notes in
definitive form of like tenor as such Global Security in denominations of $1,000
and in any greater amount that is an integral multiple thereof if (i) DTC
notifies the Company that it is unwilling or unable to continue as depository
for such Global Security or DTC ceases to be a clearing agency registered under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) the
Company executes and delivers to the Trustee a Company Order that such Global
Security shall be so transferable, registrable and exchangeable and such
transfers shall be registrable or (iii) there shall have occurred and be
continuing an Event of Default with respect to the Notes. Any Global Security
that is exchangeable pursuant to the preceding sentence is exchangeable for
Notes issuable in authorized denominations and registered in such names as DTC
shall direct and an owner of a beneficial interest in a Global Security will be
entitled to physical delivery of such Security in definitive form. Subject to
the foregoing, a Global Security is not exchangeable except for a Global
Security or Global Securities of the same aggregate denominations to be
registered in the name of DTC or its nominee.
S-23
<PAGE> 24
DTC has advised the Company and the Underwriters as follows: DTC is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC was created to hold
securities of Participants and to facilitate the clearance and settlement of
securities transactions among the Participants, thereby eliminating the need for
physical delivery of securities and certificates. Participants include
securities brokers and dealers (including the Underwriters), banks, trust
companies, clearing corporations and certain other organizations, some of which
(and/or their representatives) own DTC. Access to DTC's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with Participants,
either directly or indirectly ("Indirect Participants"). Persons who are not
Participants may beneficially own securities held by DTC only through
Participants or Indirect Participants. The rules applicable to DTC and the
Participants are on file with the Commission. DTC currently accepts only notes
denominated and payable in U.S. dollars.
CONVERSION RIGHTS
The Notes will be convertible, in whole or in part, into Common Stock of
the Company at the option of the Holder at any time following the date of
original issuance thereof and prior to the close of business on the Business Day
immediately preceding the maturity date, unless previously redeemed, initially
at the conversion price stated on the cover page of this Prospectus Supplement.
The right to convert the Notes called for redemption will terminate at the close
of business on the Business Day immediately preceding the Redemption Date unless
the Company defaults in making the payment due on the Redemption Date.
If the Company, by means of dividend or otherwise, declares or makes a
distribution in respect of its Common Stock referred to in clause (iv) or (v)
below, the Holder of each Note, upon the conversion thereof subsequent to the
close of business on the date fixed for the determination of stockholders
entitled to receive such distribution and prior to the effectiveness of the
conversion price adjustment in respect of such distribution pursuant to clause
(iv) or (v) below, will be entitled to receive for each share of Common Stock
into which such Note is converted, the portion of the evidences of indebtedness,
shares of capital stock, cash and other property so distributed applicable to
one share of Common Stock; provided, however, that the Company may, with respect
to all Holders so converting, in lieu of distributing any portion of such
distribution not consisting of cash or Notes of the Company, pay such Holder
cash equal to the fair market value thereof.
The conversion price will be subject to adjustment upon the occurrence of
certain events, including: (i) the payment of dividends (and other
distributions) of Common Stock on any class of capital stock of the Company;
(ii) the issuance to all holders of Common Stock of rights, warrants or options
entitling them to subscribe for or purchase Common Stock at less than the
current market price (as defined) thereof; (iii) subdivisions and combinations
of Common Stock; (iv) distributions to all holders of Common Stock of evidences
of indebtedness of the Company, shares of capital stock, Notes, cash or property
(excluding any rights, warrants or options referred to in clause (ii) above and
any dividend or distribution paid exclusively in cash and any dividend or
distribution referred to in clause (i) above); (v) distributions consisting
exclusively of cash to all holders of Common Stock in an aggregate amount that,
together with (A) other all-cash distributions made within the preceding 12
months and (B) any cash and the fair market value, as of the expiration of the
tender or exchange offer referred to below, of consideration payable in respect
of any tender or exchange offer by the Company or a Subsidiary for the Common
Stock concluded within the preceding 12 months, exceeds 12.5% of the Company's
aggregate market capitalization (such aggregate market capitalization being the
product of the current market price (as defined) of the Common Stock multiplied
by the number of shares of Common Stock then outstanding) on the date of such
distribution; and (vi) the successful completion of a tender or exchange offer
made by the Company or any Subsidiary for the Common Stock that involves an
aggregate consideration that, together with (X) any cash and the fair market
value of other consideration payable in respect of any tender or exchange offer
by the Company or a Subsidiary for the Common Stock concluded within the
preceding 12 months and (Y) the aggregate amount of any all-cash distributions
to all holders of the Company's Common Stock made within the preceding 12
months, exceeds 12.5% of the Company's aggregate market capitalization on the
expiration of such
S-24
<PAGE> 25
tender or exchange offer. No adjustment of the conversion price will be required
to be made until cumulative adjustments amount to 1% or more of the conversion
price as last adjusted.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Stock is
converted into the right to receive other securities, cash or other property,
each Note then outstanding would, without the consent of any Holders of Notes,
become convertible (i) in the event such transaction constitutes a Change in
Control (as defined below), only into the kind and amount of securities, cash
and other property receivable upon the transaction by a holder of the number of
shares of Common Stock which would have been received by a Holder immediately
prior to such transaction if such Holder had converted its Note, or (ii) in the
event such transaction does not constitute a Change in Control, into common
stock of the kind received by holders of Common Stock as a result of such
transaction, at an adjusted conversion price calculated as described in the
Indenture.
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the current
market price (as defined).
Except as described in this paragraph, no Holder of Notes will be entitled,
upon conversion thereof, to any actual payment or adjustment on account of
accrued and unpaid interest (although such accrued and unpaid interest will be
deemed paid by the appropriate portion of the Common Stock received by the
holders upon such conversion) or on account of dividends on shares of Common
Stock issued in connection therewith. Notes surrendered for conversion during
the period from the close of business on any Regular Record Date to the opening
of business on the corresponding Interest Payment Date (except Notes called for
redemption on a Redemption Date within such period between and including such
Regular Record Date and such Interest Payment Date) must be accompanied by
payment to the Company of an amount equal to the interest payable on such
Interest Payment Date.
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
federal income tax purposes (e.g., distributions of evidences of indebtedness or
assets of the Company, but generally not stock dividends or rights to subscribe
to capital stock) and, pursuant to the conversion price adjustment provisions of
the Indenture, the conversion price of the Notes is reduced, such reduction may
be deemed to be the receipt of taxable income to Holders of Notes.
In addition, the Company may make such reductions in the conversion price
as the Board of Directors of the Company deems advisable to avoid or diminish
any income tax to holders of shares of Common Stock resulting from any dividend
or distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes or for any other reasons.
OPTIONAL REDEMPTION
The Notes may be redeemed at the option of the Company, at any time and
from time to time, in whole or in part, on at least 30 and not more than 60
days' notice by mail to the registered Holders thereof, at any time on or after
February 22, 2001 and prior to February 15, 2002 at % of principal amount
and, thereafter, at the following Redemption Prices (expressed as percentages of
principal amount), if redeemed during the 12-month period beginning on February
15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------------------------------- ----------
<S> <C>
2002.............................................. %
2003.............................................. %
2004.............................................. %
2005.............................................. %
</TABLE>
and thereafter at 100% of the principal amount thereof; in each case together
with accrued and unpaid interest to (but not including) the Redemption Date
(subject to the rights of Holders on any Regular Record Date to receive interest
due on any Interest Payment Date that is on or prior to such Redemption Date).
If less than all the Notes are to be redeemed, the Trustee will select or cause
to be selected the Notes by such method as it deems fair and
S-25
<PAGE> 26
appropriate and which may provide for selection for redemption of portions of
the principal amount of any Note of a denomination larger than $1,000.
No sinking fund is provided for the Notes.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF NOTES
In the event a Change in Control occurs, each Holder of Notes will have the
right, at the Holder's option, to require the Company to purchase all or any
part of such Holder's Notes on the date (the "Repurchase Date") that is 75 days
after the date the Company gives notice of the Change in Control, at a price
(the "Repurchase Price") equal to 100% of the principal amount thereof, together
with accrued and unpaid interest through the Repurchase Date. On or prior to the
Repurchase Date, the Company shall deposit with a Paying Agent an amount of
money sufficient to pay the aggregate Repurchase Price of the Notes that is to
be paid on the Repurchase Date.
The Company may not purchase any Note pursuant to the preceding paragraph
at any time when the subordination provisions of the Indenture otherwise would
prohibit the Company from making payments of principal in respect of the Notes.
Notwithstanding the foregoing, failure by the Company to repurchase the Notes
when required under the preceding paragraph will constitute an Event of Default
under the Indenture whether or not such repurchase is permitted by the
subordination provisions of the Indenture.
On or before the 15th day after the Company knows or reasonably should know
a Change in Control has occurred, the Company will be required to mail to all
Holders of the Notes a notice of the occurrence of such Change in Control, the
date by which the repurchase right must be exercised, the Repurchase Price for
the Notes and the procedures that the Holder must follow to exercise such right.
To exercise the repurchase right, the Holder of a Note will be required to
deliver, on or before the second Business Day prior to the Repurchase Date,
written notice to the Company (or an agent designated by the Company for such
purpose) of the Holder's exercise of such right, together with the certificates
evidencing the Note or Notes with respect to which the right is being exercised,
duly endorsed for transfer.
A "Change in Control" shall be deemed to have occurred at such time as (a)
any Person, or any Persons acting together in a manner which would constitute a
"group" (a "Group") for purposes of Section 13(d) of the Exchange Act, or any
successor provision thereto, together with any Affiliates thereof (in each case,
excluding Permitted Holders) become the Beneficial Owners, directly or
indirectly, of capital stock of the Company, entitling such Person or Persons
and its or their Affiliates to exercise more than 50% of the total voting power
of all classes of the Company's capital stock entitled to vote generally in the
election of the Company's directors or (b) the Company shall consolidate with or
merge into any other Person, or any other Person shall consolidate with or merge
into the Company, and, in the case of any such transaction, the outstanding
Common Stock is reclassified into or exchanged for any other property or
security, unless the stockholders of the Company immediately before such
transaction own, directly or indirectly, immediately following such transaction,
at least a majority of the combined voting power of the outstanding voting
securities of the corporation resulting from such transaction in substantially
the same proportion as their ownership of the Common Stock immediately before
such transaction; provided, that a Change in Control shall not be deemed to have
occurred if at least 50% of the consideration (excluding cash payments for
fractional shares) in the transaction or transactions constituting the Change in
Control consists of shares of common stock that are, or upon issuance will be,
traded on a United States national securities exchange or approved for trading
on an established automated over-the-counter trading market in the United
States. The term "Beneficial Owner" shall be determined in accordance with Rules
13d-3 and 13d-5 promulgated by the United States Securities and Exchange
Commission (the "Commission") under the Exchange Act or any successor provision
thereto, except that a Person shall be deemed to have "beneficial ownership" of
all shares that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time.
"Permitted Holders" means Loews Corporation, a Delaware corporation, and
any of its Subsidiaries.
The effect of these provisions granting the Holders the right to require
the Company to repurchase the Notes upon the occurrence of a Change in Control
may make it more difficult for any Person or Group to acquire control of the
Company or to effect a business combination with the Company. Moreover, under
the Indenture,
S-26
<PAGE> 27
the Company will not be permitted to pay principal of or interest on, or
otherwise acquire the Notes (including any repurchase at the election of the
Holders of Notes upon the occurrence of a Change in Control) if a payment
default on Senior Indebtedness has occurred and is continuing, or in the event
of the insolvency, bankruptcy, reorganization, dissolution or other winding up
of the Company where Senior Indebtedness is not paid in full. The Company's
ability to pay cash to Holders of Notes following the occurrence of a Change in
Control may be limited by the Company's then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases.
In the event a Change in Control occurs and the Holders exercise their
rights to require the Company to repurchase Notes, the Company intends to comply
with applicable tender offer rules under the Exchange Act, including Rules 13e-4
(other than filing requirements if not then applicable) and 14e-1, as then in
effect, with respect to any such purchase.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company, without the consent of the Holders
of any of the Outstanding Notes, may consolidate with or merge into any other
Person or convey, transfer or lease its properties and assets substantially as
an entirety to any Person or may permit any Person to consolidate with or merge
into, or transfer or lease its properties substantially as an entirety to, the
Company, provided, that (a) the successor, transferee or lessee is organized
under the laws of any United States jurisdiction; (b) the successor, transferee
or lessee, if other than the Company, expressly assumes the Company's
obligations under the Indenture and the Notes by means of a supplemental
indenture entered into with the Trustee; (c) after giving effect to the
transaction, no Event of Default and no event which, with notice or lapse of
time, or both, would constitute an Event of Default, shall have occurred and be
continuing; and (d) certain other conditions are met.
Under any consolidation by the Company with, or merger by the Company into,
any other Person or any conveyance, transfer or lease of the properties and
assets of the Company substantially as an entirety as described in the preceding
paragraph, the successor resulting from such consolidation or into which the
Company is merged or the transferee or lessee to which such conveyance, transfer
or lease is made, will succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture, and thereafter,
except in the case of a lease, the predecessor (if still in existence) will be
released from its obligations and covenants under the Indenture and the Notes.
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture to be a (i) default in the
payment of any interest upon any of the Notes for 30 days or more after such
payment is due, whether or not such payment is prohibited by the subordination
provisions of the Indenture; (ii) default in the payment of the principal of and
premium, if any, on any of the Notes when due, whether or not such payment is
prohibited by the subordination provisions of the Indenture; (iii) default by
the Company in the performance, or breach, of any of its other covenants in the
Indenture which will not have been remedied by the end of a period of 60 days
after written notice to the Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% in principal amount of the Outstanding
Notes; (iv) default in the payment of any indebtedness for money borrowed by the
Company or a Subsidiary in excess of $25.0 million principal amount (excluding
such indebtedness of any Subsidiary, the Net Worth of which represents not more
than 10% of the Consolidated Net Worth of the Company and its Subsidiaries,
which indebtedness is nonrecourse to the Company or any other Subsidiary) or
default on such indebtedness which results in the acceleration of such
indebtedness prior to its express maturity, if such indebtedness is not
discharged, or such acceleration is not annulled, by the end of a period of 10
days after written notice to the Company by the Trustee or to the Company and
the Trustee by the Holders of at least 25% in principal amount of the
Outstanding Notes; and (v) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary.
The Indenture provides that if an Event of Default (other than of a type
referred to in clause (v) of the preceding paragraph) shall have occurred and is
continuing, either the Trustee or the Holders of at least 25% in principal
amount of the Outstanding Notes may declare the principal amount of all Notes to
be immediately due
S-27
<PAGE> 28
and payable. Such declaration may be rescinded if certain conditions are
satisfied. If an Event of Default of the type referred to in clause (v) of the
preceding paragraph shall have occurred, the principal amount of the Outstanding
Notes shall automatically become immediately due and payable.
The Indenture also provides that the Holders of not less than a majority in
principal amount of the Outstanding Notes may direct the time, method and place
of conducting any proceedings for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee; provided that such
direction is not in conflict with any rule of law or with the Indenture. The
Trustee may take any other action deemed proper by the Trustee that is not
inconsistent with such direction.
The Indenture contains provisions entitling the Trustee, subject to the
duty of the Trustee during the continuance of an Event of Default to act with
the required standard of care, to be indemnified by the Holders of Notes before
proceeding to exercise any right or power under the Indenture at the request of
the Holders of Notes.
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the Holders of at least 25% in aggregate principal
amount of the Outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a Holder of
a Note for enforcement of payment of the principal of and premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note or of the right to convert such Note in accordance with the Indenture.
The Indenture requires the Company to file annually with the Trustee a
certificate, executed by a designated officer of the Company, stating to the
best of his knowledge that the Company is not in default under certain covenants
under the Indenture or if he has knowledge that the Company is in such default,
specifying such default.
MODIFICATION AND WAIVER
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the Holders of not less than a majority in principal amount
of the Outstanding Notes, to enter into one or more supplemental indentures
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or modifying in any manner the rights of the Holders
of the Notes, except that no such modification or amendment may, without the
consent of the Holders of each of the Outstanding Notes affected thereby, among
other things, (i) change the Stated Maturity of the principal of or any
installment of interest on any Note; (ii) reduce the principal amount thereof or
any premium thereon or the rate of interest thereon; (iii) adversely affect the
right of any Holder to convert any Note as provided in the Indenture; (iv)
change the place of payment where, or the coin or currency in which, the
principal of any Note or any premium or interest thereon is payable; (v) impair
the right to institute suit for the enforcement of any such payment on or with
respect to any Note on or after the Stated Maturity (or, in the case of
redemption, on or after the Redemption Date); (vi) modify the subordination
provisions of the Indenture in a manner adverse to the Holders; (vii) modify the
redemption provisions of the Indenture in a manner adverse to the Holders;
(viii) modify the provisions of the Indenture relating to the Company's
requirement to offer to repurchase Notes upon a Change in Control in a manner
adverse to the Holders; (ix) reduce the percentage in principal amount of the
Outstanding Notes the consent of whose Holders is required for any such
modification or amendment of the Indenture or for any waiver of compliance with
certain provisions of, or of certain defaults under, the Indenture; or (x)
modify the foregoing requirements.
The Holders of a majority in principal amount of the Outstanding Notes may
on behalf of the Holders of all Notes waive compliance by the Company with
certain restrictive provisions of the Indenture. The Holders of a majority in
principal amount of the Outstanding Notes may on behalf of the Holders of all
Notes waive any past default under the Indenture and its consequences, except a
default in the payment of the principal of or any
S-28
<PAGE> 29
premium or interest on any Note or in respect of a provision that under the
Indenture cannot be modified or amended without the consent of the Holder of
each Outstanding Note affected.
SUBORDINATION OF NOTES
The payment of the principal of and premium, if any, and interest on the
Notes will, to the extent set forth in the Indenture, be subordinated in right
of payment to the prior payment in full of all Senior Indebtedness. When there
is a payment by or distribution of assets of the Company to creditors of the
Company upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors, marshalling of assets or any
bankruptcy, insolvency or similar proceedings of the Company, the holders of all
Senior Indebtedness will first be entitled to receive payment in full of all
amounts due or to become due thereon, or provision for such payment in money or
money's worth, before the Holders of the Notes will be entitled to receive any
payment in respect of the principal of or premium, if any, or interest on the
Notes. No payments on account of principal of, premium, if any, or interest on
the Notes or on account of the purchase or acquisition of Notes may be made (and
no repurchase may be made as described under "-- Certain Rights to Require
Repurchase of Notes") if there has occurred and is continuing a default in any
payment with respect to Senior Indebtedness or if any judicial proceeding is
pending with respect to any such default.
By reason of such subordination, in the event of insolvency, creditors of
the Company who are not holders of Senior Indebtedness (including the Notes) may
recover less, ratably, than holders of Senior Indebtedness and such holders of
Senior Indebtedness may recover more, ratably, than the Holders of the Notes.
Senior Indebtedness is defined in the Indenture as the principal of and
premium, if any, and interest on all indebtedness of the Company for money
borrowed, other than the Notes, whether outstanding on the date of execution of
the Indenture or thereafter created, incurred, guaranteed or assumed, except
such indebtedness that by the terms of the instrument or instruments by which
such indebtedness was created or incurred expressly provides that it (i) is
junior in right of payment to the Notes or any other indebtedness of the Company
for borrowed money or (ii) ranks pari passu in right of payment to the Notes.
The term "indebtedness for money borrowed" when used with respect to the Company
is defined to mean (i) any obligation of, or any obligation guaranteed by, the
Company for the repayment of borrowed money, whether or not evidenced by bonds,
debentures, notes or other written instruments, (ii) all obligations of the
Company with respect to interest rate hedging agreements to hedge interest rates
relating to Senior Indebtedness of the Company, (iii) any deferred payment
obligation of, or any such obligation guaranteed by, the Company for the payment
of the purchase price of property or assets evidenced by a note or similar
instrument and (iv) any obligation of, or any such obligation guaranteed by, the
Company for the payment of rent or other amounts under a lease of property or
assets which obligation is required to be classified and accounted for as a
capitalized lease on the balance sheet of the Company under generally accepted
accounting principles.
At January 23, 1997, Senior Indebtedness of the Company was approximately
$74.6 million in principal amount and the Company's subsidiaries had no
indebtedness for borrowed money. The Company and its subsidiaries expect from
time to time to incur additional indebtedness. The Indenture does not limit or
prohibit the incurrence of additional Senior Indebtedness or additional
indebtedness of the Company's subsidiaries.
DEFEASANCE
The Indenture provides that (A) the Company will be discharged from any and
all obligations in respect of the Outstanding Notes (except for certain
obligations to register the transfer or exchange of Notes, to replace stolen,
lost or mutilated Notes, to provide for conversion of the Notes, to maintain
paying agents and hold moneys for payment in trust, and to repurchase Notes in
the event of a Change in Control) or (B) the Company may omit to comply with
certain covenants, but not including the obligation to provide for conversion of
the Notes or repurchase of the Notes in the event of a Change in Control, and
that such omission will not be deemed to be an Event of Default under the
Indenture and the Notes, in either case with respect to clauses (A) or (B) upon
irrevocable deposit with the Trustee, in trust, of money and/or U.S. Government
Obligations that will provide money in an amount sufficient in the opinion of a
nationally recognized firm of independent public accountants expressed in
written opinions thereof to pay the principal of, premium, if any, and each
installment of, interest on
S-29
<PAGE> 30
the Outstanding Notes. With respect to clause (B), the obligations under the
Indenture other than with respect to such covenants and the Events of Default
other than the Event of Default relating to such covenants above will remain in
full force and effect. Such trust may only be established if, among other things
(i) the Company has delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Notes will not recognize gain or loss for Federal income
tax purposes as a result of such deposit, defeasance and discharge and will be
subject to Federal income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit, defeasance and discharge
had not occurred; (ii) no Event of Default (or event that with the passing of
time or the giving of notice, or both, would constitute an Event of Default)
shall have occurred and be continuing on the date of such deposit, or, in the
case of an Event of Default involving certain events of bankruptcy, insolvency
or reorganization, at any time during the 91-day period beginning on the date of
such deposit; and (iii) certain other customary conditions precedent are
satisfied.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York.
S-30
<PAGE> 31
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following general discussion summarizes certain of the material U.S.
federal income tax aspects of the acquisition, ownership and disposition of the
Notes or Common Stock. This discussion is a summary for general information only
and does not consider all aspects of U.S. federal income tax that may be
relevant to the purchase, ownership and disposition of the Notes or Common Stock
by a prospective investor in light of such investor's personal circumstances.
This discussion also does not address the U.S. federal income tax consequences
of ownership of Notes or Common Stock not held as capital assets within the
meaning of Section 1221 of the U.S. Internal Revenue Code of 1986, as amended
(the "Code"), or the U.S. federal income tax consequences to investors subject
to special treatment under the U.S. federal income tax laws, such as dealers in
securities or foreign currency, tax-exempt entities, banks, thrifts, insurance
companies or other financial institutions, persons that hold the Notes or Common
Stock as part of a "straddle," a "hedge" against currency risk or a "conversion
transaction," persons that have a "functional currency" other than the U.S.
dollar, and investors in pass-through entities. In addition, this discussion is
generally limited to the tax consequences to initial holders. Moreover, the
effect of any applicable state, local or foreign tax laws is not discussed.
This discussion is based upon the Code, existing and proposed regulations
thereunder, and current administrative rulings and court decisions. All of the
foregoing is subject to change, possibly on a retroactive basis, and any such
change could affect the continuing validity of this discussion.
PERSONS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS, AS WELL AS THE
LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR
SITUATIONS.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Note that is (i) a citizen or resident
(as defined in Section 7701(b)(1) of the Code) of the United States, (ii) a
corporation organized under the laws of the United States or any political
subdivision thereof or therein or (iii) an estate or trust, the income of which
is subject to U.S. federal income tax regardless of its source (a "U.S.
Holder"). Certain U.S. federal income tax consequences relevant to a holder
other than a U.S. Holder are discussed separately below.
STATED INTEREST
The stated interest on a Note will be taxable to a U.S. Holder as ordinary
interest income either at the time it accrues or is received depending upon such
U.S. Holder's method of accounting for federal income tax purposes.
MARKET DISCOUNT
Generally, the market discount rules discussed below will not apply to a
U.S. Holder who acquired a Note when it was originally issued. These rules would
apply, however, to any original U.S. Holder whose tax basis in the Note is less
than such Note's "issue price" (i.e., the first price at which a substantial
amount of the Notes are sold).
Gain recognized on the disposition (including a redemption) by a subsequent
purchaser of a Note that has accrued market discount will be treated as ordinary
income, and not capital gain, to the extent of the accrued market discount,
provided that the amount of market discount exceeds a statutorily-defined de
minimis amount. "Market discount" is defined as the excess, if any, of (i) the
stated redemption price at maturity over (ii) the tax basis of the debt
obligation in the hands of the holder immediately after its acquisition.
Under the de minimis exception, there is no market discount if the excess
of the stated redemption price at maturity of the obligation over the holder's
tax basis in the obligation is less than 0.25% of the stated redemption price at
maturity multiplied by the number of complete years after the acquisition date
to the Note's date of maturity. Unless a holder elects otherwise, the accrued
market discount would be the amount calculated by multiplying the market
discount by a fraction, the numerator of which is the number of days the
obligation has
S-31
<PAGE> 32
been held by the a holder and the denominator of which is the number of days
after the holder's acquisition of the obligation up to and including its
maturity date.
If a U.S. Holder of a Note acquired at market discount disposes of such
Note in any transaction other than a sale, exchange or involuntary conversion,
even though otherwise non-taxable (e.g., a gift), such U.S. Holder will be
deemed to have realized an amount equal to the fair market value of the Note and
would be required to recognize as ordinary income any accrued market discount to
the extent of the deemed gain. A U.S. Holder of a Note acquired at a market
discount also may be required to defer the deduction of all or a portion of the
interest on any indebtedness incurred or maintained to carry the Note until it
is disposed of in a taxable transaction.
A U.S. Holder of a Note acquired at market discount may elect to include
the market discount in income as it accrues. This election would apply to all
market discount obligations acquired by the electing U.S. Holder on or after the
first day of the first taxable year to which the election applies. The election
may be revoked only with the consent of the U.S. Internal Revenue Service (the
"Service"). If a U.S. Holder of a Note so elects to include market discount in
income currently, the above-discussed rules with respect to ordinary income
recognition resulting from sales and certain other disposition transactions and
to deferral of interest deductions would not apply.
BOND PREMIUM
If a U.S. Holder purchases a Note at a cost that is in excess of the amount
payable on maturity (which will be determined by reference to an earlier call
date if the call price would reduce the amount of the premium) (such excess
being the "bond premium"), a U.S. Holder may elect under Section 171 of the Code
to amortize such bond premium on a constant interest basis over the period from
the acquisition date to the maturity date of such Note (or, in certain
circumstances, until an earlier call date) and, except as future Treasury
regulations may otherwise provide, reduce the amount of interest included in
income in respect of the Note by such amount. A U.S. Holder who elects to
amortize bond premium must reduce its adjusted basis in the Note by the amount
of such allowable amortization. An election to amortize bond premium would apply
to all amortizable bond premium on all taxable bonds held at or acquired after
the beginning of the U.S. Holder's taxable year as to which the election is
made, and may be revoked only with the consent of the Service.
If an election to amortize bond premium is not made, a U.S. Holder must
include the full amount of each interest payment in income in accordance with
its regular method of accounting and will generally receive a tax benefit from
the bond premium only upon computing its gain or loss upon the sale or other
disposition or payment of the principal amount of the Note.
TAX BASIS
A U.S. Holder's initial tax basis in a Note will be equal to the purchase
price paid by such U.S. Holder for such Note.
SALE OR REDEMPTION
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by the Company) or other disposition of a Note
will be a taxable event for federal income tax purposes. In such event, a U.S.
Holder will recognize gain or loss equal to the difference between (i) the
amount of cash plus the fair market value of any property received upon such
sale, exchange, redemption or other taxable disposition (other than in respect
of accrued and unpaid interest thereon) and (ii) the U.S. holder's adjusted tax
basis therein (other than any tax basis attributable to accrued and unpaid
interest). Subject to the discussion above under the caption "Market Discount,"
such gain or loss should be capital gain or loss and will be long-term capital
gain or loss if the Note had been held by the U.S. Holder for more than one year
at the time of such sale, exchange, redemption or other disposition.
S-32
<PAGE> 33
CONVERSION OF NOTE INTO COMMON STOCK
No gain or loss will be recognized for federal income tax purposes on
conversion of Notes solely into shares of Common Stock, except with respect to
any cash received in lieu of a fractional share or any accrued interest not
previously included in income. To the extent the conversion is not treated as
resulting in the payment of interest, the tax basis for the shares of Common
Stock received upon conversion will be equal to the tax basis of the Notes
converted into Common Stock, and the holding period of the shares of Common
Stock will include the holding period of the Notes converted. Any accrued market
discount not previously included in income as of the date of the conversion of
the Notes and not recognized upon the conversion (e.g., as a result of the
receipt of cash in lieu of a fractional interest in a Note) should carry over to
the Common Stock received on conversion and be treated as ordinary income upon
the subsequent disposition of such Common Stock.
ADJUSTMENT OF CONVERSION PRICE
Section 305 of the Code treats as a distribution taxable as a dividend (to
the extent of the issuing corporation's current or accumulated earnings and
profits) certain actual or constructive distributions of stock with respect to
stock or convertible securities. Under Treasury regulations, an adjustment in
the conversion price, or the failure to make such an adjustment, may, under
certain circumstances be treated as a constructive dividend. Generally, a U.S.
Holder's tax basis in a Note will be increased by the amount of any such
constructive dividend.
BACK-UP WITHHOLDING
A U.S. Holder of Notes or Common Stock may be subject to "back-up
withholding" at a rate of 31% with respect to certain "reportable payments,"
including interest payments, dividend payments and, under certain circumstances,
principal payments on the Notes or proceeds from the disposition of Common
Stock. These back-up withholding rules apply if the U.S. Holder, among other
things, (i) fails to furnish a social security number or other taxpayer
identification number (TIN) certified under penalties of perjury within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest or dividends, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN furnished is the correct number and that such holder is
not subject to back-up withholding. A U.S. Holder who does not provide the
Company with its correct TIN also may be subject to penalties imposed by the
Service. Any amount withheld from a payment to a U.S. Holder under the back-up
withholding rules is creditable against the U.S. Holder's federal income tax
liability, provided the required information is furnished to the Service.
Back-up withholding will not apply, however, with respect to payments made to
certain holders, including corporations and tax-exempt organizations, provided
their exemption from back-up withholding is properly established.
The Company will report to the U.S. Holders of Notes and Common Stock and
to the Service the amount of any "reportable payments" for each calendar year
and the amount of tax withheld, if any, with respect to such payments.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Holder of a Note that is not a (i) citizen or
resident of the United States, (ii) a corporation organized under the laws of
the United States or any political subdivision thereof or therein or (iii) an
estate or trust the income of which is subject to U.S. federal income tax
regardless of its source ("Non-U.S. Holder").
For purposes of withholding tax on interest and dividends discussed below,
a non-resident alien or other nonresident fiduciary of an estate or trust will
be considered a Non-U.S. Holder. For purposes of the following discussion,
interest, dividends and gain on the sale, exchange or other disposition of a
Note or Common Stock will be considered to be "U.S. trade or business income" if
such income or gain is (i) effectively connected with the conduct of a U.S.
trade or business or (ii) in the case of a treaty resident, attributable to a
permanent establishment (or, in the case of an individual, a fixed base) in the
United States.
S-33
<PAGE> 34
STATED INTEREST
Generally any interest paid to a Non-U.S. Holder of a Note that is not U.S.
trade or business income will not be subject to U.S. tax if the interest
qualifies as "portfolio interest." Generally interest on the Notes will qualify
as portfolio interest if (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total voting power of all voting stock of
the Company and is not a "controlled foreign corporation" with respect to which
the Company is a "related person" within the meaning of the Code, and (ii) the
beneficial owner, under penalty or perjury, certifies that the beneficial owner
is not a United States person and such certificate provides the beneficial
owner's name and address.
The gross amount of payments to a Non-U.S. Holder of interest that do not
qualify for the portfolio interest exception and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate withholding. U.S.
trade or business income will be taxed at regular U.S. rates rather than the 30%
gross rate. In the case of a Non-U.S. Holder that is a corporation, such United
States trade or business income may also be subject to the branch profits tax
(which is generally imposed on a foreign corporation on the actual or deemed
repatriation from the United States of earnings and profits attributable to
United States trade or business income) at a 30% rate. The branch profits tax
may not apply (or may apply at a reduced rate) if a recipient is a qualified
resident of certain countries with which the United States has an income tax
treaty. To claim the benefit of a tax treaty or to claim exemption from
withholding because the income is U.S. trade or business income, the Non-U.S.
Holder must provide a properly executed Form 1001 or 4224 (or such successor
forms as the Service designates), as applicable, prior to the payment of
interest. These forms must be periodically updated. Under proposed regulations,
the Forms 1001 and 4224 will be replaced by Form W-8. Also, under proposed
regulations, a Non-U.S. Holder who is claiming the benefits of a treaty may be
required to obtain a U.S. taxpayer identification number and to provide certain
documentary evidence issued by foreign governmental authorities to prove
residence in the foreign country. Certain special procedures are provided in the
proposed regulations for payments through qualified intermediaries.
DIVIDENDS
In general, dividends paid (or deemed paid as a result of the adjustment of
the conversion price of the Notes, as described above under the heading "-- U.S.
Holders -- Adjustment of Conversion Price") to a Non-U.S. Holder of Common Stock
will be subject to withholding of U.S. federal income tax at a 30% rate unless
such is reduced by an applicable income tax treaty. Dividends that are connected
with such holder's conduct of a trade or business in the United States or (U.S.
trade or business income) are generally subject to U.S. federal income tax at
regular rates, but generally are not subject to the 30% withholding tax if the
Non-U.S. Holder files the appropriate form with the payor, as discussed above.
Any U.S. trade or business income received by a Non-U.S. Holder that is a
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be applicable under
an income tax treaty.
Dividends paid to an address in a foreign country generally are presumed
(absent actual knowledge to the contrary) to be paid to a resident of such
country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. Under proposed U.S. Treasury
regulations, not currently in effect, however, a Non-U.S. Holder of Common Stock
who wishes to claim the benefit of an applicable treaty rate would be required
to satisfy applicable certification and other requirements, which would include
the requirement that the Non-U.S. Holder file a form which contains the holder's
name and address and an official statement by the competent authority in the
foreign country (as designated in the applicable tax treaty) attesting to the
holder's status as a resident thereof.
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for a refund
with the Service.
S-34
<PAGE> 35
CONVERSION
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
on the conversion of Notes into Common Stock, except with respect to cash (if
any) received in lieu of a fractional share or interest not previously included
in income. Cash in lieu of a fractional share may give rise to gain that would
be subject to the rules described below for the sale of Notes. Cash or Common
Stock treated as issued for accrued interest would be treated as interest under
the rules described above.
SALE, EXCHANGE OR REDEMPTION OF NOTES OR COMMON STOCK
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a Note generally will not be subject to U.S. federal income tax,
unless (i) such gain is U.S. trade or business income, (ii) subject to certain
exceptions, the Non-U.S. Holder is an individual who holds the Note as a capital
asset and is present in the United States for 183 days or more in the taxable
year of the disposition, (iii) the Non-U.S. Holder is subject to tax pursuant to
the provisions of U.S. tax law applicable to certain U.S. expatriates and (iv)
in the case of the disposition of the Notes and Common Stock, the Company has
not been and does not become a U.S. real property holding company. The Company
does not believe it is currently a "U.S. real property holding company" for U.S.
federal income tax purposes.
FEDERAL ESTATE TAX
Notes held (or treated as held) by an individual who is not a citizen or
resident of the United States (for federal estate tax purposes) at the time of
his or her death will not be subject to U.S. federal estate tax provided that
the individual does not actually or constructively own 10% or more of the total
voting power of all voting stock of the Company and income on the Notes was not
U.S. trade or business income. Common Stock owned or treated as owned by an
individual who is not a citizen or resident of the United States (for federal
estate tax purposes) will be included in such individual's estate for U.S.
federal income tax purposes unless an applicable estate tax treaty otherwise
applies.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Service and to each Non-U.S. Holder
any interest or dividend that is subject to withholding, or that is exempt from
U.S. withholding tax pursuant to a tax treaty, or interest that is exempt from
U.S. tax under the portfolio interest exception. Copies of these information
returns may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-U.S. Holder
resides. The Company must also report any dividends paid to a Non-U.S. Holder.
U.S. Treasury regulations provide that backup withholding and information
reporting will not apply to payments of principal on the Notes by the Company to
a Non-U.S. Holder, if the Holder certifies as to its non-U.S. status under
penalties of perjury or otherwise establishes an exemption (provided that
neither the Company nor its paying agent has actual knowledge that the holder is
a United States person or that the conditions of any other exemption are not, in
fact, satisfied.)
The payment of the proceeds from the disposition of Notes or Common Stock
to or through the United States office of any broker, U.S. or foreign, will be
subject to information reporting and possible backup withholding unless the
owner certifies as its non-U.S. status under penalty of perjury or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that the Holder is a U.S. person or that the conditions of any other
exemption are not, in fact, satisfied. The payment of the proceeds from the
disposition of a Note to or through a non-U.S. office of a non-U.S. broker that
is not a U.S. related person will not be subject to information reporting or
backup withholding. For this purpose, a "U.S. related person" is (i) a
"controlled foreign corporation" for U.S. federal income tax purposes or (ii) a
foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of a
United States trade or business.
S-35
<PAGE> 36
In the case of the payment of proceeds from the disposition of Notes or
Common Stock to or through a non-U.S. office of a broker that is either a U.S.
person or a U.S. related person, the regulations require information reporting
on the payment unless the broker has documentary evidence in its files that the
owner is a Non-U.S. Holder and the broker has no knowledge to the contrary.
Backup withholding will not apply to payments made through foreign offices of a
broker that is not a U.S. person or a U.S. related person (absent actual
knowledge that the payee is a U.S. person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR TAX
CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND THE
COMMON STOCK OF THE COMPANY, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE
LAWS.
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement relating to the Notes (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation is acting as representative (the "Representative"), have severally
but not jointly agreed to purchase from the Company the following respective
principal amounts of Notes:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- ------------
<S> <C>
Credit Suisse First Boston Corporation...................... $100,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 100,000,000
Salomon Brothers Inc........................................ 100,000,000
------------
Total..................................................... $300,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the Notes (other than those
covered by the over-allotment option described below), if any are purchased. The
Underwriting Agreement provides that, in the event of a default by an
Underwriter, in certain circumstances the purchase commitments of non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, exercisable by the
Representative, expiring at the close of business on the 30th day after the date
of this Prospectus Supplement, to purchase up to $45,000,000 additional
principal amount of Notes at the initial public offering price, less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus Supplement. Such option may be exercised only to cover
over-allotments in the sale of the Notes. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase the same percentage of such additional Notes being sold
to the Underwriters as the amount of Notes set forth next to such Underwriter's
name in the preceding table bears to the sum of the total amount of Notes in
such table.
The Company has been advised by the Underwriters that they propose to offer
the Notes to the public initially at the offering price set forth on the cover
page of this Prospectus Supplement and to certain dealers at such price less a
concession of % of the principal amount per Note and the Underwriters and
such dealers may allow a discount of % of such principal amount per Note on
sales to certain other dealers. After the initial public offering, the public
offering prices and concession and discount to dealers may be changed by the
Underwriters.
S-36
<PAGE> 37
The Notes are a new issue of securities with no established trading market.
The Underwriters have advised the Company that they intend to act as a market
maker in the Notes. However, the Underwriters are not obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Notes.
Each of the Company and Loews Corporation has agreed that, for a period of
90 days after the commencement of the Offering, it will not, without the prior
written consent of the Representative, directly or indirectly, issue, offer,
sell, contract to sell, grant any option to purchase, hypothecate or otherwise
dispose of, or file a registration statement under the Securities Act relating
to, any Common Stock or any security convertible into or exchangeable for Common
Stock, other than to the Underwriters pursuant to the Underwriting Agreement,
upon conversion of the Notes or pursuant to employee benefit plans (including
stock option plans) existing on the date of this Prospectus Supplement.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended, or contribute to payments that the Underwriters may be required to make
in respect thereof.
In the ordinary course of their respective businesses, certain of the
Underwriters or their affiliates have engaged, and may in the future engage, in
commercial banking and investment banking transactions with the Company and
affiliates of the Company, including Loews. Each of the Underwriters served as a
co-manager of a secondary offering of Common Stock in May 1996 for which they
received customary compensation. In consideration of financial advisory services
rendered in connection with the Arethusa Acquisition, Diamond Offshore paid
Credit Suisse First Boston a $500,000 fee, reimbursed it for all reasonable
out-of-pocket expenses and indemnified it (and its directors, officers,
employees and persons controlling it) against certain liabilities and expenses
in connection with the Arethusa Acquisition. Similarly, Arethusa paid Merrill
Lynch & Co. $7.5 million for financial advisory services in connection with the
Arethusa Acquisition, reimbursed Merrill Lynch & Co. for its reasonable
out-of-pocket expenses, and indemnified it and certain related persons against
certain liabilities relating to or arising out of its engagement.
Merrill Lynch Specialists Inc. ("MLSI"), an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, one of the Underwriters, acts as a
specialist in the Common Stock of the Company pursuant to the rules of the NYSE.
Under an exemption granted by the Securities and Exchange Commission on July 31,
1995, MLSI will be permitted to carry on its activities as a specialist in the
Common Stock for the entire period of the distribution of the Notes. The
exemption is subject to the satisfaction by MLSI of the conditions specified in
the exemption.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Notes in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Notes are effected. Accordingly, any resale of the Notes in Canada
must be made in accordance with applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be made
in accordance with available statutory exemptions or pursuant to a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the Notes.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Notes in Canada who receives a purchase confirmation will
be deemed to represent to the Company and the dealer from whom such purchase
confirmation is received that (i) such purchaser is entitled under applicable
provincial securities laws to purchase such Notes without the benefit of a
prospectus qualified under such securities laws, (ii) where required by law,
such purchaser is purchasing as principal and not as agent, and (iii) such
purchaser has reviewed the text above under "Resale Restrictions."
S-37
<PAGE> 38
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of actions prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Notes to whom the Securities Act (British Columbia) applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any Notes acquired
by such purchaser pursuant to this offering. Such report must be in the form
attached to British Columbia Securities Commission Blanket Order BOR #95/17, a
copy of which may be obtained from the Company. Only one such report must be
filed in respect of Notes acquired on the same date and under the same
prospectus exemption.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Weil,
Gotshal & Manges LLP, Houston, Texas, and for the Underwriters by Andrews &
Kurth L.L.P., New York, New York.
S-38
<PAGE> 39
[Diamond Offshore Logo]
------------------
$600,000,000
Debt Securities Preferred Stock Common Stock Securities Warrants
------------------
Diamond Offshore Drilling, Inc., a Delaware corporation (the "Company"),
may issue from time to time, together or separately, (1) its debt securities
(the "Debt Securities"), which may be either senior ("Senior Securities") or
subordinated ("Subordinated Securities") and which may be convertible into or
exchangeable for shares of common stock, par value $0.01 per share, of the
Company (the "Common Stock"), shares of preferred stock, par value $0.01 per
share, of the Company (the "Preferred Stock"), or other Debt Securities; (2)
warrants to purchase Debt Securities (the "Debt Warrants"); (3) Preferred Stock,
which may be convertible into or exchangeable for shares of Common Stock or
shares of Preferred Stock or Debt Securities; (4) warrants to purchase shares of
Preferred Stock (the "Preferred Stock Warrants"); and (5) Common Stock issuable
upon the conversion or exchange of Debt Securities or Preferred Stock offered
hereunder, to the extent such Debt Securities or Preferred Stock are, by their
terms, convertible into or exchangeable for shares of Common Stock, in amounts,
at prices and on terms to be determined by market conditions at the time of
offering thereof. The Debt Warrants and Preferred Stock Warrants are
collectively referred to herein as the "Securities Warrants" and the Debt
Securities, Preferred Stock, Common Stock and Securities Warrants are
collectively referred to herein as the "Offered Securities".
The Offered Securities may be issued in one or more series or issuances and
will be limited to $600,000,000 in aggregate public offering price (or its
equivalent, based on the applicable exchange rate, to the extent Debt Securities
are issued for one or more foreign currencies or currency units). The Offered
Securities may be sold for U.S. dollars, or any foreign currency or currencies
or currency units, and the principal of, and any premium or interest on, the
Debt Securities may be payable in U.S. dollars, or any foreign currency or
currencies or currency units.
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered are set forth in the accompanying Prospectus
Supplement (the "Prospectus Supplement"), including, where applicable, (1) in
the case of Debt Securities, the specific designation, aggregate principal
amount, authorized denomination, initial offering price, maturity, premium (if
any), interest rate (which may be fixed or floating), time of and method of
calculating the payment of interest, if any, the currency in which principal,
premium, if any, and interest, if any, are payable, any redemption or sinking
fund terms, any terms for the conversion into or exchange for shares of Common
Stock or Preferred Stock or other Debt Securities, terms of subordination of
Subordinated Securities, and other specific terms; (2) in the case of Preferred
Stock, the specific designation, any dividend, liquidation, redemption, sinking
fund, voting or other rights, time of payment of dividends, any terms for the
conversion into or exchange for shares of Common Stock or shares of Preferred
Stock or Debt Securities, the initial offering price and other specific terms;
and (3) in the case of Securities Warrants, the duration, initial offering
price, exercise price and detachability thereof. The Prospectus Supplement will
also contain information, where applicable, about certain United States Federal
income tax considerations relating to, and any listing on a securities exchange
of, the Offered Securities covered by the Prospectus Supplement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
The Offered Securities will be sold directly, through agents, dealers or
underwriters as designated from time to time, or through a combination of such
methods. If any agents of the Company or any dealers or underwriters are
involved in the sale of the Offered Securities in respect of which this
Prospectus is being delivered, the names of such agents, dealers or underwriters
and any applicable agent's commission, dealer's purchase price or underwriter's
discount will be set forth in or may be calculated from the Prospectus
Supplement. The net proceeds to the Company from such sale will be the purchase
price less such commission in the case of an agent, the purchase price in the
case of a dealer, or the public offering price less such discount in the case of
an underwriter and less, in each case, other attributable issuance expenses. See
"Plan of Distribution."
The date of this Prospectus is January 22, 1997.
<PAGE> 40
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission") relating to its business, financial position,
results of operations and other matters. Such reports and other information can
be inspected and copied at the Public Reference Section maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at certain of its Regional Offices, located at Northwest Atrium Center
(Suite 1400), 500 West Madison Street, Chicago, Illinois 60661, and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission at
prescribed rates. Such material can also be inspected at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet (http://www.sec.gov).
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Reference is made to the Registration Statement
and to the exhibits relating thereto for further information with respect to the
Company and the securities offered hereby.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference herein its Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, its Quarterly Reports on
Form 10-Q for the quarterly periods ended March 31, 1996, June 30, 1996 and
September 30, 1996, its Current Reports on Form 8-K dated February 20, 1996 and
May 13, 1996, all of which have been previously filed with the Commission under
File No. 1-13926, and the description of Common Stock of the Company that is
contained in the registration statement on Form 8-A dated September 6, 1995
filed under the Exchange Act under File No. 1-13926, and Amendment No. 1 thereto
on Form 8-A/A dated October 9, 1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and before the
termination of the offering of the Offered Securities offered hereby shall be
deemed incorporated herein by reference, and such documents shall be deemed to
be a part hereof from the date of filing such documents. Any statement contained
herein, in a document incorporated or deemed to be incorporated by reference
herein, or in the accompanying Prospectus Supplement, shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein or in the accompanying Prospectus
Supplement modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the above documents incorporated or deemed to be
incorporated herein by reference (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into the documents that
this Prospectus incorporates). Written or oral requests should be directed to:
Diamond Offshore Drilling, Inc., 15415 Katy Freeway, Houston, Texas 77094; Attn:
Corporate Secretary (telephone 281-492-5300).
2
<PAGE> 41
THE COMPANY
The Company, through wholly owned subsidiaries, engages worldwide in the
contract drilling of offshore oil and gas wells and is a leader in deep water
drilling. The Company's fleet of 46 mobile offshore drilling rigs is one of the
largest in the world and includes the largest fleet of semisubmersible rigs. The
fleet is comprised of 30 semisubmersibles (including three of the world's 13
fourth-generation semisubmersibles), 15 jack-ups and one drillship.
On December 31, 1996, the Company exited the land drilling business with
the sale of its land rigs and associated equipment for approximately $26
million.
Unless the context otherwise requires, references herein and in any
Prospectus Supplement to the "Company" shall mean Diamond Offshore Drilling,
Inc. and its subsidiaries.
The Company is a Delaware corporation with its principal executive offices
located at 15415 Katy Freeway, Houston, Texas 77094, where its telephone number
is (281) 492-5300.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's fixed charges exceeded the Company's earnings by
approximately $13,803,000, $46,425,000, $21,670,000, $77,951,000, and
$22,609,000 for the years ended December 31, 1995, 1994, 1993, 1992 and 1991,
respectively. Fixed charges for the years ended December 31, 1991 through
December 31, 1995 consisted solely of interest expense on notes payable to Loews
Corporation. The Company's consolidated ratio of earnings to fixed charges for
the nine months ended September 30, 1996, was 49.49. For all such periods, the
ratio of earnings to fixed charges has been computed on a total enterprise
basis. Earnings represent income from continuing operations plus income taxes
and fixed charges. Fixed charges represent interest, whether expensed or
capitalized.
USE OF PROCEEDS
Unless otherwise specified in the Prospectus Supplement, the net proceeds
from the sale of the Offered Securities offered hereby will be used for general
corporate purposes, including repayment of borrowings, working capital, capital
expenditures and acquisitions. Additional information on the use of net proceeds
from the sale of the Offered Securities offered hereby is set forth in the
Prospectus Supplement relating to such Offered Securities.
DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities summarizes
certain general terms and provisions of the Debt Securities to which any
Prospectus Supplement may relate. The particular terms of the Debt Securities
and the extent, if any, to which such general provisions may apply to any series
of Debt Securities will be described in the Prospectus Supplement relating to
such series.
The Debt Securities are to be issued under one or more Indentures
(collectively, the "Indenture") between the Company and a trustee selected by
the Company, which trustee shall be named in a Prospectus Supplement (the
"Trustee"). The following statements are subject to the detailed provisions of
the Indenture, a copy of which is filed as an exhibit to the Registration
Statement. Wherever any particular provisions of the Indenture or terms defined
therein are referred to, such provisions and terms are incorporated by reference
as a part of the statements made herein and such statements are qualified in
their entirety by such references. References to particular sections of the
Indenture are noted below. Defined terms used herein but not defined herein
shall have the meanings ascribed to them in the Indenture.
GENERAL
The Debt Securities may be either Senior Securities or Subordinated
Securities and will be unsecured. The Indenture does not limit the amount of
Debt Securities which may be issued thereunder and Debt Securities may
3
<PAGE> 42
be issued thereunder up to the aggregate principal amount which may be
authorized from time to time by the Company. (Section 301) Debt Securities will
be issued from time to time and offered on terms determined by market conditions
at the time of sale.
The Senior Securities will be unsecured and will rank on a parity with all
other unsecured and unsubordinated indebtedness of the Company. To the extent
provided in the Prospectus Supplement relating thereto, the Company may be
required to secure Senior Securities equally and ratably with other Debt (as
defined in the Indenture) with respect to which the Company elects or is
required to provide security. The Subordinated Securities will be unsecured and
will be subordinated and junior to all "Senior Indebtedness" (which for this
purpose includes any Senior Securities) to the extent set forth in the
applicable supplemental Indenture and the Prospectus Supplement relating to such
series.
The Debt Securities may be issued in one or more series with the same or
various maturities at par, at a premium or at a discount. Any Debt Securities
bearing no interest or interest at a rate which at the time of issuance is below
market rates will be sold at a discount (which may be substantial) from their
stated principal amount. Federal income tax consequences and other special
considerations applicable to any such substantially discounted Debt Securities
will be described in the Prospectus Supplement relating thereto.
Reference is made to the Prospectus Supplement for the following terms of
the Debt Securities offered hereby: (i) the designation, aggregate principal
amount and authorized denominations of such Debt Securities; (ii) the percentage
of their principal amount at which such Debt Securities will be issued; (iii)
the date or dates on which the Debt Securities will mature; (iv) the rate or
rates (which may be fixed or floating) per annum at which the Debt Securities
will bear interest, if any, or the method of determining such rate or rates; (v)
the date or dates on which any such interest will be payable, the date or dates
on which payment of any such interest will commence and the Regular Record Dates
for such Interest Payment Dates; (vi) whether such Debt Securities are Senior
Securities or Subordinated Securities; (vii) the terms of any mandatory or
optional redemption (including any provisions for any sinking, purchase or other
analogous fund) or repayment option; (viii) the currency, currencies or currency
units for which the Debt Securities may be purchased and the currency,
currencies or currency units in which the principal thereof, any premium thereon
and any interest thereon may be payable; (ix) if the currency, currencies or
currency units for which the Debt Securities may be purchased or in which the
principal thereof, any premium thereon and any interest thereon may be payable
is at the election of the Company or the purchaser, the manner in which such
election may be made; (x) if the amount of payments on the Debt Securities is
determined with reference to an index based on one or more currencies or
currency units, changes in the price of one or more securities or changes in the
price of one or more commodities, the manner in which such amounts may be
determined; (xi) the extent to which any of the Debt Securities will be issuable
in temporary or permanent global form, or the manner in which any interest
payable on a temporary or permanent Global Security will be paid; (xii) the
terms and conditions upon which conversion or exchange of the Debt Securities
into or for Common Stock, Preferred Stock or other Debt Securities will be
effected, including the conversion price or exchange ratio, the conversion or
exchange period and any other conversion or exchange provisions; (xiii)
information with respect to book-entry procedures, if any; (xiv) a discussion of
certain Federal income tax, accounting and other special considerations,
procedures and limitations with respect to the Debt Securities; and (xv) any
other specific terms of the Debt Securities not inconsistent with the Indenture.
If any of the Debt Securities are sold for one or more foreign currencies
or foreign currency units or if the principal of, premium, if any, or any
interest on any series of Debt Securities is payable in one or more foreign
currencies or foreign currency units, the restrictions, elections, Federal
income tax consequences, specific terms and other information with respect to
such issue of Debt Securities and such currencies or currency units will be set
forth in the Prospectus Supplement relating thereto.
Unless otherwise specified in the Prospectus Supplement, the principal of,
any premium on, and any interest on the Debt Securities will be payable, and the
Debt Securities will be transferable, at the Corporate Trust Office of the
Trustee specified in the applicable Indenture, provided that payment of
interest, if any, may be made at the option of the Company by check mailed on or
before the payment date, first class mail, to the address of the person entitled
thereto as it appears on the registry books of the Company or its agent.
4
<PAGE> 43
Unless otherwise specified in the Prospectus Supplement, the Debt
Securities will be issued only in fully registered form and in denominations of
$1,000 and any integral multiple thereof. (Sections 301 and 302) No service
charge will be made for any transfer or exchange of any Debt Securities, but the
Company may, except in certain specified cases not involving any transfer,
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. (Section 305)
GLOBAL SECURITIES
The Debt Securities of a series may be issued, in whole or in part, in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a depositary (the "Depositary") identified in the Prospectus Supplement
relating to such series. Global Securities may be issued only in fully
registered form and in either temporary or permanent form. Unless and until it
is exchanged in whole or in part for the individual Debt Securities represented
thereby, a Global Security may not be transferred except as a whole by the
Depositary for such Global Security to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary or by the Depositary or any nominee of such Depositary to a successor
Depositary or any nominee of such successor.
The specific terms of the depositary arrangement with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series. The Company anticipates that the following provisions will
generally apply to depositary arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security or its nominee will credit, on its book entry registration and transfer
system, the respective principal amounts of the individual Debt Securities
represented by such Global Security to the accounts of persons that have
accounts with such Depositary. Such accounts shall be designated by the dealers,
underwriters or agents with respect to such Debt Securities or by the Company if
such Debt Securities are offered and sold directly by the Company. Ownership of
beneficial interests in a Global Security will be limited to persons that have
accounts with the applicable Depositary ("participants") or persons that may
hold interests through participants. Ownership of beneficial interests in such
Global Security will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the applicable Depositary or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants). The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Security.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a Global
Security will not be entitled to have any of the individual Debt Securities of
the series represented by such Global Security registered in their names, will
not receive or be entitled to receive physical delivery of any such Debt
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture governing such Debt Securities.
Payments of principal of, any premium on, and any interest on, individual
Debt Securities represented by a Global Security registered in the name of a
Depositary or its nominee will be made to the Depositary or its nominee, as the
case may be, as the registered owner of the Global Security representing such
Debt Securities. Neither the Company, the Trustee for such Debt Securities, any
Paying Agent, nor the Security Registrar for such Debt Securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Global
Security for such Debt Securities or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
The Company expects that the Depositary for a series of Debt Securities or
its nominee, upon receipt of any payment of principal, premium or interest in
respect of a permanent Global Security representing any of such Debt Securities,
immediately will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Security for such Debt Securities as shown on the records of such
Depositary or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in such Global Security held
through such participants will be governed by standing
5
<PAGE> 44
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name".
Such payments will be the responsibility of such participants.
If the Depositary for a series of Debt Securities is at any time unwilling,
unable or ineligible to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, the Company will issue individual Debt
Securities of such series in exchange for the Global Security representing such
series of Debt Securities. In addition, the Company may at any time and in its
sole discretion, subject to any limitations described in the Prospectus
Supplement relating to such Debt Securities, determine not to have any Debt
Securities of a series represented by one or more Global Securities and, in such
event, will issue individual Debt Securities of such series in exchange for the
Global Security or Securities representing such series of Debt Securities.
Further, if the Company so specifies with respect to the Debt Securities of a
series, an owner of a beneficial interest in a Global Security representing Debt
Securities of such series may, on terms acceptable to the Company, the Trustee
and the Depositary for such Global Security, receive individual Debt Securities
of such series in exchange for such beneficial interests, subject to any
limitations described in the Prospectus Supplement relating to such Debt
Securities. In any such instance, an owner of a beneficial interest in a Global
Security will be entitled to physical delivery of individual Debt Securities of
the series represented by such Global Security equal in principal amount to such
beneficial interest and to have such Debt Securities registered in its name.
Individual Debt Securities of such series so issued will be issued in
denominations, unless otherwise specified by the Company, of $1,000 and integral
multiples thereof.
SENIOR SECURITIES
The Senior Securities will be direct, unsecured obligations of the Company,
and will constitute Senior Indebtedness (in each case as defined in the
applicable supplemental Indenture) ranking on a parity with all other unsecured
and unsubordinated indebtedness of the Company.
SUBORDINATED SECURITIES
The Subordinated Securities will be direct, unsecured obligations of the
Company. The obligations of the Company pursuant to the Subordinated Securities
will be subordinate in right of payment to the extent set forth in the Indenture
and the applicable supplemental Indenture to all Senior Indebtedness (including
all Senior Securities) (in each case as defined in the applicable supplemental
Indenture). Except to the extent otherwise set forth in a Prospectus Supplement,
the Indenture does not contain any restriction on the amount of Senior
Indebtedness which the Company may incur.
The terms of the subordination of a series of Subordinated Securities,
together with the definition of Senior Indebtedness related thereto, will be as
set forth in the applicable supplemental Indenture and the Prospectus Supplement
relating to such series.
The Subordinated Securities will not be subordinated to indebtedness of the
Company which is not Senior Indebtedness, and the creditors of the Company who
do not hold Senior Indebtedness will not benefit from the subordination
provisions described herein. In the event of the bankruptcy or insolvency of the
Company before or after maturity of the Subordinated Securities, such other
creditors would rank pari passu with holders of the Subordinated Securities,
subject, however, to the broad equity powers of the Federal bankruptcy court
pursuant to which such court may, among other things, reclassify the claims of
any series of Subordinated Securities into a class of claims having a different
relative priority with respect to the claims of such other creditors or any
other claims against the Company.
CERTAIN DEFINITIONS
Certain terms defined in Section 101 of the Indenture are summarized below.
"Debt" means indebtedness for money borrowed.
"Subsidiary", when used with respect to the Company, means (i) any
corporation of which a majority of the outstanding voting stock is owned,
directly or indirectly, by the Company or by one or more other Subsidiaries, or
both, (ii) a partnership in which the Company or any Subsidiary of the Company
is, at the date of
6
<PAGE> 45
determination, a general or limited partner of such partnership, but only if the
Company or its Subsidiary is entitled to receive more than fifty percent of the
assets of such partnership upon its dissolution, or (iii) any other Person
(other than a corporation or partnership) in which the Company or any Subsidiary
of the Company, directly or indirectly, at the date of determination thereof,
has (x) at least a majority ownership interest or (y) the power to elect or
direct the election of a majority of the directors or other governing body of
such Person.
COVENANTS
The Indenture contains certain covenants that will be applicable (unless
waived or amended) so long as any of the Debt Securities are outstanding, unless
stated otherwise in the Prospectus Supplement.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Indenture provides that the Company may not consolidate with or merge
into any other Person or convey or transfer its properties and assets
substantially as an entirety to any Person, unless (i) the successor Person
shall be a corporation or partnership organized and existing under the laws of
the United States or any State thereof or the District of Columbia, and shall
expressly assume by a supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, the due and punctual payment of
the principal of, any premium on, and any interest on, all the outstanding Debt
Securities and the performance of every covenant in the Indenture on the part of
the Company to be performed or observed; (ii) immediately after giving effect to
such transaction, no Event of Default, and no event which, after notice or lapse
of time or both, would become an Event of Default, shall have happened and be
continuing; and (iii) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance or transfer and such supplemental indenture
comply with the foregoing provisions relating to such transaction. (Section 801)
In case of any such consolidation, merger, conveyance or transfer, such
successor Person will succeed to and be substituted for the Company as obligor
on the Debt Securities, with the same effect as if it had been named in the
Indenture as the Company. (Section 802 )
EVENTS OF DEFAULT; WAIVER AND NOTICE THEREOF; DEBT SECURITIES IN FOREIGN
CURRENCIES
As to any series of Debt Securities, an Event of Default is defined in the
Indenture as (a) default for 30 days in payment of any interest on the Debt
Securities of such series; (b) default in payment of principal of or any premium
on the Debt Securities of such series at maturity; (c) default in payment of any
sinking or purchase fund or analogous obligation, if any, on the Debt Securities
of such series; (d) default by the Company in the performance of any other
covenant or warranty contained in the Indenture for the benefit of such series
which shall not have been remedied by the end of a period of 60 days after
notice is given as specified in the Indenture; (e) certain events of bankruptcy,
insolvency and reorganization of the Company; and (f) to the extent set forth in
the applicable supplemental Indenture and Prospectus Supplement, certain
defaults under other Debt. (Section 501)
A default under one series of Debt Securities will not necessarily be a
default under another series. Any additions, deletions or other changes to the
Events of Default which will be applicable to a series of Debt Securities will
be described in the Prospectus Supplement relating to such series of Debt
Securities.
The Indenture provides that (i) if an Event of Default described in clause
(a), (b), (c), (d) or (f) above (if the Event of Default under clause (d) is
with respect to less than all series of Debt Securities then outstanding) shall
have occurred and be continuing with respect to any series, either the Trustee
or the holders of not less than 25% in aggregate principal amount of the Debt
Securities of such series then outstanding (each such series acting as a
separate class) may declare the principal (or, in the case of Original Issue
Discount Securities, the portion thereof specified in the terms thereof) of all
outstanding Debt Securities of such series and the interest accrued thereon, if
any, to be due and payable immediately and (ii) if an Event of Default described
in clause (d) or (f) above (if the Event of Default under clause (d) is with
respect to all series of Debt Securities then outstanding) shall have occurred
and be continuing, either the Trustee or the holders of at least 25% in
aggregate principal amount of all Debt Securities then outstanding (treated as
one class) may declare the principal (or, in the case of Original Issue Discount
Securities, the portion thereof specified in the terms thereof) of all Debt
Securities then outstanding and
7
<PAGE> 46
the interest accrued thereon, if any, to be due and payable immediately, but
upon certain conditions such declarations may be annulled and past defaults
(except for defaults in the payment of principal of, any premium on, or any
interest on, such Debt Securities and in compliance with certain covenants) may
be waived by the holders of a majority in aggregate principal amount of the Debt
Securities of such series then outstanding. If an Event of Default described in
clause (e) occurs and is continuing, then the principal amount (or, in the case
of Debt Securities originally issued at a discount, such portion of the
principal amount as may be specified in the terms hereof) of all the Debt
Securities then outstanding and all accrued interest thereon shall become and be
due and payable immediately, without any declaration or other act by the Trustee
or any other Holder. (Sections 502 and 513)
Under the Indenture the Trustee must give to the holders of each series of
Debt Securities notice of all uncured defaults known to it with respect to such
series within 90 days after such a default occurs (the term default to include
the events specified above without notice or grace periods); provided that,
except in the case of default in the payment of principal of, any premium on, or
any interest on, any of the Debt Securities, or default in the payment of any
sinking or purchase fund installment or analogous obligations, the Trustee shall
be protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interests of the holders of the Debt
Securities of such series. (Section 602)
No holder of any Debt Securities of any series may institute any action
under the Indenture unless (a) such holder shall have given the Trustee written
notice of a continuing Event of Default with respect to such series, (b) the
holders of not less than 25% in aggregate principal amount of the Debt
Securities of such series then outstanding shall have requested the Trustee to
institute proceedings in respect of such Event of Default, (c) such holder or
holders shall have offered the Trustee such reasonable indemnity as the Trustee
may require, (d) the Trustee shall have failed to institute an action for 60
days thereafter and (e) no inconsistent direction shall have been given to the
Trustee during such 60-day period by the holders of a majority in aggregate
principal amount of Debt Securities of such series. (Section 507)
The holders of a majority in aggregate principal amount of the Debt
Securities of any series affected and then outstanding will have the right,
subject to certain limitations, to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to such series of Debt
Securities. (Section 512) The Indenture provides that, in case an Event of
Default shall occur and be continuing, the Trustee, in exercising its rights and
powers under the Indenture, will be required to use the degree of care of a
prudent man in the conduct of his own affairs. (Section 601) The Indenture
further provides that the Trustee shall not be required to expend or risk its
own funds or otherwise incur any financial liability in the performance of any
of its duties under the Indenture unless it has reasonable grounds for believing
that repayment of such funds or adequate indemnity against such risk or
liability is reasonably assured to it. (Section 601)
The Company must furnish to the Trustee within 120 days after the end of
each fiscal year a statement signed by one of certain officers of the Company to
the effect that a review of the activities of the Company during such year and
of its performance under the Indenture and the terms of the Debt Securities has
been made, and, to the best of the knowledge of the signatories based on such
review, the Company has complied with all conditions and covenants of the
Indenture or, if the Company is in default, specifying such default. (Section
1004)
If any Debt Securities are denominated in a coin or currency other than
that of the United States, then for the purposes of determining whether the
holders of the requisite principal amount of Debt Securities have taken any
action as herein described, the principal amount of such Debt Securities shall
be deemed to be that amount of United States dollars that could be obtained for
such principal amount on the basis of the spot rate of exchange into United
States dollars for the currency in which such Debt Securities are denominated
(as evidenced to the Trustee by an Officers' Certificate) as of the date the
taking of such action by the holders of such requisite principal amount is
evidenced to the Trustee as provided in the Indenture. (Section 104)
If any Debt Securities are Original Issue Discount Securities, then for the
purposes of determining whether the holders of the requisite principal amount of
Debt Securities have taken any action herein described, the principal amount of
such Debt Securities shall be deemed to be the portion of such principal amount
that would
8
<PAGE> 47
be due and payable at the time of the taking of such action upon a declaration
of acceleration of maturity thereof. (Section 101)
MODIFICATION OF THE INDENTURE
The Company and the Trustee may, without the consent of the holders of the
Debt Securities, enter into indentures supplemental to the Indenture for, among
others, one or more of the following purposes; (i) to evidence the succession of
another corporation to the Company, and the assumption by such successor of the
Company's obligations under the Indenture and the Debt Securities of any series;
(ii) to add covenants of the Company, or surrender any rights of the Company,
for the benefit of the holders of Debt Securities of any or all series; (iii) to
cure any ambiguity, omission, defect or inconsistency in such Indenture; (iv) to
establish the form or terms of any series of Debt Securities, including any
Subordinated Securities; (v) to evidence and provide for the acceptance of any
successor Trustee with respect to one or more series of Debt Securities or to
facilitate the administration of the trusts thereunder by one or more trustees
in accordance with such Indenture; and (vi) to provide any additional Events of
Default (Section 901).
With certain exceptions, the Indenture or the rights of the holders of the
Debt Securities may be modified by the Company and the Trustee with the consent
of the holders of a majority in aggregate principal amount of the Debt
Securities of each series affected by such modification then outstanding, but no
such modification may be made without the consent of the holder of each
outstanding Debt Security affected thereby which would (i) change the maturity
of any payment of principal of, or any premium on, or any installment of
interest on any Debt Security, or reduce the principal amount thereof or the
interest or any premium thereon, or change the method of computing the amount of
principal thereof or interest thereon on any date or change any place of payment
where, or the coin or currency in which, any Debt Security or any premium or
interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the maturity thereof (or, in the
case of redemption or repayment, on or after the redemption date or the
repayment date, as the case may be), or (ii) reduce the percentage in principal
amount of the outstanding Debt Securities of any series, the consent of whose
holders is required for any such modification, or the consent of whose holders
is required for any waiver of compliance with certain provisions of the
Indenture or certain defaults thereunder and their consequences provided for in
the Indenture, or (iii) modify any of the provisions of certain Sections of the
Indenture, including the provisions summarized in this paragraph, except to
increase any such percentage or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of each
outstanding Debt Security affected thereby. (Section 902)
DISCHARGE AND DEFEASANCE
Unless otherwise set forth in the applicable Prospectus Supplement, the
Company can discharge or defease its obligations with respect to any series of
Debt Securities as set forth below. (Article Four)
The Company may discharge all of its obligations (except those set forth
below) to holders of any series of Debt Securities issued under any Indenture
that have not already been delivered to the Trustee for cancellation and that
have either become due and payable, or are by their terms due and payable within
one year (or scheduled for redemption within one year), by irrevocably
depositing with the Trustee cash or U.S. Government Obligations (as defined in
such Indenture), or a combination thereof, as trust funds in an amount certified
to be sufficient to pay when due the principal of, premium, if any, and
interest, if any, on all outstanding Debt Securities of such series and to make
any mandatory sinking fund payments, if any, thereon when due. (Section 401)
Unless otherwise provided in the applicable Prospectus Supplement, the
Company may also elect at any time to (a) defease and be discharged from all of
its obligations (except those set forth below) to holders of any series of Debt
Securities issued under each Indenture ("defeasance") or (b) be released from
all of its obligations with respect to certain covenants applicable to any
series of Debt Securities issued under each supplemental Indenture ("covenant
defeasance"), if, among other things: (i) the Company irrevocably deposits with
the Trustee cash or U.S. Government Obligations, or a combination thereof, as
trust funds in an amount certified to be sufficient to pay when due the
principal of, premium, if any, and interest, if any, on all outstanding Debt
Securities of such series and to make any mandatory sinking fund payments, if
any, thereon when due and such
9
<PAGE> 48
funds have been so deposited for 91 days; (ii) such deposit will not result in a
breach or violation of, or cause a default under, any agreement or instrument to
which the Company is a party or by which it is bound; and (iii) the Company
delivers to the Trustee an opinion of counsel to the effect that the holders of
such series of Debt Securities will not recognize income, gain or loss for
Federal income tax purposes as a result of such defeasance or covenant
defeasance and that defeasance or covenant defeasance will not otherwise alter
the Federal income tax treatment of such holders' principal and interest
payments, if any, on such series of Debt Securities. (Section 403)
DESCRIPTION OF PREFERRED STOCK
The following is a description of certain general terms and provisions of
the Preferred Stock. The particular terms of any series of Preferred Stock will
be described in the applicable Prospectus Supplement. If so indicated in a
Prospectus Supplement, the terms of any such series may differ from the terms
set forth below.
The Board of Directors of the Company (the "Board of Directors") is
authorized, without action by the holders of Common Stock, to issue up to
25,000,000 shares of Preferred Stock in one or more series. Prior to issuance of
shares of each series, the Board of Directors is required by the Delaware
General Corporation Law (the "DGCL") and the Company's Restated Certificate of
Incorporation (the "Certificate of Incorporation") to adopt resolutions and file
a Certificate of Designations (the "Certificate of Designations") with the
Secretary of State of the State of Delaware, fixing for each such series the
designations, powers, preferences and rights of the shares of such series and
the qualifications, limitations or restrictions thereon, including, but not
limited to, dividend rights, dividend rate or rates, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences as are permitted by
the DGCL. The Board of Directors could authorize the issuance of shares of
Preferred Stock with terms and conditions which could have the effect of
discouraging a takeover or other transaction which holders of some, or a
majority, of such shares might believe to be in their best interests or in which
holders of some, or a majority, of such shares might receive a premium for their
shares over the then-market price of such shares.
Subject to limitations prescribed by the DGCL, the Board of Directors is
authorized to fix the number of shares constituting each series of Preferred
Stock and the designations and powers, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
thereof, including such provisions as may be desired concerning voting,
redemption, dividends, dissolution or the distribution of assets, conversion or
exchange, and such other subjects or matters as may be fixed by resolution of
the Board of Directors or duly authorized committee thereof. The Preferred Stock
offered hereby will, upon issuance and full payment of the purchase price
therefor, be fully paid and nonassessable and will not have, or be subject to,
any preemptive or similar rights.
Reference is made to the Prospectus Supplement relating to the series of
Preferred Stock being offered for the specific terms thereof, including: (i) the
title and stated value of such Preferred Stock; (ii) the number of shares of
such Preferred Stock offered, the liquidation preference per share and the
purchase price of such Preferred Stock; (iii) the dividend rate(s), period(s)
and/or payment date(s) or method(s) of calculation thereof applicable to such
Preferred Stock; (iv) whether dividends shall be cumulative or non-cumulative
and, if cumulative, the date from which dividends on such Preferred Stock shall
accumulate; (v) the procedures for any auction and remarketing, if any, for such
Preferred Stock; (vi) the provisions for a sinking fund, if any, for such
Preferred Stock; (vii) the provisions for redemption, if applicable, of such
Preferred Stock; (viii) any listing of such Preferred Stock on any securities
exchange; (ix) the terms and conditions, if applicable, upon which such
Preferred Stock will be convertible into Common Stock, including the conversion
price (or manner of calculation thereof) and conversion period; (x) voting
rights, if any, of such Preferred Stock; (xi) a discussion of any material
and/or special Federal income tax considerations applicable to such Preferred
Stock; (xii) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; (xiii) any limitations on issuance of any series of
Preferred Stock ranking senior to or on a parity with such series of Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company; and (xiv) any other specific terms,
preferences, rights, limitations or restrictions of such Preferred Stock.
10
<PAGE> 49
The transfer agent and registrar for each series of Preferred Stock will be
described in the related Prospectus Supplement.
DESCRIPTION OF COMMON STOCK
The following summary does not purport to be complete and is subject in all
respects to the applicable provisions of the DGCL and the Certificate of
Incorporation. The Company is presently authorized to issue 200,000,000 shares
of Common Stock, par value $0.01 per share. At the close of business on January
16, 1997, an aggregate of 68,386,262 shares of Common Stock were outstanding.
Subject to such preferential rights as may be granted by the Board of
Directors in connection with the future issuance of Preferred Stock, holders of
Common Stock are entitled to one vote for each share held. Such holders are not
entitled to cumulative voting for the purpose of electing directors and have no
preemptive or similar right to subscribe for, or to purchase, any shares of
Common Stock or other securities to be issued by the Company in the future.
Accordingly, the holders of more than 50% in voting power of the shares of
Common Stock voting generally for the election of directors will be able to
elect all of the Company's directors. At January 16, 1997, Loews Corporation
beneficially owned 51.3% of the outstanding shares of Common Stock and is in a
position to control actions that require the consent of stockholders, including
the election of directors, amendment of the Certificate of Incorporation and any
mergers or any sale of substantially all of the assets of the Company.
Holders of shares of Common Stock have no exchange, conversion or
preemptive rights and such shares are not subject to redemption. All outstanding
shares of Common Stock are, and upon issuance and full payment of the purchase
price therefor the shares of Common Stock offered hereby will be, duly
authorized, validly issued, fully paid and nonassessable. Subject to the prior
rights, if any, of holders of any outstanding class or series of Preferred Stock
having a preference in relation to the Common Stock as to distributions upon the
dissolution, liquidation and winding-up of the Company and as to dividends,
holders of shares of Common Stock are entitled to share ratably in all assets of
the Company which remain after payment in full of all debts and liabilities of
the Company, and to receive ratably such dividends, if any, as may be declared
by the Board of Directors from time to time out of funds and other property
legally available therefor.
The Company is a Delaware corporation and is subject to Section 203
("Section 203") of the DGCL. In general, Section 203 will prevent an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) of the Company from engaging in a
"business combination" (as therein defined) with the Company for three years
following the date such person became an interested stockholder, unless (i)
before such person became an interested stockholder, the Board of Directors
approved the business combination in question, or the transaction which resulted
in such person becoming an interested stockholder, (ii) upon consummation of the
transaction that resulted in the interested stockholder becoming such, the
interested stockholder owns at least 85% of the voting stock of the Company
outstanding at the time such transaction commenced (excluding stock held by
directors who are also officers of the Company and by employee stock plans that
do not provide employees with rights to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer), or
(iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the Board of Directors and
authorized at a meeting of stockholders by the affirmative vote of the holders
of not less than 66 2/3% of the outstanding voting stock of the Company not
owned by the interested stockholder. Under Section 203, the restrictions
described above do not apply to certain business combinations proposed by an
interested stockholder following the announcement (or notification) of one of
certain extraordinary transactions involving the Company and a person who had
not been an interested stockholder during the preceding three years or who
became an interested stockholder with the approval of the Board of Directors,
and which transactions are approved or not opposed by a majority of the members
of the Board of Directors then in office who were directors prior to any person
becoming an interested stockholder during the previous three years or were
recommended for election or elected to succeed such directors by a majority of
such directors. Section 203 does not apply to Loews Corporation because it has
been more than three years since Loews Corporation became an interested
stockholder.
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C., whose principal offices are located at 450 West
33rd Street, New York, New York 10001.
11
<PAGE> 50
DESCRIPTION OF SECURITIES WARRANTS
The Company may issue Securities Warrants for the purchase of Debt
Securities or Preferred Stock. Securities Warrants may be issued independently
or together with any Debt Securities or shares of Preferred Stock offered by any
Prospectus Supplement and may be attached to or separate from such Debt
Securities or shares of Preferred Stock. The Securities Warrants are to be
issued under Warrant Agreements to be entered into between the Company and the
Warrant Agent named in the Prospectus Supplement relating to the particular
issue of Securities Warrants (the "Warrant Agent"). The Warrant Agent will act
solely as an agent of the Company in connection with the Securities Warrants and
will not assume any obligation or relationship of agency or trust for or with
any holders of Securities Warrants or beneficial owners of Securities Warrants.
The following summaries of certain provisions of the form of Warrant Agreement
and Securities Warrants do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all the provisions of the
applicable Warrant Agreement and the Securities Warrants.
GENERAL
If Securities Warrants are offered, the Prospectus Supplement will describe
the terms of the Securities Warrants, including the following: (i) the offering
price; (ii) the currency, currencies or currency units for which Securities
Warrants may be purchased; (iii) the designation, aggregate principal amount,
currency, currencies or currency units and terms of the Debt Securities
purchasable upon exercise of the Securities Warrants and the price at which such
Debt Securities may be purchased upon such exercise; (iv) the designation,
number of shares and terms of the series of Preferred Stock purchasable upon
exercise of the Securities Warrants to purchase Preferred Stock and the price at
which such shares of Preferred Stock may be purchased upon such exercise; (v) if
applicable, the designation and terms of the Debt Securities or Preferred Stock
with which the Securities Warrants are issued, and the number of Securities
Warrants issued with each such Debt Security or share of Preferred Stock; (vi)
if applicable, the date on and after which the Securities Warrants and the
related Debt Securities or shares of Preferred Stock will be separately
transferable; (vii) the date on which the right to exercise the Securities
Warrants shall commence and the date (the "Expiration Date") on which such right
shall expire; (viii) whether the Securities Warrants will be issued in
registered or bearer form; (ix) a discussion of certain Federal income tax,
accounting and other special considerations, procedures and limitations relating
to the Securities Warrants; and (x) any other terms of the Securities Warrants.
Securities Warrants may be exchanged for new Securities Warrants of
different denominations, may (if in registered form) be presented for
registration of transfer, and may be exercised at the corporate trust office of
the Warrant Agent or any other office indicated in the Prospectus Supplement.
Before the exercise of their Securities Warrants, holders of Securities Warrants
will not have any of the rights of holders of the Debt Securities or shares of
Preferred Stock purchasable upon such exercise, including the right to receive
payments of principal of, any premium on, or any interest on, the Debt
Securities purchasable upon such exercise or to enforce the covenants in the
Indenture or to receive payments of dividends, if any, on the Preferred Stock
purchasable upon such exercise or to exercise any applicable right to vote.
EXERCISE OF SECURITIES WARRANTS
Each Securities Warrant will entitle the holder to purchase such principal
amount of Debt Securities or such number of shares of Preferred Stock at such
exercise price as shall in each case be set forth in, or calculable from, the
Prospectus Supplement relating to the Securities Warrant. Securities Warrants
may be exercised at such times as are set forth in the Prospectus Supplement
relating to such Securities Warrants. After the close of business on the
Expiration Date (or such later date to which such Expiration Date may be
extended by the Company), unexercised Securities Warrants will become void.
Subject to any restrictions and additional requirements that may be set
forth in the Prospectus Supplement relating thereto, Securities Warrants may be
exercised by delivery to the Warrant Agent of the certificate evidencing such
Securities Warrants properly completed and duly executed and of payment as
provided in the Prospectus Supplement of the amount required to purchase the
Debt Securities or shares of Preferred Stock purchasable upon such exercise. The
exercise price will be the price applicable on the date of payment in full, as
12
<PAGE> 51
set forth in the Prospectus Supplement relating to the Securities Warrants. Upon
receipt of such payment and the certificate representing the Securities Warrants
to be exercised properly completed and duly executed at the corporate trust
office of the Warrant Agent or any other office indicated in the Prospectus
Supplement, the Company will, as soon as practicable, issue and deliver the Debt
Securities or shares of Preferred Stock purchasable upon such exercise. If fewer
than all of the Securities Warrants represented by such certificate are
exercised, a new certificate will be issued for the remaining amount of
Securities Warrants.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities offered hereby (1) through
underwriters or dealers; (2) through agents; (3) directly to purchasers; or (4)
through a combination of any such methods of sale. Any such underwriter, dealer
or agent may be deemed to be an underwriter within the meaning of the Securities
Act. The Prospectus Supplement relating to the Offered Securities will set forth
their offering terms, including the name or names of any underwriters, dealers
or agents, the purchase price of the Offered Securities and the proceeds to the
Company from such sale, any underwriting discounts, commissions and other items
constituting compensation to underwriters, dealers or agents, any initial public
offering price, any discounts or concessions allowed or reallowed or paid by
underwriters or dealers to other dealers, and any securities exchanges on which
the Offered Securities may be listed.
If underwriters or dealers are used in the sale, the Offered Securities
will be acquired by the underwriters or dealers for their own account and may be
resold from time to time in one or more transactions, at a fixed price or
prices, which may be changed, or at market prices prevailing at the time of
sale, or at prices related to such prevailing market prices, or at negotiated
prices. The Offered Securities may be offered to the public either through
underwriting syndicates represented by one or more managing underwriters or
directly by one or more of such firms. Unless otherwise set forth in the
Prospectus Supplement, the obligations of underwriters or dealers to purchase
the Offered Securities will be subject to certain conditions precedent and the
underwriters or dealers will be obligated to purchase all the Offered Securities
if any are purchased. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid by underwriters or dealers to other
dealers may be changed from time to time.
Offered Securities may be sold directly by the Company or through agents
designated by the Company from time to time. Any agent involved in the offer or
sale of the Offered Securities in respect of which this Prospectus is delivered
will be named, and any commissions payable by the Company to such agent will be
set forth, in the Prospectus Supplement. Unless otherwise indicated in the
Prospectus Supplement, any such agent will be acting on a best efforts basis for
the period of its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters, dealers or agents to solicit offers by certain specified
institutions to purchase Offered Securities from the Company at the public
offering price set forth in the Prospectus Supplement pursuant to delayed
delivery contracts providing for payment and delivery on a specified date in the
future. Such contracts will be subject to any conditions set forth in the
Prospectus Supplement and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts. The underwriters and
other persons soliciting such contracts will have no responsibility for the
validity or performance of any such contracts.
Underwriters, dealers and agents may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
by the Company to payments they may be required to make in respect thereof. The
terms and conditions of such indemnification will be described in an applicable
Prospectus Supplement. Underwriters, dealers and agents may be customers of,
engage in transactions with, or perform services for the Company in the ordinary
course of business.
Each series of Offered Securities other than Common Stock will be a new
issue of securities with no established trading market. Any underwriters to whom
Offered Securities are sold by the Company for public offering and sale may make
a market in such Offered Securities, but such underwriters will not be obligated
to do
13
<PAGE> 52
so and may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for any Offered
Securities.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the Company
by Weil, Gotshal & Manges LLP, 700 Louisiana, Suite 1600, Houston, Texas 77002,
and for the underwriters, dealers or agents, if any, by Andrews & Kurth L.L.P.,
425 Lexington Avenue, New York, New York 10017, unless otherwise specified in
the Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company and subsidiaries as of
December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995, incorporated by reference in this Prospectus from the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, have
been audited by Deloitte & Touche LLP, independent auditors, as indicated in
their report with respect thereto, and is incorporated by reference herein, in
reliance upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Arethusa (Off-Shore) Limited and
subsidiaries as of September 30, 1995 and 1994 and for each of the years in the
three-year period ended September 30, 1995, incorporated by reference in this
Prospectus from the Company's Current Report on Form 8-K dated May 13, 1996,
have been audited by Arthur Andersen & Co., independent public accountants, as
indicated in their report with respect thereto, and is incorporated by reference
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
---------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
OFFERED SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
---------------------
14
<PAGE> 53
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary......... S-3
The Company........................... S-6
Use of Proceeds....................... S-7
Price Range of Common Stock........... S-7
Capitalization........................ S-8
Selected Consolidated Financial
Data................................ S-9
Unaudited Pro Forma Consolidated
Condensed Financial Statements...... S-10
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-13
Description of Notes.................. S-22
Certain United States Federal Tax
Considerations...................... S-31
Underwriting.......................... S-36
Notice to Canadian Residents.......... S-37
Legal Matters......................... S-38
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Ratio of Earnings to Fixed Charges.... 3
Use of Proceeds....................... 3
Description of Debt Securities........ 3
Description of Preferred Stock........ 10
Description of Common Stock........... 11
Description of Securities Warrants.... 12
Plan of Distribution.................. 13
Legal Matters......................... 14
Experts............................... 14
</TABLE>
[DIAMOND OFFSHORE LOGO]
$300,000,000
% Convertible
Subordinated Notes
Due 2007
PROSPECTUS SUPPLEMENT
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
